Why outsource procurement?

by Peter Smith on May 16, 2010

This is the first of a series of posts I plan to do around procurement outsourcing over the next few weeks.

I’ve worked client side a few times on outsourcing projects and even done a little on the provider side.  And during the NatWest takeover battle in 2000, we were pursuing a very exciting procurement outsource / JV creation.  That might have left me, as the NW CPO, as the new CEO (and equity holder) in a dynamic, potentially market leading outsourcing provider.  (Sighs and thinks of the yacht….)

Until those nice people at RBS won the takeover and the chain of events ending in banking crisis commenced…..

Anyway, enough ancient history.  I’ve mentioned recently that I see a boom in public sector outsourcing of procurement coming soon, and the private sector market is showing signs of real growth, so for our first post let’s consider why organisations – public or private – outsource procurement.

The overarching reason we would assume is that the organisation will achieve its overall strategic objectives better through outsourcing.  In most cases, this will have an element of ‘bottom line’ benefits; the outsourced service is going to reduce costs / add direct value.  But how will it do that?  There are five main possibilities.

Focus and expertise – “we have indirect spend or low priority categories that will just never get the internal attention they possibly deserve”.   An outsourcer may bring that focus – what is a low priority category for the client may be run by a highly skilled manager in the outsourcing firm who can drive better value / lower costs – “the world’s best buyer of toilet rolls” concept.

Leverage - “we don’t buy much of this category (in terms of the entire market; note our spend may still be large by conventional standards) so we will give it to someone who has real scale and leverage”.  That leverage may come from other clients, or the provider’s own internal business, or both.

Technology and process – “we know there is great technology out there but we don’t have the expertise / budget / time to make our own investment work”.  Someone with P2P transactional management, reverse auctions, contract and supplier management, or other technology already in place can improve efficiency and reduce cost (in a sense, this is a particular subset of the first point but a very powerful one).

Running Cost - “they can run procurement cheaper than we can internally”.  Particularly where there is a large element of transactional processing, with limited automation, moving to outsourcing with an offshoring element can bring savings in staff costs in particular.

Control - “we can’t manage internal spend in a controlled and governed manner – an external provider might”.  Outsourcing and contractualising this can make it easier to control the internal budget holders; they may be ‘forced’ through the power of a formal contract into using the outsourced service, reducing maverick and unmanaged spend.

In my experience, it is often a combination of the ‘focus’ and ‘control’ drivers that are top of the list. Control is a strange one really; in theory at least, there is no reason why an organisation couldn’t drive compliance with an internal team.  But there is no doubt that an external contract can force an organisation into appropriate behaviour.

There are secondary drivers as well; an outsource may lead to better service from the procurement function, it may free up physical space, it may lead to identification of more innovative suppliers,  it may offer better career prospects to the staff who are moved over to the provider.  All of these can be valid reasons  but generally one or more of the value generating drivers will also be key.

Next time, we will discuss what sort of providers there are in the market, and how they might fit against these criteria. But in the meantime, I came across this very useful list of ‘why outsourcing goes wrong’.  We will also  cover that here, but this is well worth a read.

{ 2 comments… read them below or add one }

Andrew Coulcher May 18, 2010 at 9:18 am

Peter,

An interesting blog and very topical given that outsourcing could be seen as one of the key drivers to unlock some of the £6B savings the Government is searching for.

You haven’t so far differentiated between strategic and non-strategic spend and what influence this has on an outsourcing decision. Whilst outsourcing of non-strategic spend could derive a number of the advantages you outlined I think that any organisation (public or private sector) needs to retain a high level of Procurement capability around it’s core business as failing to do so can have a disastrous and long term impact on the organisations competitive advantage or, in the case of Public Sector, a diminished capability in terms of how public services are developed and delivered.

I would be interested in hearing your thoughts on how can the Public Sector unlock value from outsourcing without throwing the proverbial baby out with the bath water?

Bettieclaire May 18, 2010 at 10:51 am

Great work on it. I’ve mentioned recently that I see a boom in public sector outsourcing of procurement coming soon, and the private sector market is showing signs of real growth, so for our first post let’s consider why organisations – public or private – outsource procurement.

Procurement Staffing

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