Demand for outsourcing services, which has otherwise grown consistently since the 1980s, was tempered significantly during 2008 and 2009, as poor economic visibility frightened corporations off long-term commitments. There are already signs, however, that companies are now as hungry as ever to offload non-strategic processes in return for cost savings.
According to a survey of 209 enterprise buyers, conducted in January 2010 by analyst company Horses for Sources, much of the outsourcing activity seen this year will be the result of companies expanding their existing engagements in such tried and tested fields as application, IT infrastructure and finance process outsourcing.
But the survey also detected an appetite for some less established forms of outsourcing. Among those was procurement outsourcing, which 10% of respondents said they planned to adopt for the first time this year.
Broadly speaking, procurement outsourcing has two components. The process of paying for goods – which includes generating invoices and conducting payments – can, like any other administrative function, be outsourced to a third party with cheap labour and tightly engineered processes, and a saving duly made. The other component sees the client hand responsibility for sourcing materials over to a third-party expert, who uses negotiating skills and bulk buying to get better value from suppliers.
European IT services and outsourcing supplier Capgemini provides both of these. The process element is conducted from its business process outsourcing (BPO) facilities in Chennai, India. But according to David Poole, an expatriate Brit running the company’s BPO business in North America, it is as a buying partner that Capgemini can score real results.
“We buy and source indirect materials for our clients, not the raw materials of their products,” he explains. “This includes everything from printer paper and IT equipment to temporary labour and travel.” The savings that Capgemini says it can pass on to customers derive from the economies of scale it can achieve through buying for many clients simultaneously, from the strategic relationships it can build with suppliers and from the fact that it hires specialist ‘procurement consultants’, says Poole. “It would be unusual for even a large company to have a dedicated telecoms buyer, or a dedicated travel buyer,” he explains. “But these people are worth their weight in gold because of the way that they consolidate deals and build relationships with their providers.”
Poole claims that considerable savings can be made. A bank, he says, whose materials are entirely indirect, might save between 10% and 15% of its cost base.
These are appealing claims, and it is little wonder that a boom in procurement outsourcing has long been anticipated. “At various points over the past ten years, BPO industry experts have predicted an explosion of procurement outsourcing activity,” a recent report from industry analyst Ovum explained.
“But the expected boom has yet to happen.” What may be holding the procurement outsourcing market back is its fractured nature. Ovum’s report observed that the field is dominated by two outsourcers, IBM and Accenture, and two software vendors, IGC Commerce and Ariba, whose tools are variously described as ‘spend management’ or ‘supplier relationship management’ (SRM) applications.
The rest of the industry is divided along similar lines, it added. The disjunction between process and technology in procurement outsourcing may have prevented its true potential from being realised as, according to Horses for Sources’ Phil Fersht (formerly of AMR Group), “It is challenging to transform a global process effectively without tying it to the underlying technology workflow.”
Certainly, Capgemini hopes that this is the case. In February 2010, the company – whose CEO recently described demand for its services as “mediocre” – announced its intention to acquire Swedish software-as-a-service procurement management vendor IBX.
The technology of the acquired company, which counts Ericsson and Ikea among its customers, is based on SAP software, but with a number of what Poole describes as “enhancements and developments that fill some of the gaps in the SAP suite”.
The combination of IBX’s platform and Capgemini’s BPO and consultancy represents a ‘turnkey’ solution, says Poole. “We can implement IBX and provide procurement BPO for our clients in a way that is cash neutral – in other words, the savings will come through quick enough to pay for any investments required to make it happen.” “There is no-one in the market providing the full range of procurement services from strategy, through sourcing, through technology, through implementation, through to the back office,” he adds.
However, he does not believe that this will be the case for long. “I would be most surprised if we didn’t see Accenture, IBM or others trying to buy some of the remaining independent SRM platforms in the coming year,” he says. If Poole is right, this could be the moment when procurement outsourcing finally breaks through to the mainstream.