Procurement Outsourcing: Does India have a play?
Date: Thursday , May 31, 2007
Rewind back to 1990, and the troops were busy selling IT Outsourcing & Offshoring. It traditionally started with pictures of Taj Mahal and discussions on Aryabhatta (an Indian mathematician who is supposed to have invented the numeral “Zero”). Year 2000 acted as a catalyst resulting in IT Outsourcing and Offshoring becoming mainstream businesses.
Around 1997-98, call centers & help-desk centers (customer relationship management centers) outsourcing became a rage. At the same time HR outsourcing was being seeded while Finance and Accounts Outsourcing sneaked in as a captive process outsourcing to begin with so that companies could really leverage outsourcing as well as global collaboration as a cost productivity measure.
With so much being outsourced, it appeared that we were reaching the end of road in terms of processes. Everyone seemed to have forgotten the procurement groups spread across various Fortune 1000 companies which could also gain significant efficiencies by being outsourced to companies specializing and focused on this. More so that the Procurement Outsourcing (PO) can be the biggest bang for the buck:
PO has much higher potential savings than other BPO functions
We had a glimpse of the PO wave in a different form in years 1995-2000. It was in the form of emergence of lot of e-consolidators who talked of a web based portal which they claimed was panacea to reduce the costs & problems, which is now remembered (or rather not remembered) as a star-studded flop movie. The real opportunity lies in a combination of several factors which include technology platform & capability, outsourcing methodology, process maturity, industry knowledge delivery capability, live procurement experience on the top of everything associated with change management in outsourcing. Even the typical offshore model might not work as a company with lack of experience in PO might expose the client’s spend, thus running several hundreds of millions of dollars to risk.
Irrespective of Industry verticals, procurement function is something which gives immediate scope in cost reductions, which I am sure that many will argue against. On many occasions companies end up spending almost 40-60 percent of their budget in procuring goods and services. Interestingly, if we study a typical Procurement process flow, we will find that buyers spend almost 60 percent of their time and resources in doing administrative rather than strategic work, which apparently deviates the focus from buyer’s core competency and results in inflating the budget and makes cost reduction a mirage.
Solution of this problem could be focusing more attention and resources on strategy which includes planning and developing policies and challenging specifications. So if the tactical work is outsourced to a PO company and strategic procurement is retained internally, it can result in a focus which can drive significant improvements in the bottom line.
Studying the recent trends in Procurement, we will find that companies are looking at the option of outsourcing their different Procurement functions. These functions may vary from buying and commodity specialization to Value and product quality engineering. Order management, order fulfillment, Compliance management, logistics and spend analysis are also things which companies are looking to outsource.
Direct vs Indirect spend
At a high level, we can classify procurement into two major categories:
* Direct Category
* Indirect category
* MRO (Maintenance, Repair & Overhaul)
Traditionally enterprises have been more open to outsource the procurement management of indirect and MRO spend categories than for direct materials, such as those used in manufacturing industries. Most of the companies that are outsourcing or plan to outsource are relying on third-party procurement services for computer equipment and peripherals, transportation / logistics / shipping, systems integration, IT services, office supplies / furnishings, temporary labor, and travel, which has been a primary target for outsourcing. However, the jury is out on the kind of savings the companies got by outsourcing procurement. Most of the time, the approach has been to throw multi-million dollar upgrades to hardware and software applications including spend management tools on which establishing ROI has not been an easy task. The market will take notice if someone can offer guaranteed savings form the first year of engagement, like it happened in several other areas of outsourcing.
Direct Procurement outsourcing includes functions like Buying, Contract administration, Value Engineer, Quality Engineer, Logistics, NPI and Customer Support. Till date, direct materials have been considered as the Holy Grail and ‘untouchable’ but now the approach is changing. It has been realized that there is a significant piece of non-strategic direct procurement which could be as high as 60 percent by number of transactions (number of parts in discreet manufacturing) with only 10-20 percent in spend. Can this be outsourced? Yes and it can increase the effectiveness of the internal procurement organization significantly. Trends in the automotive industry, suffering right now, have been towards outsourcing significant direct procurement tactical pieces to companies which can guarantee cost reductions from year one of outsourcing. The savings for large automotive companies can touch several hundreds of millions of dollars as some of the reorganization experts will include PO as powerful tool to their advantage. There are few powerful case studies in the transportation industry already.
PO: Fastest Growing BPO
There is significant activity building up in several Global 1000 companies both on direct and indirect procurement and companies with demonstrable experience, guaranteed operational cost reductions, IT capability and global collaboration advantages stand to win several hundreds of millions of dollars of annuity contracts.
Companies that have outsourced procurement activities reported that they had done so for a variety of reasons. Some of these are
* To focus the procurement organization on important categories and higher value-added activities.
* To reduce costs of transaction processing.
* To tap into external category expertise and use the market leverage of the outsourcing provider.
* To reduce cycle time and improve sourcing efficiency.
* To gain access to information technology tools without major investment.
* To establish and develop minority suppliers.
Though procurement outsourcing was developed at the same time as other BPO tasks such as finance, accounting, HR, etc., it is only now that procurement outsourcing has witnessed growth in massive proportions.
India: A prime destination for Procurement Outsourcing
According to NASSCOM, a nascent yet rapidly growing vertical, procurement outsourcing is slated to emerge as India’s next successful outsourcing story.
India has the potential to be a favorite destination for PO not because of labor arbitrage but due to its highly skilled English Speaking labor pool, engineering skills, value enhancement through LCCS, competitive advantage, process and quality focus. The absence of category expertise on several commodities in India will have to be filled through capability build up in the U.S. and Europe. To be clear, just any company doing offshore, small or large can not execute PO successfully, as it is far more complex and requires many years of experience.
My belief is that Procurement Outsourcing will lead the pack in outsourcing initiatives in next five years, saving global companies billions of dollars. At the same time companies specializing in this field have opportunities to drive significant value to their global clients and be the leaders of tomorrow.
The author is the President of Corbus, a U.S. based IT and BPO service firm. Miital can be reached at email@example.com