7 Procurement Outsourcing Myths, Demystified!!

By Satyen Pathak (VP, Procurement, Genpact), Subhonil Ghoshal (AVP, Procurement, Genpact), Upendra Rabadia (AVP, Procurement, Genpact)

In recent times, misunderstandings about the why, when and what to outsource have increased in the procurement outsourcing (PO) space. This has created gaps between customer expectations and actual outcomes. While the success of outsourcing initiatives is partly driven by a service provider’s performance, the absence of a clear procurement strategy and unrealistic customer expectations can also adversely impact business outcomes. Genpact’s insights into 7 common myths can help drive best practices, set correct expectations and bring about increased success in procurement outsourcing initiatives.

Myth 1 – The majority of savings are from labor arbitrage
Labor arbitrage does contribute to savings, but PO service providers also help customers by driving significant cost-outs, especially in tail-end spending which is largely unmanaged due to inadequate staff resources. Additionally, service providers can consolidate and standardize processes, unlocking opportunities for scalability. The resulting capacity creation assists in the redeployment of valuable resources for strategic initiatives, thereby increasing the overall value of sourcing.

Myth 2 – Procurement outsourcing delivers savings by price reductions alone
Price reductions by negotiating with suppliers do contribute significantly to savings, however, “non-price levers” also contribute to reducing costs. “Non price levers” are based on repeatable and compliant processes and metrics that reflect performance across the entire source-to-pay process. Adherence to compliance guidelines, effective demand management and rationalization of specifications across an organization helps lower costs. Non-compliance to contracts, using non preferred-suppliers and not ordering from catalogs can result in contracted savings losses as high as 30-40%.

Myth 3 - Direct procurement functions cannot be outsourced
While functions such as vendor development and vendor relationship management may need to stay with the customer organization, a considerable number of direct procurement support activities have been decoupled and outsourced. Functions including demand planning and forecasting, spend analytics, commodity price tracking and transactional purchasing have all been successfully outsourced over the years.

Myth 4 – Procurement outsourcing results in a loss of control in strategy and processes
In most successful PO engagements, procurement vendors are well integrated and act as virtual extensions of a customer’s procurement functions - from the adoption of strategic goals to the operational culture. The customer, therefore, continues to exercise full control over all aspects of the procurement function with the vendor. Key steps in reinforcing “positive control” by customers in an outsourcing engagement are:

• Careful identification of sub-processes and categories to be outsourced and retained
• Robust transition project management, effective governance and change-management
• Appropriate service levels and metrics linked to business outcomes

Myth 5 - New technology platforms are essential to success
Depending on the process-maturity of a procurement function, using existing technology along with implementing incremental software changes obviates the need for a completely new platform.

Typically, customers have already implemented ERP platforms which may have sub-optimal utilization rates. While certain sub-processes, such as contract workflow or eRFX, may require tools to drive compliance to effectively increase spend management, they do not necessarily require expensive system implementations. A number of cost-effective Software-As-AService (SaaS) products that are available for adoption during transition can be used.

Myth 6 - It’s all about outsourcing low-end transactional activities
The PO landscape is shifting away from the transactional “Accounts Payable” to a more strategic focus on a “Source-to-Pay” framework. While PO began as a low-end transactional activity, high value work such spend-analytics, sourcing, contract-lifecycle management and vendor relationship management are being outsourced in more mature outsourcing relationships. PO vendors are now being deployed for sourcing and transactional procurement together, in order to derive the benefits of end-to-
end process integration.

Myth 7 - Internal stakeholder satisfaction and supplier-relationships are adversely impacted
Most mature procurement relationships have governance structures that effectively mitigate dissatisfaction with internal stakeholders and suppliers. Customer organizations use transparent frameworks e.g. “Procurement Helpdesk” with an escalation mechanism, to resolve issues with the outsourced procurement organization to head off and resolve potential conflicts. Additionally, customer procurement organizations can monitor stakeholder satisfaction metrics and ensure quick intervention when issues are escalated.

Procurement outsourcing already delivers significant value to customers, however, its true potential has yet to be fully exploited. This is partly due to common misconceptions and misunderstandings including those outlined here. Customers and their partner organizations should work to resolve these and close the gap between expectations and final outcomes.