Cost may be a priority, but service providers can't get complacent

OutsourcingProcurement outsourcing

In this guest post, Procurement Leaders invites Xchanging’s Nick Ford to provide some insight into a recent survey of outsourcing decisions made by European manufacturers. The study found that while cost pressure on indirects remains a key driver of outsourcing, customers are looking for different things from service providers.


The use of external procurement service providers is not just growing, it’s changing.


The market is starting to place a greater emphasis on partnerships. The traditional “lift and drop” outsourcing model has grown more sophisticated, and over the past few years has been replaced by partnering models whereby third party providers are now becoming an integral part of the organisations procurement team.


As the outsourcing market is developing, customers are demanding more from their procurement providers in terms of deep category expertise, and are looking for tailored solutions to meet their business needs, rather than a "one-size-fits-all" delivery model.


Over a third of CPOs have recognised that they need to focus their resources on the areas of involvement that will deliver the highest value for their businesses. Increasingly they are finding that effective partnering in an outsourcing or co-sourcing arrangement can free up these resources and expand the overall capability of the team without losing control. In many instances the capabilities of the external providers are far greater and more mature than the indirect procurement teams, so a partnership can bring an enhanced capability to the company.


The ability to deliver an indirect procurement service depends upon a flexible delivery model. This is because many of the key drivers vary from location and/or region due to the complexity and make up of their organisation. In addition, companies are increasingly demanding more from their partners regarding the level of expertise and track record within each of the sub categories.


Cost reduction is still a key business driver for the industry, and four in five still see it as a major priority. This makes it imperative that a clear baseline for service should be agreed at the start of the relationship, and there are good benefits tracking tools and technologies that can be used to ensure that value is delivered. Deploying an external provider with the correct technology to underpin a “closed loop” source-to-pay process within an organisation can deliver massive benefits in evaluating spend, tracking savings and providing complete transparency to stakeholders.


As indirect sourcing strategies become more advanced there are growing concerns about tail-end spend. In most organisations where it is not under control it results in challenges for business relationships and incurs time and effort from procurement resources which could be deployed elsewhere on more strategic commercial issues.


This becomes an even greater problem across organisations that operate in a decentralised manner with a number of remote locations. This means that many of sites will create their own localised tail end spend in each location, with no cross-site procurement provision and a massive duplicate of effort across the organisation. This facet is compounded further in international scenarios with very little co-ordination between teams.


Our research makes clear that as well as these developments there are also a number of challenges facing the sector. Many businesses don’t believe that providers can deliver the savings they want, or that they will provide the transparency and accountability that is required, with over half (51%) fearing that they would lose control of their own organisation by using external providers.


For this reason all providers need to focus on ensuring that we are upfront about our techniques, but also about how we can be more accountable. Benefit-tracking technology has to be central to what we are delivering, as does a clearly defined baseline. However, there are a number of companies that remain to be convinced, with four in five not outsourcing any functions whatsoever, and that is why spreading the message and highlighting real and measurable achievements must be central to our industry.


Nick Ford is business development and market director at Xchanging Procurement Services.

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