Speaking Out on Outsourcing

March 9, 2008
Study shows more companies are now willing to outsource procurement tasks.

Although manufacturers are steadily being encouraged to focus on their core competencies while they outsource everything else to a third-party, many companies are still hesitant to outsource their procurement function due to factors such as a perceived loss of control, challenges related to quantifying benefits, or a belief that procurement actually is one of their core competencies.

However, according to a report published by research and analyst firm Aberdeen Group, 40% of companies are expected to be engaged in some level of procurement outsourcing in the next two years.

For many of them, the growth is explained by a combination of expanding global service delivery capabilities and the process rigor involved in procurement. Findings indicate that outsourcing is also becoming more attractive as service providers can also offer labor arbitrage and core competencies in transaction and process management capabilities, which often are difficult and expensive to sustain internally. Aberdeen indicates that those companies more likely to adopt procurement outsourcing are typically more proficient in measuring gaps between their current procurement performance and where they could be through strategic actions by leveraging scale, analytics, automation and supply chain expertise.

The potential return on investment for adopters points to procurement outsourcing increasingly becoming a viable strategy for operational process improvement. In addition to realizing 28% improvements on their procurement cost savings, organizations are gaining key strategic advantages such as streamlining business processes and improving operational performance overall. Of the expected benefits respondents cited for outsourcing their procurement function, improved pricing led with 56%, followed by lower procurement costs, headcount reduction, market and supplier intelligence and improved spend visibility, which were each cited by 44% to 47% of respondents.

"Our research has discovered that top-performing enterprises are more likely to leverage third-party expertise in the form of outsourcing," says Bill Browning, a research analyst for Aberdeen. "These companies are realizing strategic benefits such as gaining service provider and market intelligence, and streamlining operations, while also delivering cost and process savings."

Aberdeen advises companies considering procurement outsourcing to start by carefully evaluating current process and technology capabilities to establish a baseline and identify the spectrum of potential benefits through outsourcing. After that crucial groundwork is laid, organizations can focus on the strategic advantages that can be gained in addition to the tactical, cost-cutting results.

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