What is Procurement Outsourcing

Procurement outsourcing , is the assignment of well-defined procurement activities to a third-party service provider and typically addresses components of both Source to Pay and Integrated Supply processes. These may include strategic sourcing, purchase order transaction processing, spot buy and RFQ support, supplier invoice processing, financial settlement, inventory management and supplier management.

The factors that drive companies to consider procurement outsourcing include skill and resource constraints, process maturity, technology innovation, improved leverage and competency focus. As with any type of outsourcing, the overarching objectives are to improve service levels while reducing costs.

Procurement outsourcing does not mean "off-shoring". The labor arbitrage advantages that off-shoring provides can be significantly off-set by in-country providers who combine efficient processes with focused technologies. Additionally, local knowledge of supplier capabilities combined with geographically focused purchasing leverage further reduces costs leading many companies to select "on-shore" procurement outsourcing providers.

Category and vendor management supporting indirect materials and services is a popular area for outsourcing. Companies continue to work to reduce overhead costs and therefore choose to outsource these procurement activities rather than to attempt to build their own set of world-class procurement capabilities.

Procurement outsourcing providers have the advantage of spreading their overhead costs across many customers. They often employ a breadth of procurement professionals with deep category expertise; even large companies would have difficulty building and maintaining these skill sets. Additionally, because their primary business is managing high volumes of source to pay transactions, their processes tend to be extremely efficient and are supported by the latest e-procurement technologies. Taken together, companies that outsource their procurement stand to benefit in the following ways:

  • Highly skilled procurement professionals with deep commodity expertise negotiating to the benefit of all customers translates to lower item pricing.
  • Market leverage results in price points that no single company can achieve on its own.
  • Increased leverage with suppliers results in improved delivery timing and service.
  • Access to cutting edge e-procurement technologies provides efficiency and improves communication.
  • Economies of scale and process efficiencies results in lower transaction costs.
  • Better information management and purchasing analysis capabilities enables on-going cost cutting strategies.
  • Departmental cost reductions including head count, training, office space and equipment delivers additional bottom line savings to a company.

Should You Outsource Your Indirect Procurement?

Historically, only large companies considered procurement outsourcing. The maturing of the market has led to focused providers with a range of scalable capabilities allowing companies of all sizes to reap significant benefits. Small companies may reap proportionally greater benefits more from this strategy than the larger ones who enjoy substantial pockets of leveraged spend. Companies of all sizes, across all industries would do well to consider this strategy. Here are some key advantages

  • Cost Savings: Outsourcing partners leverage their expertise and economies of scale to negotiate better deals with suppliers, potentially leading to substantial cost reductions.
  • Expertise and Resources: Gain access to dedicated procurement professionals with specialized knowledge and tools, improving spend management and compliance.
  • Efficiency and Streamlining: Free up internal resources and streamline procurement processes, allowing your team to focus on core competencies.
  • Risk Management: Mitigate risks associated with supplier management, contract negotiations, and fraud through the expertise of your outsourcing partner.

Making the Right Choice:

Deciding to outsource your indirect procurement hinges on several factors:
  • Company size and spend volume: Larger companies with significant spend might benefit more from economies of scale offered by outsourcing.
  • Internal expertise: Consider the existing capabilities and limitations of your internal procurement team.
  • Strategic goals: Evaluate if outsourcing aligns with your overall business objectives and resource allocation strategy.
  • Budget and resources: Compare the potential cost savings with the implementation and ongoing fees associated with outsourcing.

The Takeaway:

Indirect procurement outsourcing can be a powerful tool for optimizing costs, gaining expertise, and streamlining processes. However, it's crucial to carefully weigh the pros and cons, assess your specific needs, and choose a reputable partner aligned with your company culture and goals. By doing so, you can unlock the true potential of outsourced procurement and drive strategic value for your business.

DSSI's Solution

Our Source To Pay solution provides complete purchasing processing capabilities supported by our web-based eProcurement system, Epic®. We feature a rapid enterprise-wide implementation that allows the first client facility to be fully supported within eight weeks. Receive immediate value through rapid, sustainable improvements in indirect procurement performance with reduced costs, less risk and improved financial control.