Historically, most companies have either had an in-house procurement function or have relied on other in-house resources to drive procurement related activities.
Procurement in-house functions are increasingly adding value to businesses by driving down operating costs through unit price reductions, reducing consumption, improving supply chain efficiencies, and working with technical departments to improve specifications. However, companies should regularly measure the performance of their in-house strategic procurement teams with a simple measure, return on investment (ROI). Cost reductions can quickly become eroded by excess overhead from an in-house procurement team, with return on investment falling below target levels.
Companies that have sizeable spend and do not have an in-house procurement team, rather relying on other in-house resources without the expertise to manage spend, are missing out on the benefits a strategic procurement team provides.
There are four options available to companies to strategically manage their spend:
1. Invest in an in-house procurement team
2. Use other in-house resources
3. Outsource to a third party to manage
4. Do nothing and do not procure strategically
Each of the options has its pros and cons, however there is a growing trend for companies with sizeable spend to outsource more of their procurement function to third parties as they focus on core business and reducing overhead costs. The outsourcing of the transactional process of procurement has been around for some time, with the outsourcing scope now increasing to include the management of spend, such as sourcing and contract management.
Businesses need to consider whether outsourcing fits their business objectives and the market sector in which they operate. Advantages of outsourcing strategic procurement include:
- Improving expertise– does the business have the experience and skills to achieve their procurement objectives? An outsourced model can give the company access to expertise in niche areas of spend with the expertise only paid for when required i.e. not an overhead cost.
- Resource Utilisation– is the in-house team utilized more than 85% of the time? An outsourced model provides a flexible resource level based on strategic procurement activity at the time, without having to carry excess overhead throughout the year. Resource capacity can be increased and reduced very quickly.
- Return on investment– is the in-house procurement team achieving the ROI target and can this be improved? An outsourced team with its expertise and lower cost typically delivers an improved ROI for the company.
- Key supplier relationships– is it important for the company to maintain healthy relationships with its strategic suppliers? An outsourced model can facilitate the supplier relationship management process and can improve these relationships with strategic suppliers, as this area is given a real focus.
- Leveraging processes, tools and technology– does the business have ‘best practice’ processes, tools and technology to enable efficient procurement process and cost reductions to be achieved? An outsourced model can provide this platform, with companies not having to invest time, resources and funds into new processes and technology.
- Market intelligence and benchmarking– does the business have enough market intelligence to make informed decisions? An outsourced model can provide this market intelligence through on-going engagement of the market. Companies may engage the market once every 3 years, however an outsourced team will likely be engaging the market many times throughout the year providing real time market information.
- Accountability– does the in-house team provide assurance of procurement outcomes, and is the team held to account for these outcomes, with commercial penalties for not achieving targets? An outsourced model can provide this level of assurance with service contracts structured with incentives and penalties for not achieving procurement targets e.g. spend under contract; cost reduction targets; internal customer satisfaction; and strategic supplier rating.