Procurement outsourcing: A comprehensive guide to create solid procurement strategy
Procurement outsourcing allows you to save operational costs and helps you leverage focus-time to grow core competencies of the business. Read on to learn the benefits, pitfalls and best practices of the process.
While your procurement team is self-sustaining, they still view spreadsheets as the ultimate tool for managing procurement processes. And this approach can lead to severe disappointment besides affecting the most important bottom line metric—revenue.
Imagine your team members trapped in a cycle of repetitive work that doesn’t contribute to their performance goals, instead decreasing their productivity and increasing likelihood of human errors.
According to a study, a mid-size business uses more than 200 applications on an average for company-wide operations. The process of searching for information across multiple application systems, analyzing it and manually entering it is tiresome, time-consuming and inefficient. Even with shortcuts in place, you can’t scale these processes to handle large volumes of data in real time.
Relying solely on internal systems with limited resources and expertise is risky and therefore not a sustainable solution for your business growth.
This is where procurement outsourcing enters. An effective collaboration and partnership between your internal team and outsourced team can improve your overall cash flow and, hence, bottom line profitability.
Learn how to mitigate various business risks with procurement outsourcing, pick the right services and develop a smart strategy.
What is procurement outsourcing?
Procurement outsourcing is the process of delegating some or all of the tasks related to buying goods and services for a business to a third-party service provider.
The process of outsourcing is based on utilizing time, cost, energy and money. The lesser time your organization spends on procurement, the more revenue it can generate by focusing on and enhancing its core competencies.
Procurement outsourcing can be further divided into two types:
- Direct procurement: It involves buying goods and services that directly impact your product or service. For instance, an automobile dealer will need to buy engines, tires and seats to get their business running.
- Indirect procurement: Indirect procurement is when a company is buying goods or services that are not directly used in their products or services but are needed for operations. For instance, a car manufacturing company also needs to buy office supplies, IT equipment and marketing services to help boost its business.
Having said that, procurement outsourcing comes with some challenges and risks.
Risks in procurement outsourcing
Procurement outsourcing can help companies save costs, access skilled workers and concentrate on their core competencies. No wonder this market is forecasted to grow at a compound annual growth rate (CAGR) of 15% for the next five years!
Many entrepreneurs and business leaders agree with the strategy of outsourcing.
Richard Branson, founder of Virgin group and a British billionaire, said that companies should outsource what they are not good at and focus on what they are.
“ Everything in your business can be outsourced…if you’re not emotionally attached to doing it all.”
~ Richard Branson, Founder of Virgin Group
However, no solution is a perfect solution unless there are robust, careful checks.
- Unclear project costs
You can’t estimate precise costs without establishing your requirements, timelines and resources. Hence, if the procurement outsourcing company misuses your funds, it will nullify the entire goal of hiring them. Therefore, proactively asking intelligent questions and setting a clear project cost can help you avoid risks.
- Inexperienced vendors
It’s a no-brainer but choosing an experienced vendor with good credentials can ease your procurement process. Conveying your expectations to a new colleague, especially someone inexperienced, takes time and increases the risk of them making a mistake.
- Poor communication and team management
Ensure clear and accurate communication with your outsourced team from day one to establish effective collaboration to get the desired results. Include regular calls, feedback loops and other communication efforts in your project plan.
- Poor knowledge transfer
If your previous vendor did not keep clear documentation, your next outsourced procurement team will not be able to provide the best results. You must document everything clearly and create a knowledge transfer plan with extensive details.
Apart from that, there are other risks as well that may arise, such as lack of trust, incorrect outsourcing approach, legality and more.
How to develop a risk-free procurement outsourcing strategy
A KPMG report suggests that 6 out of 10 business organizations are considering procurement outsourcing to improve their businesses, which is good news.
Here are the 7 key questions you must ask to ensure you mitigate most risks to create an effective procurement strategy :
- What is your current procurement situation?
Understand your procurement situation fully before speaking with the outsourced team. Try to have answers to the following questions:
- What are your procurement goals and challenges?
- What are your procurement strengths and weaknesses?
- What are your procurement opportunities and threats?
- How satisfied are you with your procurement performance and outcomes?
- How mature is your procurement function?
- What are your outsourcing needs and objectives?
Understand gaps and pain points in your existing system that you want to rectify with outsourcing. Jot down your expectations and KPIs (key performance indicators) that will decide the success or failure of your outsourcing.
- Are your service providers procurement experts?
Once you have defined your outsourcing needs and objectives, consider factors such as the provider’s reputation, experience, expertise, capabilities, resources, pricing, quality, service level agreements (SLAs) and references.
- Have you defined the scope and terms of the contract?
There should be a specification of functions or categories you want to outsource:
- Outcomes you expect from the provider
- Roles and responsibilities each party will have
- Timelines will be followed
- Risks and contingencies will be addressed
- Payments and termination terms will apply.
- Have you implemented the transition and transformation plan?
You must ensure a smooth handover of the outsourced functions or categories from your internal team to the provider. You will also need to ensure flawless integration of the provider’s processes and systems. Additionally, you have to communicate and collaborate with the provider throughout the transition and transformation phase.
- Will you be able to monitor and manage the relationship?
After transformation, you will have to track and report the performance and outcomes of the outsourced functions or categories. You should resolve issues by providing feedback and guidance to the provider on how to improve or optimize their service delivery.
- Are you ready to review and evaluate the results?
Finally, you have to compare the actual performance and outcomes with the expected ones. Then only you can decide whether to modify, continue or terminate the outsourcing arrangement.
By answering all these questions, you will have a solid grasp on the expectations and you can ensure achieving your procurement goals by collaborating with them.
What factors to consider for a successful partnership with a procurement outsourcing company?
You can find the right procurement outsourcing company if you know what to look for. There are several factors that can help you distinguish a good outsourcing company from a bad one, such as:
- Expertise in your domain
While searching for the right procurement outsourcing company, you should know if they have enough experience in handling various procurement functions and categories for different industries and markets.
They should be able to handle complex or unique categories and markets. Besides, they should have access to market intelligence, benchmark pricing data, best practices and innovations.
- Updated tools and tech stack
They must have tools and technologies to streamline and optimize the procurement process from sourcing to payment. Also, the company should have the flexibility and scalability to adapt to changing business needs and customer demands.
- Effective communication and collaborative attitude
Your procurement outsourcing company should communicate and collaborate with their clients effectively, understand their needs and expectations and resolve any issues or disputes promptly. They should strive to optimize and improve the procurement operations outsourcing.
- Quality stands out
Your outsourcing company should ensure that suppliers and products or services meet quality and compliance requirements. They must check, resolve and confirm the quality of suppliers and their outputs.
- Robust compliance processes
You should know how they identify and mitigate risks associated with procurement activities. They must have the strategies and methods to deal with supply breaches, frauds, failures or supply chain issues.
- Sustainability is imperative
A company should be able to enhance the sustainability of the procurement function. They must integrate the environmental, social and governance factors into their procurement decisions and best practices.
Why do companies prefer procurement outsourcing?
Visibility is a major concern in the procurement industry and outsourcing can save you costs by reducing risks and help you make smart decisions.
From greater flexibility to better tax breaks, procurement outsourcing:
- Reduces your costs drastically
Cost reduction is one of the key perks of procurement outsourcing. For instance, you can reduce the cost of labor by utilizing the specialized skills of the provider’s staff located in low-cost regions. This way, you don’t have to spend on training and maintaining your procurement team.
- Provides you with procurement expertise
Outsourcing can help you source from the best suppliers, negotiate optimal contracts and manage supplier relationships effectively.
- Improves your supplier management processes
Your outsourcing provider takes care of the time-consuming and complex tasks of finding, evaluating and picking the right supplier for you. So, you can have a sigh of relief while they ensure product/service quality and resolve operational concerns.
- Helps you improve your core competency
The fundamental idea of procurement outsourcing is to help you save money, time and improve your core business operations. Outsourcing can free up your time and resources for strategic focus at work that you would otherwise spend on procurement tasks.
- Increases your business agility
Procurement outsourcing manages customer expectations, allowing you to tap the flexibility and scalability of the provider’s resources and capabilities.
- Fosters innovation in your procurement function
Outsourcing procurement services bring new ideas, solutions and methods to improve your procurement performance and outcomes. You can leverage emerging technologies such as blockchain, artificial intelligence or cloud computing to automate, optimize and transform your procurement processes. Thus, tapping the new markets and creating value for your business.
- Improves product or services quality
The outsourcing provider can help you ensure that the procured services or products meet the quality requirements and specifications. They can assist you in implementing quality control measures, such as testing, inspections and audit to verify the quality of suppliers and their deliverables.
- Identify and mitigate risks
Your outsourcing provider can help you identify and mitigate risks, such as supply chain disruptions, supplier frauds, failures or breaches. Usually, they have a compliance team to help you comply with relevant laws, regulations, standards and policies that govern procurement activities. Furthermore, they can help you implement risk management strategies such as contingency planning, insurance coverage or backup sourcing.
- Enhance the sustainability of your procurement function
The procurement outsourcing provider can enhance the sustainability of the procurement function by incorporating environmental, social and governance factors into your procurement decisions and practices.
- Gives you a competitive edge
All businesses thrive on competition. By outsourcing, you can gain access to best-in-class procurement capabilities that help you to procure better products or services at lower costs than your rivals. You can also leverage the provider’s network, knowledge and innovation to create value for customers and business.
Airmeet, a US-based events platform founded in 2019, used procurement outsourcing services to streamline and optimize their SaaS procurement process. As a result, they were able to save more than 80 hours of procurement time and achieve a 17X return on investment.
How to choose a reliable procurement outsourcing service
Procurement outsourcing services can help you scale your business in less time. Not only are they efficient but can also provide data-backed insights and better customer-vendor relations, mostly a solid partnership between the internal and outsourced teams.
With most software applications going SaaS, Spendflo can help you negotiate, manage and optimize your software acquisitions, and also provides you with more visibility, automation and integration for your software utilization and performance.
It is a user-friendly, risk-free platform that guarantees to save you 3X what you pay for it or your money back. Wondering how to explore the possibilities?
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