Indirect Procurement Outsourcing – Customer Requirements

This article outlines the key findings of a recent NelsonHall report on indirect procurement requirements. The global study interviewed 329 direct user organizations to establish:

• Key indirect procurement issues and challenges faced by user organizations together with levels of satisfaction with different sourcing and procurement processes
• A profile of indirect procurement process maturity reached by user organizations
• User organization’s current and forecast usage of external indirect procurement services
• Benefits sought from indirect procurement outsourcing, and vendor selection criteria
• Preferred indirect procurement outsourcing delivery approaches.

Methodology

In order to qualify as BPO in this survey, outsourcing contracts must involve the vendor taking overall responsibility for the business process and not just supplying IT applications or processes to facilitate the process. Typically, BPO involves the vendor in employing those personnel involved in delivery of the business process.

The profile of user organizations interviewed by geography is shown in Table 1, below User organizations interviewed were split equally across the following industry sectors: banking, insurance, federal/central government, local government, retail CPG & discrete manufacturing, transportation & logistics, telecoms and utilities.

Table 1

The rating system used to assess importance and satisfaction throughout the user survey is a 1-to-5 scale, with 1 being not at all important/satisfied and 5 being very important/satisfied.

Summary of Findings

Satisfaction with In-house Indirect Procurement Capability Remains Moderate Only 20% of organizations express low satisfaction with their indirect procurement capability, implying that fixing indirect procurement is not a major business priority for the majority of organizations. This is reflected in the levels of procurement outsourcing activity which has remained relatively low during the past year.

Table 2

Maverick spend is not yet regarded as a major issue by the majority of organizations, with high levels of maverick spend only perceived to be a major issue by approximately a quarter of organizations: this may be a consequence of the immaturity of current indirect procurement operations, in particular resulting from a lack of indirect spend visibility. Current priorities are still typically focused on the more elemental need to improve control of vendor management. However, despite relatively high levels of satisfaction with their indirect procurement IT systems and processes and the lack of importance attached to improving indirect procurement operations, only 42% of organizations are highly satisfied with their current procurement capability for indirect goods & services, and there are many significant issues to be addressed. In particular, organizations express low satisfaction with their overall indirect procurement service quality and with the availability of appropriate management information. Another area of dissatisfaction is the ability to implement major change across the organization. These patterns are relatively consistent across geographies.

There is a broad consensus globally, that while organizations are generally satisfied with their ability to achieve volume discounts for indirect goods and services, they are generally dissatisfied with the cost-effectiveness of their indirect procurement services. This suggests an inability to drive the discounts agreed into hard savings as a result of geographical and organizational fragmentation of indirect procurement processes.

Current common challenges faced by organizations’ procurement functions include:

• A corporate requirement to reduce the cost of indirect goods and services
• Managing large numbers of suppliers in the absence of adequate category management expertise in all areas and without common indirect procurement systems and processes
• Lack of indirect spend visibility.

Table 2 shows the proportion of organizations regarding certain considerations in indirect procurement management to be a major issue. In order to address these concerns and assist clients in enhancing their indirect procurement operations, vendors need to:

• Develop from client-specific to more standardized offerings above and beyond purchase-to-pay or source-to-contract to full lifecycle indirect procurement outsourcing
• Widen their areas of category management expertise
• Develop an integrated multi-shore delivery capability.

Indirect Procurement BPO Needs to Develop From Client-Specific to Standardized Offerings

For the majority of organizations indirect procurement has traditionally been a much lower priority than direct procurement and so has received less investment and specialist personnel. Accordingly indirect procurement is at a relatively low stage of process maturity. This is reflected in the lack of centralization of indirect procurement services. The table below provides some measures of the current levels of centralization within organizations’ indirect procurement operations.

Overall, the level of centralization of indirect procurement is relatively low with individual business units often retaining/utilizing their own indirect procurement processes. This clearly presents an opportunity for organizations to achieve greater standardization and centralization of applications and processes.

Similarly, only a third of organizations claim to have implemented regional or global indirect procurement shared services centers, with another third of organizations beginning to implement these. This leaves a final third of organizations with highly distributed indirect procurement operations. This lack of centralization inhibits indirect procurement outsourcing in several ways:

Table 3

• approximately 70% of organizations perceive that they need to implement internal shared services centers for indirect procurement prior to outsourcing these activities; clearly, the majority of organizations have yet to reach this level of maturity
• only 35% of organizations would be prepared to move to a utility based multiorganization delivery model within five years of outsourcing indirect procurement. A key vendor selection criteria relating to indirect procurement outsourcing remains vendors having the flexibility, capability, and willingness to provide their clients with tailored services

In addition, organizations need to implement standard "best-practice" indirect procurement processes and systems. The majority of organizations (57%) would be prepared to transfer responsibility for implementing, enhancing and supporting associated indirect procurement software application on outsourcing indirect procurement operations. This suggests that the best approach to outsourcing indirect procurement operations would be similar to that currently adopted for multi-process HR outsourcing, with the vendor building a set of standard indirect procurement platform/processes that can be used to standardize, say, two-thirds of indirect procurement activity – with the remainder being tailored for individual clients.

This, however, has implications for organizations’ continued development of their own indirect procurement shared services facilities. If vendors develop their own process/platform components delivered from their own multi-shore delivery centers, they will have a reduced willingness to acquire existing shared services facilities from clients, since these will frequently either use inappropriate processes and systems or be sited in inappropriate locations. Accordingly, buy-side organizations that expect to outsource their indirect procurement operations in the longer term need to ensure that they do not make inappropriate or wasted investments in their own shared services centers.

Vendors Need to Extend the Scope of their Indirect Procurement Outsourcing Offerings At present full-lifecycle indirect procurement outsourcing is relatively infrequent. Organizations tend to favor outsourcing purchase-to-pay functions relating to indirect procurement, with vendors such as Accenture focusing strongly on this space. At the same time sourcing and category management are also outsourced in isolation from purchase-to-pay processes, and have their own specialist vendors, for example Ariba and ICG Commerce. There have been fewer full lifecycle source-to-pay contract awards, e.g., vendors such as IBM Global Services and Xchanging. However, clients are seeking a wide range of benefits from indirect procurement outsourcing, as shown in Table 4.

Figure 4

More than three-quarters of organizations attach high importance to achieving:

• Lower costs through reducing the costs of goods and services and reducing purchasing process costs
• Accelerated sourcing cycle times
• Improved vendor management through improved spend visibility and improved ability to manage supplier performance preferably through a single interface
• Access to expertise & procurement best practice.

These can only be delivered by the service provider managing both sourcing & category management and purchase-to-pay processes. In addition, vendors should consider offering indirect procurement outsourcing services alongside F&A outsourcing and HR outsourcing services.

While the indirect procurement outsourcing market is still immature, 50% of organizations are highly willing to outsource indirect procurement to a vendor currently providing them with F&A outsourcing or HR outsourcing services, and there are some synergies between indirect procurement and F&A and HR services. For example, purchaseto- pay processes are common to both F&A outsourcing and indirect procurement, and recruitment of temporary personnel is potentially common to both HR outsourcing and indirect procurement. In one example, an early adopter organization, BAe Systems, outsourced both its HR and its indirect procurement to Xchanging. In a more recent example, Japanese electronics company Omron, having outsourced accounts receivable services to IBM Global Services in December 2005, subsequently outsourced all sourcing, tactical buying, CAC and procurement operations (but not accounts payable) to the company, too. The main benefits being sought by Omron were improved strategic sourcing and process compliance.

Clients need to be careful and evaluate vendor capabilities independently across indirect procurement, finance and accounting, and HR, but there are potentially some emerging synergies once vendors achieve high maturity in each of these process areas.

In the short-term, we can expect to see more examples of indirect procurement being outsourced alongside F&A than alongside HR.

Vendors Should Extend the Scope of their Category Management Coverage One of the current inhibitors to outsourcing indirect procurement is a perception that it is limited in scope and hence of limited value to the client organization. While one element of low scope relates to the fragmentation of indirect sourcing processes outsourced, another aspect of fragmentation relates to the categories under management. Clients running pilots as a first phase of adoption of indirect procurement outsourcing typically run pilots based on a limited number of spend categories. At present, pilots tend to cover just a sub-set of indirect procurement categories, typically office supplies & equipment; temporary labor; business travel, MRO, for manufacturing organizations. However, the benefits of indirect procurement outsourcing are considerably enhanced if a wider scope of categories are transferred to the external service provider to manage. Organizations should thus be willing to transfer a wider range of spend categories beyond these areas to spread the investment and increase the benefits derived from the investment.

There is a broad consensus across all geographies that organizations are generally satisfied with their capabilities in procuring commodity office supplies and equipment, reflecting the ease of buying items in these spend categories, even from paper-based 19 catalogs. In contrast, MRO, print procurement and marketing related spend are generally perceived to be more challenging. Vendors looking to extend their category management coverage should consider gaining expertise in these categories to extend their indirect procurement category coverage as widely as possible.

Vendors Should Develop an Integrated Multi-Shore Capability

Offshore capability is not currently perceived to be of high importance as a vendor selection criterion; organizations are more concerned with the vendor’s ability to provide a tailored service and their expertise within the categories of high initial relevance. However, indirect procurement processes can be divided into two main process groups:

• Sourcing & category management
• Purchase-to-pay.

Each of these has differing delivery characteristics, with purchase-to-pay processes being relatively highly suitable for offshore delivery and sourcing & category management typically (BUT NOT ALWAYS) requiring relatively local expertise. In addition, clients are typically seeking to manage procurement services regionally or globally and require a combination of global and local capability from their service supplier, including an ability to offer local support for change management issues.

Accordingly, it is important in the mediumterm for vendors to develop multi-shore delivery models incorporating improved indirect procurement processes and standard indirect procurement processes and systems, underpinned by the most effective combination of onshore, nearshore and offshore resources. The complexity of indirect procurement processes will ensure that delivery from a single location will typically prove a sub-optimum solution.

It is also important to develop strong analytical capabilities. Three of the most important benefits sought from indirect procurement by buy-side organizations are:

• Improved spend visibility
• Improved management reporting and process control
• Improved supplier monitoring.

Organizations are initially seeking to achieve improved vendor management through use of a single procurement interface and improved spend visibility. Although they initially attach lower importance to internal compliance, internal compliance in conjunction with vendor compliance is the key to improved spend management.

Note: The complete report is available from NelsonHall. www.nelson-hall.com

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