How to generate cash to increase competitiveness and fund growth13 May 2012 | Filed under: Cost & Purchase Management
Posted by: Paul Foster
Do you want to find a way of generating cash to invest in innovation and increasing your competitive advantage? You can easily achieve this through indirect procurement outsourcing.
Indirect procurement outsourcing
Indirect spend typically makes up 30% to 60% of the average company’s overheads. Now consider a company with a 10% net profit margin before taxes, every £10 of income translates into £1 of profit contribution. It can either cut costs by £1 or increase income by £10. This simple illustration clearly shows the value of indirect procurement outsourcing.
What is indirect procurement outsourcing?
Outsourcing the management of cost, purchase and supplier management, already an accepted practice in many areas of indirect spend. Companies already outsource their IT, Travel, Print, HR, Security, Marketing and many more other non-core areas of their business. Indirect procurement outsourcing simply consolidates the processes and resources associated with managing these contracted services. Procurement outsourcing is not black and white it flexibly accommodates many options depending on client requirements.
Why outsource indirect procurement?
There are many compelling arguments for outsourcing cost, purchase and supplier management. Firstly, the traditional reason for Business Process Outsourcing (BPO) and secondly some procurement specific reasons. The key business drivers are lack of in-house expertise, achieving economies of scale and lower staff costs. Cost, purchase and supplier management is often decentralised which makes it even harder to build in-house competencies or expertise in any given category of spend. Additionally, purchasing is often just involved in the transaction aspects, as a “middleman” between end users and suppliers, further hindering deep knowledge within the purchasing organisation. Decentralisation also opposes the scale needed to justify investment in best-in-class technologies and tools, and access to lower staffing costs.
Outsourcing indirect procurement provides other specific benefits:
- Increased buying power – a service provider can negotiate better prices.
- Comprehensive supply chain – a service provider introduces clients to a multitude of approved suppliers.
- Access to lower staff costs – a service provider aggregates specific business processes across a number of companies.
Are you a good candidate for indirect procurement outsourcing?
Most companies are candidates for indirect procurement outsourcing. Very few companies have sufficient spend across all indirect spend categories to enjoy the scale and buyer benefits of an outsourced solution.
So who offers indirect procurement outsourcing?
The good news is there are plenty of companies willing to take on indirect procurement outsourcing work. The bad news is that so many of these companies have very different skills. Finding the right solution for your requirements can prove very challenging. There are many companies who will help you to outsource your procurement but they come at it from many different directions.
- Transaction focused providers – these are primarily software companies that provide automation and analysis tools.
- Category specialists – companies typically focussed on one or a few spend categories. One good example is in printing services, where companies such as Office2Office, HH Associates and Williams Lea offer consulting and outsourcing services to manage the entire print procurement process. Others might be energy and telecoms brokers with similar wrapped up services.
- Comprehensive service providers – there are typically two kinds of providers, the generalists who provide Business Process Outsourcing(BPO) such as Capita, Serco, and Accenture that initially focus on IT, but have moved on to HR, Finance and procurement processes. The second group specialise in procurement and have a strong record of successfully managing cost, purchase and supplier management requirements for many companies.
- Group purchasing organisations – which act as procurement intermediaries. These companies often provide clients with access to purchasing power and some benefits of the comprehensive service providers.
What is the best option?
The key to success is of course picking the right partner. What is the scope? What are the goals? There are many potential partners: but these are the key questions to ask:
- Expertise – does the potential partner have category expertise in the categories to be outsourced? Do they have best practice employed across all the services you require?
- Technology – how much automation will be used to manage the process? Where will the work be carried out? What tools do they use?
- Services – what kind of analysis of spending patterns will be carried out? What level of supplier management will the outsourcer provide? Will a company aggregate spending? Who makes the final decision on which supplier to use? Are they willing to guarantee response times or sign a Service Level Agreement (SLA)? What kind of service will be provided versus spend?
- Supplier network – is service provider increasing or decreasing the number of suppliers by category? How will the service provider determine which suppliers are adequate to satisfy the company’s requirements?
- Savings – who provides the best most sustainable source-to-pay services? Is service provider paid for their performance, i.e. gain share commercial model?
- Testimonials – does the potential service provider have sufficient sector specific references for the magnitude of processes and categories to be outsourced?
About the author
Paul Foster is a Partner – Cost Management Specialist at Auditel, the UK’s premier cost, purchase and supplier management specialist, with 200 fully trained specialists, and over 3800 clients. He can be contacted on Mobile: 07964 623920, Office: 01908 990017, Email: firstname.lastname@example.org