Procurement outsourcing set to boom

The multi-process procurement outsourcing is growing at a rate of 30 per cent a year and will exceed $380 million in 2006, according to a new study.

Procurement Outsourcing: Annual Report 2005, published by outsourcing advisory firm Everest Research Institute, says the market is on the 'cusp of its next growth phase' from which buyers can benefit.

Procurement outsourcing -- complete or partial transfer of the business processes, infrastructure and resources associated with purchasing all indirect costs, including contracted services, by a company to a third-party services provider-- currently represents a spend base of $25 billion, according to Everest's analysis.

"Procurement outsourcing has the potential to become the biggest 'game-changer' in business process outsourcing," said Michel Janssen, managing research director at Everest Research Institute.

"Our findings indicate that PO will achieve five times the savings multiples of other BPO domains, including HR, IT and offshore outsourcing, delivering a potential bottom-line saving of up to 2 per cent of sales."

Unlike other BPO domains, the study found that procurement outsourcing does not depend on labour cost arbitrage or scale to pay off.

"Procurement outsourcing is dependent on sector and functional expertise, with savings coming from smarter sourcing decisions, effective relationship management and legal compliance," Janssen added.

The Everest study analysed 38 global indirect spend procurement outsourcing contracts, and found that, while the market is still in its early stages, suppliers are expanding and buyers that move quickly can capitalise on competitive deals as a result.

"Buyers should be able to attract very positive deals at this early stage of market evolutions, acting as marquee clients for prominent outsourcers such as Accenture, IBM, Ariba and ICG Commerce," it concluded.

These companies represent 80 per cent of the market, but all providers are expanding outsourcing capabilities to meet demand.

"Procurement outsourcing directly addresses the bottom line, and is a high impact decision," Janssen said.

"It offers great opportunities for partners to share gains, which many are embracing. But its transition to a rapid growth market will depend upon suppliers' ability to create an effective marketplace, by integrating sourcing expertise and niche technology with broader BPO outsourcing experience."