The case against outsourcing procurement
By Bill E. Koskie, C.P.M. -- Purchasing, 5/2/2002 6:00:00 AM
The sum total of the argument against outsourcing purchasing is this—outsourcing of procurement may not be the lowest total cost solution.
A great analogy for outsourcing procurement would be the comparison of a collegiate football team to a university. Clearly, the core competency would be education. Also, football would not contribute on the surface to that core competency. However, the loss of football to the university would result in loss of visibility, loss of students, loss of identity, and ultimately, loss of support. Outsourcing procurement can have similar impacts on a company.
As the freight train of outsourcing continues to roll on, the case needs to be made that outsourcing procurement is not a panacea for corporate ills. When looked at from a broad yet fundamental point of view, many of the arguments for outsourcing can actually be looked upon as supporting the opposite.
Cost savings—are all costs considered?
First and foremost, there is the view that outsourcing the purchasing function will result in cost savings for overhead. This is based on the traditional view that lower headcount will result as well as associated cost reductions. Many times, however, a fully weighted study can reveal that outsourcing will result in little cost savings or even higher costs.
How can this be? First, lower headcount assumes reallocation of responsibilities to the outsource company. Oversight responsibility cannot be abdicated, however. Further, the outsource company is likely purchasing for several entities to have a leveragable position. This can result in less than favorable purchasing decisions specific to the company. Additionally, the uplift cost for outsourcing has other hidden costs to consider, such as possible loss of leverage for value-added services, lack of internal and external customer focus, loss of flexibility to react to changing business conditions, and the sharing of savings rather than singly enjoying savings benefits.
Noncore doesn't mean noncritical
Second, there is the widely accepted view that any function that is not specific to the product manufactured is a noncore function, thus subject to outsourcing. However, procurement has a fundamentally different effect on profitability. Every dollar saved by procurement goes straight to the bottom line. Additionally, the ability to take those savings and recommend investing them in market expansion through margin management, improved product performance or supply chain reliability is often unsurpassed with a professional procurement function. A critical assessment of the impacts of releasing these opportunities is one needing, but many times not getting, a solid review by purchasing professionals.
A purchasing pro does much more than just purchasing
Many articles and discussions have attempted to address what encompasses a purchasing professional. Below is this author's view of the requirements to be a true purchasing professional:
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Recognized purchasing acumen,
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Broad business management knowledge, including financial evaluation and production management understanding,
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Leadership and coaching skills,
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Effective cross-functional communication and teambuilding skills,
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Credibility across the entire organization,
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Track record of significant results, and
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Ability to evaluate, accept and manage risk.
Clearly, encompassing these skills is essential to fully evaluate and appreciate the outsource decision.
A final, yet perhaps more important, argument against outsourcing is the loss of internally generated talent. As procurement gets viewed as a noncore competency, purchasing professionals will tend to get viewed as noncore talent. However, given the varied exposure that a solid purchasing professional receives in the course of building a career path, the possibility of assembling highly capable and successful corporate executives are often much better than recognized. The ability of procurement to balance broad corporate goals and requirements with the dynamic opportunities encountered by the everyday purchasing professional allows for the assembly of a complete and successful leader.
Send your contributions for this column to dsmock@cahners.com . Articles will be published here and at www.purchasing.com as space permits. Include photo, current position and biographical data.
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