How to survive procurement outsourcing

Paul Teague, Editor in Chief -- Purchasing, 3/16/2006

Mention the word "outsourcing" to most purchasing professionals and their eyes light up as they analyze all the possibilities for operational breakthroughs in their companies.

Add the word "procurement" to "outsourcing" and you may get a cold stare.

Which is surprising, given that procurement outsourcing—particularly in the indirect area—has been going on for years. And now, as the story on page 46 shows, it's growing. That means everyone has to take a hard look at the possibilities procurement outsourcing offers—because others in your company are surely looking.

The big fear is potential job loss. We'll get to that in a minute. First, let's look at the potential for savings. It can be big. So too can be the potential for having more time to concentrate on core competencies. In a manufacturing company, that can mean concentrating on building relationships with suppliers who can provide the raw materials that truly differentiate a product, and leaving other complex buys—like telecommunications, travel and IT consulting—to the experts.

There is a growing list of companies that offer purchasing services. Theoretically, the cost savings they bring can be compelling, particularly for small companies that don't buy in large volumes. But, there may be less than meets the eye here, so it's important that purchasing digs into the details to ensure the promised savings are real.

Intel Director of Corporate Purchasing Roger Whittier suggests you do some benchmarking of the prices you now pay and of your own overhead costs. Also, build in incentives that make it worthwhile for your purchasing-services provider to actually reduce your consumption.

That brings us to the job-loss fear. Some people will lose their jobs. On the other hand, outsourcing procurement enables you to virtually add special resources without increasing headcount. And anyway, as National Instrument's Global Procurement Manager Mark Mirelez says, companies will always need a small cadre of procurement personnel to manage the outsourced work. The trick is to prove to senior executives that purchasing isn't just about buying stuff. It's about adding competitive advantage. No executive wants to lose that opportunity.