Procurement outsourcing is hot. And, really, what is the downside? Committed savings on identified spend that may not have otherwise been captured and realized (and hopefully offsetting and well exceeding any procurement outsourcing fees). Procurement outsourcing is a great business proposition and can be a win for a company if it picks a service provider that can deliver and it has strong contract protections that enable “guaranteed” savings. Four factors that we have seen lead to a successful deal are good (1) sourcing and category management strategies, (2) contract collection and vendor management, (3) benchmark data and buying leverage, and (4) success metrics that are accurate and measurable.
- Good Strategies: Good sourcing strategies are critical to the success of any procurement outsourcing engagement. This includes being able to identify the categories of high-impact spend, as well as other areas of opportunity for consolidating spend within a company to reduce overall costs. Many service providers offer strategic services to help define target areas in addition to the more typical procurement services.
- Good Contract Collection and Ongoing Vendor Management: It may seem like a funny benefit, but procurement outsourcing often forces customers to locate contracts, enhance their contract databases, and put better collection and retention policies in place. Some deals transfer responsibilities for these activities to the service provider after initial collection. In addition, the service provider often assumes tasks that can lead to better vendor management, including tracking and managing vendor price performance, tracking expiration dates and renewals, and benchmarking prices against market data on a regular basis.
- Good Data and Buying Leverage: Procurement outsourcing with the right service provider can provide the customer with better spend data and metrics by spend category, location, or business area and against other companies in the same market. Also fundamental to these types of deals is that, because the service provider aggregates buys across a larger purchasing base, buying leverage (and associated price reductions and discounts) will be more favorable than if the customer went to market to purchase on its own. (One area to think about that can be a pitfall is how the service provider uses the customer data and vendor information in connection with services provided to a company and to a broader customer base for benchmarking purposes. Where is a company’s data going, and does it have the rights to allow the data to go there?)
- Good Success Metrics Tied to Realized Savings: Accurately measuring success so that realized savings are, well,real, is key to procurement outsourcing. This requires good baselining of current spend (so that increased savings provided by the service provider are captured). Sometimes too much of a good thing can cause unanticipated payments to the service providers, so customers should think about capping the upside for overperformance.