Procurement outsourcing constitutes a growing dimension of corporate procurement strategy. To date, procurement outsourcing has mostly been limited to the transactional purchase-to-pay process rather than the more strategic aspects of procurement. However, research by The Hackett Group®, a leading global strategy and operations consulting firm, indicates that major companies will likely expand the scope of procurement outsourcing in the coming years. If procurement outsourcing is to yield the expected benefits, its adopters will need to carefully weigh the comparative costs and risks of insourcing vs. outsourcing across specific procurement activities, manage the potential risks, and ensure that sufficient effort goes into process design and optimization.
Procurement outsourcing cost and risk assessment
To assess the potential for procurement outsourcing across specific procurement activities, it’s helpful to think in terms of a simple cost-risk matrix. The X-axis gauges the cost of outsourcing the procurement activity relative to performing it in house, and arrays activities from low cost across to high cost. The Y-axis measures the risk associated with non-performance or incorrect performance of the procurement activity, and arrays activities from low risk up to high risk.
Procurement activities that fall in the low cost, low risk area of the matrix – such as purchase order (PO) processing and accounts payable – are clear candidates for procurement outsourcing. Activities that have high risks attached to non-performance, such as supplier scheduling, are candidates for procurement outsourcing only if risks can be well managed through information sharing and carefully structured service level agreements (SLAs). Meanwhile, activities for which the costs of procurement outsourcing are not less than doing them in house – which may be the case for large companies that can achieve internal economies of scale – may still be outsourcing candidates in situations when the company would benefit from trading capital expenditure for variable costs, or when there is a benefit in the company being able to redirect its time and attention away from operational activities and toward more strategic concerns.
The Hackett Group can help you assess, plan, and implement procurement outsourcing
The Hackett Group offers procurement advisory programs and procurement outsourcing consulting services that drive measurable improvements in our clients’ operational efficiency and effectiveness. Our procurement outsourcing consulting, like all of our G&A strategy and operations consulting, is informed by our renowned benchmarking and best practices repository built on more than 25,000 benchmarking engagements with the world’s leading companies. Leveraging rich empirical data and years of hands-on experience, The Hackett Group’s veteran advisors can help you with all aspects of procurement strategy development and implementation, including benchmarking of your current operations; evaluation of organizational options such as shared services, outsourcing, or offshoring; supply chain strategy formation; business process reengineering; and talent management for the procurement function.