Executive Summary

Despite the potential to achieve significant savings and create sustained value for their organizations, enterprise buyers have been slow to adopt Procurement Outsourcing (PO) services. Everest Research estimates potentially a 5X savings multiple for PO over other outsourcing markets like Finance & Accounting (FAO) and Human Resources (HRO). This should have resulted in the PO market being vibrant, stable, and well-developed; but in reality the PO market size is less than half that of FAO or HRO. This is the paradoxical situation that exists today. 

While direct cost reduction has traditionally been the focus of outsourcing buyers, the real value proposition of PO does not lie in reducing operational costs but in realizing savings through procurement spend reduction, i.e., reduction of the non-strategic spend on third-party goods and services. The procurement spend represents a much greater cost base and potentially far greater savings than traditional outsourcing but also renders the PO process challenging – especially around realization of the potential. This is one of key reasons why the PO market continues to be in the “pioneer” phase of outsourcing market maturity.

There are five main hurdles in realizing the PO potential:

1. Define “savings”
2. Establish savings target
3. Measure savings
4. Enforce savings
5. Manage operational costs                          

This paper discusses how buyers and suppliers can address the above challenges by well-designed savings mechanisms and well-executed outsourcing practices.

Both buyers and suppliers also need to recognize that PO is transformational in nature and is not “your-mess-for-less.” As such, the realization of the large savings potential in PO is challenging and requires intensive process management, up-front investments, and agreement across all internal stakeholders (procurement, finance, and individual departments). Buyers and suppliers need to collaboratively tailor the “right” roadmap to realize savings depending on their unique business situation and build it into the outsourcing contract.

Objectives and methodology

Everest Research Institute conducted a study of the PO market to educate the industry on the challenges in the PO market and the available mechanisms to address those challenges. In the study, we observed that buyers and suppliers use a number of different mechanisms to achieve savings objectives – mostly around defining, estimating and securing the savings. In a young and upcoming market like PO, the lack of understanding of the different mechanisms and the lack of prevailing process and delivery standards creates a high-risk profile for both buyers and suppliers of PO services.

This paper discusses:

• Issues with definitions and realization of savings in PO
• Key features of the different mechanisms that exist in the market to address the issues
• Best practices to consider

The intent is not to recommend one savings mechanism over another, as the applicability and usage of a mechanism depends entirely on the unique business situation.

The sources of information for the discussion include:

• Proprietary Everest data on over 60 multi-process PO contracts
• Everest advisory experience in the PO market
• Detailed informational interviews with a diverse set PO suppliers including buyingTeam, Corbus, Genpact, HCL Technologies, IBM, ICG Commerce, Infosys BPO, Provade, and Xchanging