Growing business organizations are constantly looking for ways to improve their performance by decreasing operational costs and increasing revenue. Business Process Outsourcing (BPO) is one of the strategies that can facilitate these goals. BPO refers to the outsourcing of business processes to external agencies, with the goal of relieving the company of non-business-critical tasks, while concentrating on its core business. Procurement Outsourcing is one of the most overlooked candidates for BPO.
Procurement Outsourcing (PO) is a process when an organization moves part or the full scope of its sourcing activities to another specialist body. Implementing PO can bring considerable benefits to small and medium enterprises, which boil down to three major advantages: market leverage opportunities, access to on-demand specialist expertise and cost savings.
1. MARKET LEVERAGE
Procurement Outsourcing strategy gives small and medium business a competitive advantage that other SMEs are not using – access to market intelligence, supplier networks and volume to leverage the market. PO service providers work with numerous organizations across many different industries.
This automatically puts them in a comfortable position to gather market intelligence – who is the competition? What are the newest packaging and warehousing solutions? Who can offer most suitable logistics for a particular enterprise? These are all areas in where small business can gain an advantage over its competition.
Procurement Outsourcing can also help to increase company’s buying power by facilitating partnerships in some of the basic services. Most of the small and medium businesses use a number of same services, such as IT software, office supply, transportation or hotels. In many cases, the volume of an organization’s demand is not high enough to negotiate more favorable terms, and SMEs are left with little choice but to accept supplier’s conditions. By using networks and combining the demand across several businesses, PO agencies can increase the volume of purchased services and leverage the suppliers to their customer’s advantage.
Another benefit of the PO is that it lowers exposure to supplier risks and offers a safety net of alternative vendors. Disruption in the supply chain can significantly damage company’s performance and reputation. PO providers can help to mitigate this risk by helping to choose a trustworthy supplier in the first place, and sharing its network of alternative suppliers in emergency situations.
2. SPECIALIST EXPERTISE
Small and medium-size businesses often have limited procurement resource, which is often shared with other departments, especially when the volume does not justify headcount increase. Outsourcing companies can help to solve this issue by providing specialist services on-demand.
Outsourcing agencies have a pool of procurement professionals specializing in a certain industry and processes. Businesses can tap into that pool and get relevant expert support on demand, without increasing their overhead costs. Outsourcing procurement to third parties provides businesses an access to flexible and highly specialized procurement expertise. Purchasers tend to specialize in a certain industry or spend category and are knowledgeable of its specific standards and requirements.
Another advantage of using specialized procurement experts is their advanced communication skills. Procurement Specialists are often trained in effective communication and professional negotiation methods, which allows them to act as expert intermediaries between businesses and suppliers. In the increasingly globalized world, purchasing specialists are tasked with navigating complex markets and leading negotiations in culturally diverse environments.
Miscommunication can lead to poorly negotiated contracts and later even claims. Understanding the unspoken rules of, say, Russian business culture or observing Japanese etiquette is an important part of any successful business
3. COST REDUCTION
Procurement Outsourcing can help businesses to reduce operational costs, increase contract compliance and negotiate discounts. For many companies and for growing organizations, in particular, in-house procurement creates a considerable drain on financial and human resources. PO offers an attractive solution for this issue – reduction of requirements in headcount and office space and equipment.
Outsourcing companies provide enterprises such advantages as access to advanced technology, flexible additional resources, operational and process efficiencies, and the ability to focus on core business activities. Aberdeen Group Study (2007) looked at 260 different enterprises to evaluate effects of Procurement Outsourcing on organization’s spend and efficiency.
The study concluded that companies with implemented PO strategy had on average 8.3% savings in operational and strategic procurement, and 30% lower costs to process requisitions than companies that did procurement in-house.
Another advantage that comes from PO is contract compliance and contract savings. The same study estimated a 55% contract compliance rates in the companies with outsourced procurement function. PO agencies can do much more than just help to set right frameworks – they can ensure contract savings.
With right contract terms and monitoring in place, money can be saved in areas like order management, supply schedule, indirect spend management and much more. There is also a matter of fraud. Managing small expenses provided by a multitude of vendors can be challenging, especially if scaling up. Poorly managed expenses, even small once, leave space for errors and even intentional mischarges, which over time can result in considerable expenditures. By outsourcing contract and spend management tasks to a third party, organizations immediately reduce the possibility of such errors and fraud happening in their purchasing operations.
Finally, working with an outsourcing agency can help to secure proper discounts. Increased buying\power across numerous customers and the ability to negotiate discounts can translate into considerable savings for a small and medium company. Every penny counts – smart outsourcing can make a difference between profitable and a dismal financial year.
Keeping up with a fast-paced and constantly changing market is difficult and costly, which is why more and more organizations are turning to outsourcing as a solution. Procurement Outsourcing can be a great strategy to boost SME performance. It provides growing companies access to broad market networks and increases their buying power by forming strategic partnerships. It also allows SMEs tapping into flexible specialist resources with expert knowledge of purchasing standards and strategies within specific spend category. Finally, PO helps to reduce operational costs while ensuring attractive pricing levels for goods and services procured.