LONDON, Dec. 12, 2005 (PRIMEZONE) -- According to Everest Research Institute, Procurement Outsourcing (the outsourcing of multiple indirect procurement processes) is growing at 30 per cent per annum, and offers the highest potential returns of any business process currently outsourced.
Procurement outsourcing (PO) now accounts for almost 10 per cent of the total GBP 1.76bn market for procurement transaction outsourcing -- topping GBP 172m in 2005. Continued PO growth in 2006 should see this figure top GBP 220 million as the market moves into a more rapid growth phase.
The annual Procurement Outsourcing report from the Everest Research Institute suggests that, unlike most types of BPO (Business Process Outsourcing), the value of PO goes far beyond operational cost savings. Instead, the main value driver for Procurement Outsourcing is the reduction of expenditures on indirect spend categories such as office equipment, travel, and professional services. Such savings are often in the region of 10-15% depending primarily on the rigorous use of strategic sourcing practices, technologies, and organisational adoption. Based on a typical indirect procurement budget of 20 per cent of revenues, PO can deliver savings of up to 2 per cent on the corporate bottom line -- resulting in a 25 per cent profit margin improvement if margin is 8%, and thus as much as a 25 per cent increase in market capitalization.
To achieve these returns, Everest Research Institute managing research director Michael Janssen says that PO buyers are increasingly focusing on strategic sourcing and compliance management -- the high value sourcing elements -- rather than just on the P2P (Procure-to-Pay) functions. While P2P is traditionally dominated by major players like EDS, IBM and Accenture, which contribute just 15% of the overall potential returns in a complex PO deal, strategic sourcing and compliance management can create around 85 per cent of savings. Nonetheless buyers still need to include P2P in contracts to release maximum value.
The PO sector is only just emerging. According to Everest, the 38 global Procurement Outsourcing contracts now manage around GBP 15bn of corporate spending on IT, training, marketing, mail and office equipment, among other areas.
With 45 per cent of global Procurement Outsourcing deals up for renewal within the next five years, sourcing advisory firm Everest Group foresees a huge opportunity for suppliers, suggesting that the 'outsourced outsourcing' market is on the cusp of its next growth phase, which the Everest Research Institute terms 'emerging rapid growth'.
Implications for buyers
According to Everest Group's U.K. principal, Stephen Dunn: "Today's Procurement Outsourcing is now starting to deliver on the original promise of e-commerce platforms such as Ariba -- more convenient purchasing for corporate customers coupled with lower commodity prices."
Dunn explains: "Unlike other BPO domains, reduced labour costs and scale play only a small part. The savings in Procurement Outsourcing derive from smarter sourcing decisions, effective relationship management and contract compliance."
Dunn emphasises that outsourcing indirect procurement:
-- necessitates specific category expertise (to understand the
nature of the goods and services being procured)
-- has direct and immediate bottom line impact
-- depends on tight partnership between the buyer and the supplier
of services
-- requires strong technology and change management skills to
cultivate behavioural change and system adoption by buyer
personnel
Future expectations
According to Everest, corporate PO buyers should be able to attract very positive deals at this early stage of market evolution, acting as marquee clients for prominent outsourcers such as Accenture, IBM, Ariba and ICG Commerce, who are all expanding their outsourcing capabilities and together represent 80% of the market.
All players, even sourcing experts like ICG and Ariba need to broaden and better define their sourcing offerings to create a strong and competitive marketplace.
Research director Janssen comments, "Our analysis indicates that Procurement Outsourcing directly addresses the corporate bottom line. It is a high impact decision, offering great opportunities for partners to share gains, which many are embracing."
"Despite the financial promise though, the transition to an emerging rapid growth market will depend upon suppliers' ability to create an effective marketplace, by integrating sourcing expertise and niche technology with broader BPO outsourcing experience."
Notes to editors:
Everest Group's definition of Procurement Outsourcing (PO) includes only those strategic PO deals requiring at least three separate processes to be transferred, with at least one process from within 'downstream' (Procurement to Payment -- P2P) and one within 'upstream' (Sourcing).
Everest Group was established in 1991 as an independent strategic sourcing advisory firm. Everest Group (www.everestgrp.com) has served as business advisor on hundreds of business process outsourcing transactions worldwide across more than 30 different business processes, supporting the IT, Finance, HR and Customer Service and Procurement functions. Everest helps companies create sourcing strategies and outsourcing relationships that deliver total value-improving performance and results throughout their organizations.
The Everest Research Institute (www.everestresearchinstitute.com) serves as a central source of strategic intelligence, analysis and actionable insight for corporate buyers, service providers and investors in the global business process outsourcing and information technology outsourcing marketplace.
Everest owns the Outsourcing Center (www.outsourcing-center.com), the world's largest online educational resource dedicated purely to outsourcing.