Because Money Matters
Procurement outsourcing authorizes another person or organization with procurement experience to carry out certain key procurement activities on your behalf. Typically, it includes sourcing, managing vendors, negotiations, purchase transactions, and category management. Clients outsource the procurement function under various circumstances. It is mainly to minimize the financial burden and time involved in setting up and managing the entire Purchase department.
The best alternative is, hand over the complexities to an expert and relieve yourself to focus on core Procurement functions.
Clients without a dedicated department or whose procurement departments often handle many transactions can opt for this choice. Large corporations outsource the Procurement function where the level of operation is high rather than strategies. It would be difficult for the Client to look at every single work.
“You need to understand what you are buying, and why, how it will affect your business, and what the potential risks are. That detailed understanding may be beyond the scope of a procurement department.”
What Kind of Organizations Outsource?
The use of the Procurement Service Provider (PSP) is rising all over the world. Statistics indicate that almost half of businesses around the globe have used third-party procurement services in recent years.
The main factors for this are the volatile and rapidly evolving market dynamics and to ensure that costs are reduced so that the organization’s bottom-line is healthy.
The PSPs are someone you can trust and act as an extension of your Procurement function. A PSP has its employees and they possess the required knowledge and experience to support clients with a range of tasks. These tasks are usually undertaken by the Customer’s resources at high salaries and perks. Additionally, the primary function of PSP, they also provide clients with detailed reports of spending and the evaluation of opportunities.
What are the Types of Procurement?
In general, Procurement is divided into two types:
- Direct procurement
It is where all purchased products are directly involved in the manufacture of finished goods. In other words, the Direct Procurement of goods or services becomes part of the BOM (Bill of Material). A suitable example may be the automotive industry, where windshields, paints, etc. are purchased from manufacturers and the manufacture directly use in the finished goods.
- Indirect procurement
The goods or services procured are used to facilitate work for the employees of the Client. They do not directly go as part of the product itself.
For example, the automotive industry that allows a PSP to buy computers, mobile phones, tables, chairs, etc to ensure that employees are assisted with these goods and services to produce the product exactly as planned and these purchases are not represented as such in the final product.
Are the Results significant enough?
Clients outsourcing their procurement roles to PSPs have access to a pool of expertise to handle policy implementation and process issues too. They will provide collective experience to achieve higher efficiency and better overall performance. Clients would usually seek to reap more profits by using PSPs, even under sluggish and unpredictable economic conditions including pandemics. Outsourcing the procurement function to a 3rd party is the ideal solution today because the PSPs come with required skill-sets and specializations thus Client can avoid adding expertise, procedures, equipment, and much more that will cost a lot of time and money.
Procurement outsourcing would help the Client rapidly scale up the function to meet constantly changing business needs. Many service providers use an on-demand pricing model that allows Clients to pay only for the support they need or the services they offer. They can also reduce or remove the headcount faster on demand.
The benefits of this outsourcing model are infinite. The service providers will have high-domain-specific knowledge across a broad variety of fields. They have a deep pool of business insights, best practices, pricing comparisons, contract models, and procurement tools, etc. The PSP is best positioned to mitigate costs, thereby opening internal marketing teams to offer highly competitive value to external consumers with more visibility.
Should I Outsource?
Time is money, and that is what drives Clients to decide whether or not to employ a PSP instead of involving themselves directly on every procurement tasks. The cost management and efficiency of the Clients are significant. Since the funds required are most often high, the outsourcing of procurement offers a fairly attractive return on investment (ROI). Annual returns are expected to be roughly three to five times the fees of the outsourcing service provider, as per industry experts.