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The Pros and Cons of Outsourced Procurement

May 22, 2023
Before companies outsource their procurement functions to reliable third parties, there are both benefits and risks to consider.

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A type of business process outsourcing (BPO), procurement outsourcing finds companies hiring a service provider to perform some or all procurement activities. According to Vendr, this outsourcing process often involves procurement functions that are considered non-core (e.g., indirect procurement) but can also include functions like supplier relationship management, RFP/bid management, spend management and contract negotiation.

After a pandemic-related boom, enterprises are still adopting procurement BPO while exploring deeper transformations. According to the 2023 ISG Provider Lens™ global Procurement BPO and Transformation Services report, enterprises have scaled back investments in procurement BPO services since late-2022. However, ISG says many organizations are “still modernizing their procurement functions to better compete under still-challenging business conditions.”

Post-COVID Slowdown

According to ISG, spending on procurement outsourcing has slowed from about 30% year-over-year in the immediate wake of COVID-19 lockdowns to 15-20% today. While the dramatic supply chain disruptions and price shocks of the pandemic have eased, it says companies are still facing global instability, economic uncertainty and the need to deeply transform procurement.

“When the pandemic hit, companies suddenly saw the cracks in their procurement practices,” said Scott Furlong, an ISG partner, in a press release. “Emergency measures helped, but now they are looking at structural changes that will help them adapt to future requirements, so we expect investment to accelerate again.”

Business process outsourcing—especially procurement outsourcing—has become a widely accepted practice over the past few years, the report says, with most initial outsourcing aimed at cutting expenses in the short run and avoiding cost increases in the future. Manufacturing firms remain the most common users of procurement outsourcing, accounting for nearly 30% of procurement BPO and transformation engagements worldwide, followed by healthcare and pharmaceutical companies, ISG says.

Hitting ESG Goals

With all eyes on environmental, social and governance (ESG) right now, many enterprises are also outsourcing processes in order to comply with ESG-related standards in procurement.

According to ISG, all service providers offer ESG compliance management “as a service,” while roughly 80% of all enterprises have at least a “moderate commitment” to sustainable procurement.

“Procurement is a major focus area for ESG goals and regulations,” said Jan Erik Aase, who is also an ISG partner. “By including ESG management in their standard portfolios, service providers make it easier for clients to enforce and streamline their own policies while meeting current and future regulations.”

3 Reasons to Consider Outsourcing

Companies that outsource procurement can expect to see numerous benefits from this strategy. According to Vendr, some of the top wins include: 

  • Access to a wide selection of experts. Some areas of procurement are highly specialized and require ongoing education, training, certifications and experience to maintain a competitive advantage. 
  • Enhanced reporting and key performance indicator (KPI) tracking. When negotiating their procurement outsourcing agreements, companies can include reporting and KPIs that are developed for their specific needs and goals.
  • Simplified supplier and spend management. According to Vendr, outsourced procurement teams also have access to software that streamlines the purchasing process. For example, most use supplier relationship management software—which is widely used by third-party procurement services—to manage the process in real time.  

Addressing the Risks

There are also risks to consider when outsourcing procurement responsibilities to a third party. Those providers may not be experts in your industry, for example, and may not devote the same level of attention that an in-house procurement team would to a project or task. Also, in-house teams may have to relinquish some control when outsourcing—a “downside” that could turn into an “upside” because buyers will have time to focus on more important projects.

Finally, Vendr says it’s important to understand that outsourcing procurement does not offload the responsibility of procurement to the outside partner. Internal stakeholders must maintain a relationship with your new vendor,” it adds, “and will manage the transition between the firm’s current procurement and the new outsourced operations.

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About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.