Procurement Is the Next Outsourcing Target

Business process outsourcing has cut a wide channel through traditional human resources departments, financial and accounting operations, and customer relationship management departments.

Now, another business function has surfaced as a candidate for outsourcing: procurement. A number of recent outsourcing contracts cover this area. Affiliated Computer Services Inc.’s portion of Walt Disney Co.’s $1.3 billion outsourcing initiative includes procurement services, according to ACS.

Accenture’s seven-year outsourcing deal with Japanese electronics manufacturer Elpida Memory Inc. covers traditional realms such as finance and customer relations, but also includes procurement.

IBM’s $1.6 billion outsourcing contract with NiSource Inc., a natural gas distributor, also involves a procurement component. IBM commences work on the contract July 1.

Vendors now maneuver for position in what they perceive to be a large and expanding market. IBM made a splash last week, unveiling a Supply Chain Management outsourcing business unit, which will pursue procurement, among other areas. IBM pegs the supply-chain transformation services market at $23.5 billion.

IBM’s supply chain offering grew out of its own experiences. The company embarked on a supply chain retooling in 2002. “Duplicate spending and redundant inventory” cost IBM $4 billion in 2001, according to a Forrester Research Inc. report. But the company’s supply chain overhaul saved $5.6 billion in 2002, IBM noted.

Smaller integrators such as World Wide Technology Inc. also offer procurement outsourcing. The company recently bolstered its service, rolling out ClearOrbit Inc.’s POC (Purchase Order Collaborator) application to support a procurement outsourcing contract with an automotive OEM.

World Wide Technology will automate purchases between the OEM and its 900 suppliers, “who will log on to POC to view and accept purchase orders, to submit invoices for items shipped, and to track payments,” according to ClearOrbit.

Procurement outsourcing deals, thus far, tend to focus on aspects of procurement, rather than the process in its entirety. Vendors typically aren’t negotiating prices on behalf of their outsourcing customers. Instead, the contracts focus on areas such as managing procurement-related applications—the technological underpinnings of the procurement process.

Accenture’s pact with Elpida falls into the application management category, said John Wallace, an Accenture partner.

An Accenture study published in 2004 suggested that those organizations pursuing procurement outsourcing do so on a selective, service-by-service basis. Accenture found that the most commonly outsourced items were the hosting of e-sourcing and e-procurement applications. The next most popular area was the requisition-to-pay process.

Outsourcing the strategic process—the supplier and negotiation activities—was less common, the Accenture study found.

In addition, Accenture discovered that organizations were more likely to outsource processes associated with indirect materials—office equipment, for example—than processes associated with direct materials, the raw materials used to manufacture a product. The indirect materials processes were viewed as less risky to outsource.

The increasingly complicated and, at times, inefficient nature of procurement makes it a natural target for outsourcing. Vendors hoping to expand in this area will have to move fairly quickly, however: Accenture and IBM are already on the scene. Providers ranging from resellers to the service arms of supply chain software companies also hover about the field.

Call procurement the next stop on the outsourcing trail.