Procurement BPO – The Best Possible Option?

Procurement BPO is a growing service being offered by large consultancies.  Procurement BPO or to give it it’s full title Procurement Business Process Outsourcing is the provision of the business functions of the processing or purchasing department of one large company by another company. 

Currently it is only large companies that are outsourcing their procurement functions as procurement BPO is an expensive option.  It involves placing a great deal of trust in another company to efficiently and effectively manage a key department of their business.

Whilst it has been common for companies to outsource their Human Resources, Travel, Payroll and Accounting very few have undertaken a full
procurement BPO and this service remains very much a budding service.

When a company outsources its purchasing department it needs to ensure that the BPO consultancy can provide a full purchasing infrastructure staffed with numerous experienced staff. It would also expect an IT intensive infrastructure plus advisory services.

Some companies just outsource part of their purchasing requirements such as their staffing, printing, travel or IT or they might outsource their direct purchasing in one geographic area.  Still others may outsource their tendering activities and there are a growing number of web sites base companies that manage procurement auctions.

There are very few large companies that have dared to outsource their entire procurement activities. Some companies have found that it is natural to outsource some of their procurement functions that sit naturally with their existing outsourcing of their accounts payable and human resource functions.

Those companies that have outsourced have tended to concentrate on their indirect procurement activities. Indirect procurements are those purchases that assist in the day to day running of a business, as opposed to direct purchases which are those that contribute to the products that a business sells.

Indirect purchases would include: cleaning, office equipment, repairs, marketing. 

Whilst you would classify contract management and supplier selection as a main part of successful purchasing, very few companies have been brave enough to outsource this facility.  Perhaps this is due to the effect that incorrect management of this factors directly affects the bottom line and profitability of a company.

As the procurement BPO market is growing, large consultancies are starting to notice and put in place the appropriate infrastructures, processes and personnel. 

Several large contracts have been signed, noticeably the UK’s National Health Service (NHS) transferred its logistic services and 1,700 personnel to DHL and Novation in 2006.

The contract was to manage the supply chain services currently managed by the logistics division of the NHS Business Services Authority (NHSBSA) and part of the NHS Purchasing and Supply Agency (PASA).  The value of the contract was circa $40m.

According to press release:

“LONDON, 06 April 2010 - CHEP, the global leader in pallet and container pooling services has awarded a five-year procurement outsourcing contract to Xchanging (LSE:XCH), one of the largest and fastest growing global business processors.

CHEP operates in 45 countries, serving customers in diverse sectors. Their global partners include Procter & Gamble, SYSCO, Kraft, Nestle, Ford and GM. The company has more than 7,500 employees.” 
http://www.xchanging.com/Media/PressRelease.aspx?ID=180

Many large companies are seeking cost effective methods to maintain their market share and some will naturally turn to procurement BPO, surely the fastest growing back office BPO service in the 2010 – 2020 decade?

NelsonHall Research estimated the global indirect procurement BPO market to be just $340 million in 2005 but many predict that procurement BPO has the potential to be a billion dollar market.

 

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