Outsourcing Your Purchasing

The following is a summary of a recent Insight Report into the burgeoning market for procurement outsourcing, covering who the big players are, the principal outsourced service types on offer, and the three main pricing models.

PROCUREMENT OUTSOURCING SERVICE AND PRICING MODELS

The global procurement outsourcing market was valued at £358m in 2006 and is expected to grow at a compound annual growth rate of 22% by 2011. Although still in the nascent stages of its life, the procurement outsourcing a market has started to gain traction with an increase in the number of deals.

EMEA accounted for the largest share of the global procurement outsourcing market at 44% in 2006, closely followed by the Americas at 43%. However, EMEA’s slim lead is set to be whittled away by 2011, when the Americas is expected to account for the maximum share of the market with 45%.

The market is highly consolidated, with just four global players:

  • Accenture
  • Ariba
  • IBM
  • ICG Commerce

These four main players accounted for 82% of the total market, measured in terms of the annualized contract value, as of August 2006.

Other players in the market include procurement outsourcing specialists such as:

  • buyingTeam
  • Cirqit
  • NewlineNoosh
  • ThreeCore

In addition, the market has witnessed the entry of offshore players such as:

  • Infosys
  • Genpact
  • Wipro

There are four main procurement outsourcing services, as follows:

Source-to-pay

Often abbreviated to S2P, source-to-pay outsourcing involves the end-to-end procurement of multiple business processes. It comprises strategic sourcing, compliance and operating efficiency.

A source-to-pay supplier needs to invest in category experts, market know-how, tools and technology, as well as the procure-to-pay process. Key players offering this service include IBM, Accenture, Ariba and ICG Commerce.

Procure-to-pay

Often abbreviated to P2P, procure-to-pay involves transactional procurement (operating efficiently and compliance) as an extension of finance and accounting outsourcing.

The suppliers provide tools and technology, and the procure-to-pay process. The main providers of procure-to-pay include Capgemini, Genpact HP and Progeon.

Sourcing

This service involves strategic consulting for sourcing. The service providers are typically required to provide category experts and market know-how. AT Kearney and buyingTeam are the key players offering this service.

Category Specialization

This service involves source-to-pay for only one category and covers strategic sourcing, compliance and operating efficiency. The service provider needs to invest in category experts, market know-how, tools and technology, as well as the procure-to-pay process. Key service providers here include Cirqit, NewlineNoosh and ThreeCore. There are three types of pricing models typically on offer in the procurement outsourcing industry:

  • Managed fee: in this model, the buyer pays the supplier a fixed fee for a predetermined volume of purchasing activity with a ‘dead band’ cushion
  • Pure gain-share: in this pricing model, the buyer hands over to the supplier a share of any savings attained above an agreed baseline
  • Gain-share and managed service fee: this pricing model is a combination of managed service fee and gain-share.