Procurement outsourcing can address both procurement spend and operational costs. According to the Everest Group, a procurement outsourcing engagement that spans the source-to-pay process can influence costs equivalent to 5%-15% of an organization's total revenues — far exceeding the less than 1% impact typical of most other business process outsourcing (BPO) segments.
This makes procurement outsourcing a powerful lever for cost reduction, with organizations typically realizing savings of 5% to 10% on their outsourced spend.
Best Practices for Procurement Outsourcing
To maximize the benefits, GEP and the Everest Group have developed a list of best practices:
Procurement outsourcing contracts have traditionally focused on specific activities within procure-to-pay (P2P) operations or sourcing and category management. Fewer contracts take an end-to-end source-to-pay (S2P) approach. While P2P-focused contracts enhance operational efficiency, source-to-contract (S2C) contracts can lead to unit-price reductions. However, the lack of integration between upstream and downstream processes often leads to substantial savings leakage. For instance, non-compliance in the P2P process can undermine the value generated in the S2C process.
To maximize savings, sourcing and finance must collaborate closely to ensure contracted savings are reflected in adjusted budgets, preventing budget holders from reallocating funds inefficiently.
Procurement outsourcing (PO) and finance outsourcing (FAO) often overlap in accounts payable (AP), where efficiency and compliance are key to savings. Issues like maverick spending, duplicate payments, and poor working capital management can undermine PO value, making finance involvement critical from the start for seamless transitions and sustainable results.
CFO involvement enhances savings potential, especially in high-spend areas like marketing and legal, where procurement traditionally has less influence. CFOs can foster partnerships and ensure the provider's expertise is fully utilized. Active finance engagement also improves data flow, streamlines processes, and reduces AP headcount, driving additional cost savings.
There are various ways to classify procurement spend, with the most common being the differentiation of direct versus indirect spend. Traditionally, procurement outsourcing (PO) has focused on indirect spend, while direct spend is seen as strategic and managed internally. However, as the PO market matures and organizations seek to drive bottom-line impact in challenging economic conditions, PO is increasingly encroaching on traditional direct spend areas through procure-to-pay (P2P) outsourcing, tail-spend management, and specific categories like packaging, bundled services, and maintenance, repair, and operations (MRO).
While the direct versus indirect classification is relevant in manufacturing, it is less applicable to service-oriented sectors such as telecommunications, hospitality, and financial services. Given that these sectors are now leading adopters of procurement outsourcing, it makes more sense to classify spend as core versus non-core. All spend that can be outsourced—including all indirect categories and non-core direct categories like MRO—can be classified as non-core spend.
Procurement outsourcing requires a phased approach to manage risk, but buyers must also prioritize a long-term vision. Focusing solely on short-term gains can erode value over time and limit future expansion opportunities.
Starting with select parts of the procure-to-pay (P2P) or source-to-pay (S2P) process, or specific categories, helps build trust and a strong buyer-provider relationship. However, buyers should aim for a scalable model that eventually integrates the entire S2P cycle and all non-core categories.
A strategic plan should include centralization, sourcing model adoption, technology and process transformation, and organizational changes to streamline and optimize the S2P cycle.
Unit price reduction, achieved through strategies like competitive bidding, global sourcing, and supplier consolidation, drives 40%–60% of savings in procurement outsourcing.
Spend compliance, often overlooked, accounts for an additional 30%–50% of savings. A strong governance structure involving both buyer and provider is critical to prevent maverick spending, budget issues, and vendor non-compliance.
Operational efficiency further enhances savings by standardizing processes, reducing procurement effort, and optimizing headcount. Benefits include minimizing duplicate payments, capturing Early Payment Discounts (EPD), and improving working capital.
