When businesses don’t have the time or resources to handle things in-house, they outsource them. Outsourcing can be a useful solution to an overstretched or understaffed function, and is becoming more attractive as business’s attempt to further reduce their costs.
The adoption of procurement outsourcing has been slow, with many companies being hesitant to ask for support in this area, but we have seen a steep incline in recent years as businesses become more agile. In a recent Deloitte survey more than 90% of companies questioned felt ill-equipped to manage risk posed by using third-party organisations and a large majority said that they have already faced incidences involving an outsourced service provider.
Despite this, most organisations believed third parties would play a key role in the future. Insourcing also seems to be on the rise –could this be a real alternative to prevent such risk?
The benefits of outsourcing
Outsourcing has been around for some time but it seems the stigma sometimes surrounding it is decreasing. Research suggests that the average manufacturer outsources 70 to 80% of their finished product, commonly from an offshore provider. The case is no different for service providers, who commonly outsource anything from marketing to human resources and IT.
So, why do procurement functions look to outsource? According to a Deloitte survey, the most prevalent reason is to cut costs, whilst some believe that it is simply a way of complementing the existing expertise the team already possesses, just as you would an IT or legal outsourcing process. Other more specific benefits would be::
- Enhanced service quality from category specialists who understand the core market
- Access to highly-skilled procurement specialists who typically have access to extensive and relevant networks
- Better negotiation by an expert in the field, which is often more effective and profitable
- Improved management information and purchasing analysis by people who understand the purchasing environment
Is there a problem?
The worry, however, is where exactly these services are being outsourced to. Foreign countries may offer lower costs with ample infrastructure and technology to enable a more proactive purchasing strategy, making them a more attractive offer, but are they a reliable solution? The likes of India, China and Korea are among the most popular, as well know financial hotspots, with Eastern European countries also emerging as valuable outsource locations in recent years. Around 89% of respondents to the Deloitte survey believed that offshore outsourcing will continue to increase in popularity unless there is legislation enacted to curb it.
This generates concerns about data security and confidentiality, especially in light of the new GDPR regulations coming into play in May 2018. Nearly a quarter of companies reported cyber risks as a key factor in their outsourcing decision, with 87% considering cyber security in the outsourcing process. There’s also the problem with control, which becomes even more prominent when it comes to procurement.
Sending part of your business out, whether offshore or otherwise, creates a problem with control. It’s much harder to manage standards and maintain communication with providers. Despite this, between 2014 and 2016, the number of companies using external providers for procurement almost doubled – from 15% to 29%.
With many companies describing procurement outsourcing as crucial to their growth, it’s naturally becoming more complex and cost-consuming in large businesses, and so the management of these services is becoming riskier. Customers are requiring more accountability from their providers, and more from those in Vendor Management roles. Vendor Managers must evaluate the performance of each individual supplier to ensure the relationships between supplier and service provider remains strong and beneficial to both businesses. Dispute Management teams must then work to resolve issues that arise along the duration of the contract. They can look at issues surrounding lack of innovation, underqualified resourcing, culture incompatibility and proactivity vs reactivity when assessing the suitability of a certain provider.
There’s also the issue of integration. With procurement so essential to the day-to-day operation of a business, companies require the right technology to keep them constantly updated with any changes. Recent development such as cloud computing and innovations such as Big Data are having monumental impact on how we manage our solutions, and could mean that companies who invest are able to have increased control and visibility.
Insourcing - a controlled alternative to outsourcing?
The ideal scenario for companies is to have the benefits of outsourcing, without the control issues. Enter insourcing. Put simply, insourcing is referred to as the practice of using your own staff to accomplish a project or task. The term is also used when allowing external providers to take over a business function, whilst working on your premises and using your own facilities. Like outsourcing, it offers cost savings and streamlining of projects, but with better capability to standardise processes and more effective communication and reporting.
Change is inevitable throughout the duration of any contract, and so a degree of flexibility is required. Insourcing allows for this with relative ease. Without having to work with a sometimes rigid and time-consuming process with an external supplier, insourcing allows for a greater level of control to be obtained when managing the nature and speed of the change.
While insourcing does offer savings on cost from staff, whom you may already have within the business, it also requires companies to provide space and facilities for their insourced services. Essentially, it’s only suitable and sustainable for businesses with the right capacity, and those who have members of the team available to manage the external providers now working within the business.
Company reputation, and customer satisfaction, should be at the forefront of all decisions, and many feel that by bringing these essential purchasing services in house they are able to monitor these more stringently. With key brand defining decisions now being given to procurement, wider business goals, risk management, sustainable savings, as well as board level stakeholder buy-in could potentially be better managed within the same premises as the rest of the wider business.
Unfortunately, there is still no ‘one size fits all’ solution.
That said, there are some key things to consider with procurement, whether it’s being insourced, outsourced or kept in-house. Procurement is no longer a discrete and siloed function. In 2018, companies should look to move away from niche offerings that address pieces of the procurement puzzle and should instead, consider making a move towards a more collaborative method of working across the entire business.
As the most popular choice, the outsourcing landscape is having to constantly change to better serve customers. At present, we’re seeing a continued growth in outsourced services, but it’s unclear how long that will last, and how long those services will continue to fulfil customers’ needs. Businesses should continually consider which option – insourcing, outsourcing or completely offshoring – is most suitable and effective for them.
Responsibility is broadening for procurement roles across all sectors, so it’s essential to make the right choice for your business. So, whether you are a third-party supplier taking on a new contract, or a company considering bringing your outsourced procurement service internal, your people are what will make you successful.
Our dedicated team has over 35 years of procurement recruitment experience across a broad range of sectors and as a result, have extensive market knowledge, an exceptional network and a very comprehensive understanding of what a great procurement candidate looks like. Contact us today to discuss how we can help you to solve the challenges faced by your business.