What is BPO in Procurement and Sourcing?
Business process outsourcing (BPO) allows companies to tap into third-party resources to take on important business processes, freeing up internal resources for high-value activities. Many companies outsource strategically important activities, like manufacturing or R&D. BPO in procurement and sourcing, however, is becoming more common.
BPO in procurement has allowed some companies to cut overall operating costs by nearly 20%, gaining efficiency and providing better customer service in the process. However, BPO does add risk to your organization. Here’s what to consider when outsourcing elements of your procurement and sourcing functions.
BPO in procurement and sourcing
Over the last 10 years, it’s become common for enterprises to outsource some or all of their procurement activities. Business process outsourcing can take place at multiple points throughout the procurement lifecycle.
Business process outsourcing in procurement and sourcing allows an organization to capture a number of benefits. When multiple organizations outsource to the same partner, that partner is able to aggregate demand and secure lower prices. A partner’s scale also offers the organization expertise, especially in areas in which low spend makes it difficult to source in-house. And, by delegating smaller or less important procurement categories to a BPO partner, procurement teams can focus on optimizing critical strategic spending.
There are some risks to BPO in procurement. Many outsourcing deals fail due to mistakes in vetting third-party partners, outsourcing the wrong activities, or setting the wrong incentives to help create long-term savings. Here’s how companies can avoid these common errors.
Getting started with BPO
There are three steps to help your team get started with BPO in procurement.
1. Outsource buying in the right categories
The first step to successful procurement BPO is to decide whether to outsource strategic buying in a specific category. Not all spend categories should be outsourced. Those categories that are strategically important, e.g. because they create a competitive advantage, should not be outsourced. BPO can increase risk for a company — therefore, only consider outsourcing those non-critical buying categories.
There are a range of other factors to consider in this analysis, too. “A company’s ability to capture the maximum possible value from a category depends on a host of factors, including the size and complexity of the supply market, the organization’s relative influence in that market, the existence of appropriate in-house expertise, and the availability of sufficient capacity to manage the sourcing process,” wrote McKinsey.
Ultimately, the procurement categories you choose for BPO may be those that are of low strategic importance and where there aren’t enough resources (or expertise) to manage sourcing in-house. Create a shortlist of those spending categories and move to the next step.
2. Maximize where outsourcing can deliver value
Next, analyze whether or not BPO can ultimately deliver value for your organization. This involves understanding whether a solution like Fairmarkit is sufficient for improving your procurement process in comparison with outsourcing completely to a third party. It also requires vetting providers to understand the unique value they can offer.
Typically, when you outsource to a procurement partner, they are able to deliver value in three ways.
- Volume aggregation: bundling demands from multiple clients allows procurement partners to negotiate lower prices;
- Expertise: specialized outsourcing or outsourcing at scale allows procurement partners to offer deep expertise and real-time market insight;
- Reduced labor costs: BPO allows a client to reduce the labor cost of sourcing activities through a contract with a procurement partner.
Each potential BPO partner must be vetted with these benefits in mind to ensure that the deal and agreement are structured to properly capture the anticipated results.
3. Create a strong agreement
The success of any BPO is determined by the strength of the underlying agreement. Choose the best BPO vendor and create a contract that reflects your business goals. It’s also worthwhile to practice strong supplier relationship management and define long-term KPIs that ensure you reach your outcomes. “Strong agreements focus on metrics that drive long-term savings, like continuous improvement targets,” wrote McKinsey.
[Read more: 5 procurement KPIs to measure]
Finding a procurement BPO partner
Not sure how to find the right outsourcing partner? A good place to start is with a sourcing and procurement tool like Fairmarkit. Try our vendor recommendations tool which sources intelligent vendor recommendations using both your historic data and ours. Outsource procurement to the right people to meet compliance requirements and receive more bids across categories.
For more advice on optimizing the procurement process, check out Fairmarkit’s blog, The Source.