Managed outsourcing is the process of transferring key activities in your business to an external service provider to cut down costs, add value, improving operational efficiency without adding to your expenses. It helps the companies to focus more on their core competencies and bring significant returns on investment especially when the companies themselves lack in internal capabilities.
Managed outsourcing service providers bring in their expertise in different categories, varied experience by dealing with multiple clients. Managed outsourcing may also involve procurement activity, which is either direct or indirect procurement. While direct procurement deals with procurement of your basic raw materials to run your company, indirect procurement usually involves support functions like marketing, IT and HR related services, office services etc. As a result, it is the indirect procurement, which is outsourced the most.
Managed outsourcing often results in higher returns on investment, thereby, increasing organizational efficiency and effectiveness. Businesses often notice jumps in productivity. It enables your company to form stronger and more strategic relationships with suppliers. Managed outsourcing service providers add value to your business and help you to curb significant costs. In this article, let us take a look at what procurement outsourcing is, which comes under managed outsourcing too.
Procurement service providers are the ones who have achieved a strong expertise in procurement of goods and services, especially, indirect procurement. They offer a wide variety of services including purchase transaction, spend analysis, category management, e-procurement services, supplier management and much more which shall be discussed briefly ahead.
Main areas of outsourcing solutions:
• Purchase transactions –
All procurement activities involve purchase transactions. Processing of purchase orders, managing quotation request, invoice matching and payment are some of the most common purchase transactions. Experienced service providers efficiently handle these transactions.
• Quality measurement and development –
Strong analytical approach to measure quality, spending patterns and compliance to standard methods is deployed by service providers. Service providers ensure quality checks at different levels of product manufacturing or a service process.
• Contract outsourcing –
Legal weapon like contract negotiation becomes a tedious job when your company does not have relevant experience to negotiate terms and conditions with your buyers and suppliers. Moreover, it consumes a lot of time, which you can, otherwise, devote to your core business activities. By outsourcing your contract formation services to an agency brings your expertise from different fields.
• Strategic sourcing –
Strategic sourcing deals with corporate supply and sourcing strategies. Strategic sourcing is not focused only on cost but it concentrates on the total cost of ownership, thereby, incorporating customer needs, organizational goals and market conditions. Its aim is to get the best product or a service at the best possible price. Strategic sourcing is based on a collaborative approach and the decisions made are supported by factual analysis and market intelligence; and it is a continuous process that evolves with time.
• Procure to pay system –
Procure to pay is a process, which starts from creating a formal request for purchase to the payment entry in the general ledger. The intermediate processes involve creation of purchase order, invoice and payment of invoice. The efficient application of this automated cycle comes with many benefits for your organization. It increases your transactional efficiency, reduces transaction processing cost, enable quick dispute resolution and better collaboration with your vendors.
• Category management –
Category management involves the development of different product categories as a strategic business unit. It makes sure that sale of Product A does not get affected with the increase in sales of Product B. To add to it, companies have realized its importance from the fact that price negotiation is not enough for profit gains and increasing overall sales of the category is of primary concern. It also involves participation of supplier in the process.
• Spend management –
Spend management focuses on controlling business spends. The expenses could be related to operating cost, administrative cost or cost of any other business activity in the supply chain. Both indirect and direct costs form a part of spend management. Spend management helps you to avoid ad hoc expenses and increase spend economies of scale. It also takes into account VAT/Tax, fluctuation in cost of raw materials, demand, exchange rate factors to get a holistic view.
• Tail spend management –
Tail spends are 20% of your total expenses, which you make on 80% of your suppliers. As a natural approach, businesses tend to focus on 20% of suppliers who form a majority of your supplies. But in vain, they are not able to cut-down their expenses after a particular level. To come out of this approach, it is wise to start working on these unexplored business expenses, which are spread across 80% of your suppliers who do not form a majority of your supplies. There are many software that give you insight into tail spends.
• Spend Analytics –
Spend analysis is crucial to your business to give you valuable insights into your spending patterns. It comes with many benefits. The sole purpose of this task is to reduce procurement costs, improve operational efficiency and monitor contracts/purchasing policy compliance. It counters issues like supply risk and ad hoc spending. Activities like inventory management, budgeting, research and development also come under the purview of spend analysis.
• E-Procurement services –
E-procurement services refer to online buying and selling of goods/services. Buyers and sellers meet on internet and specify their requirements/quotations. Ongoing purchases may qualify the customers for bulk-buying discounts and special offers. E-procurement software helps the businesses to automate their buying and selling process, and thereby, save cost of transaction and manage inventory cycles. Therefore, it forms an integral part of supply chain management.
• Supplier management –
Maintaining relationship with your suppliers involves co-ordination among the two parties across business and functional touch points. Supplier management focuses on strategic alliance with your supplier to maximize value, reduce risk, achieve competitive edge and deliver escalated levels of innovation. It helps you enhance relationship with your key suppliers and align with their business strategy for mutual benefits.
Advantages of managed outsourcing
• Economic improvement –
It is proven that procurement outsourcing gives you improved visibility and an interface for regular touch with the category markets. It keeps you posted about market price and saves cost through standardization of process. Besides helping your staff right-sizing with effective utilization of labor, it offers economies of scale and streamlines workflow.
• Service improvement –
Keep up the standard service level with service level agreements. It helps you measure cycle time and increase satisfaction of your customers. It further helps you in identifying loopholes in service delivery and constantly works towards its improvement.
• Capability improvement –
It equips you with a spectrum of market knowledge of supply in different categories. With the use of e-procurement tools like spend analysis, eRFX, reverse auctions, supplier enablement, eProcurement, eInvoicing etc. your company gets a better hold of the business operations. As already discussed above, it helps you identify and work closely with key suppliers. It often results in delivery of more value added services at the same cost.
• Adaptability –
Service providers can leverage their resources across multiple clients. Consequently, they can more effectively handle staff requirement during peaks and troughs in business.
• Business risk reduction –
Service providers pre-empt the business risk by early detection and intervention and they are apt at handling any contingency.
• Regulatory and corporate social responsibility –
Service providers follow green norms and provide lower cost solutions for regulatory and CSR compliance.
Promising trends in outsourcing
Outsourcing BPO is likely to grow at a rate of 12% annually over the next 5 years. CFOs have realized the importance of procurement outsourcing as it finds a close association between financial accounting and procure-to-pay. Besides this, they are getting skill expertise in specific category; spend management and technology, which help them to add value to their business in contrast to just cheap labor. Procurement sourcing has evolved from transactional P2P processes to more strategic processes in the value chain including strategic sourcing, vendor governance and spend analytics. Vertical expertise and geographical market sourcing has further added a distinctive feature to it. Sourcing expertise including marketing, consulting among IT/ITES service providers like Accenture, IBM, GEP, Infosys etc. and working as strategic partners than mere outsourcing service providers have set a benchmark in the realization of benefits of outsourcing. Meanwhile, managed outsourcing encompasses a number of other aspects too, like IT, HR, customer service and R&D. Depending on what your company needs, a managed outsourcing agency will be able to draw a plan so that you can save time, effort and cost both in the short and long terms.