Procurement as a Service (PaaS) is a great opportunity for companies and their procurement teams. It does not compete with existing knowledge and skills but complements them. It is also a great opportunity for startups and new/innovative service providers because it is still a somewhat unchartered territory and size does not (yet) matter. And it is an opportunity for established service providers as they can reach those potential customers that have previously been reluctant to give up significant control over their procurement processes.
Business Process Outsourcing in Procurement
When organizations struggle to meet their procurement objectives by maintaining a Strategic Procurement function, many of them consider outsourcing some or all procurement activities to third parties. One of the main promises these specialist Business Process Outsourcing (BPO) providers make is generating significant savings fast.
Outsourcing procurement activities can range from full to partial outsourcing. It can focus on single processes such as Source to Contract (S2C) and Procure to Pay (P2P) or individual categories such as Professional Services or Electricity.
In this context, it is important to remember what procurement is. Procurement is not an isolated business function but a set of cross-functional activities. As a function, it is the mediator between consumer and vendor. Procurement is there to facilitate, making sure internal customers get what they need at the right quality, time, place, and of course price. At the same time, it must ensure vendors stay loyal and available because the ability to source goods and services competitively is vital to most profit-oriented businesses.
In order to make its contribution to the bottom line, procurement must know and reconcile the specific needs of its internal customers and suppliers in equal measure. A winner vs. loser mentality along the supply chain leads to everyone losing in the long run.
Usually, outsourcing business processes aims at reducing headcount in the organization. One major pitfall to consider is, that releasing staff usually means losing knowledge and expertise. And I argue that procurement expertise is quite essential to run a business successfully. I am not making a case against BPO in general here, I am making a case for being smart about it.
In looking for smart ways of evaluating outsourcing opportunities, I came across a simple but seemingly effective methodology published by Peter Spiller and Martina Tokic (both with McKinsey & Company) in 2015. Regarding outsourcing Category Management, they suggest that decision making rests on two main factors:
- The relative strategic importance of a category to the organization’s value proposition
- The organization’s ability to successfully manage the category in house
Exhibit 1: High-level approach for strategic segmentation of categories
Source: McKinsey & Company 2015, “Creating value through procurement outsourcing”
Applying this methodology has its strengths and weaknesses. On the one hand, it is simple to understand and seems easy to implement. On the other hand, it assumes that the strategic importance of categories remains stable and that they are in themselves somewhat homogeneous.
Business Process Automation
I suggest a more differentiated view on the matter. We need more innovative approaches to Business Process Outsourcing. We need to look beyond the manual component of a task. Let us find a way to combine the advantages of insourcing and outsourcing as well as considering automation – Business Process Automation (BPA).
BPO is, amongst others, aimed at reducing headcount. Without automation, the manual task is merely transferred from one person to another. This does not make the process more efficient; it may reduce labor costs – nothing more.
Automation eliminates labor costs and inefficiencies that come with manual tasks. And, if kept in-house, competences to automate processes can be scaled across business units and functions. This makes the organization smarter and more efficient.
Automation does not eliminate outsourcing as an option to create more value, it complements it. Among the Thought Leaders in BPA are providers of BPO, such as Accenture or GEP. They understand that their very profitable outsourcing business models can only continue if they master automation. So, looking at outsourcing should always mean, looking at automation opportunities as well.
Side note: About a decade ago, large corporations started to outsource transactional procurement activities to low-cost countries. Now, they consolidate the necessary tasks near-shore or in-house and strive to automate the rest.
Procurement as a Service
After exhausting opportunities to automate, Strategic Procurement may want to consider event-based BPO as an alternative to outsourcing a fixed set of categories or processes permanently. This means building a pool of service providers that act on demand, covering peaks, or providing expert knowledge or skills for specific procurement tasks. This idea is not new. For instance, several of my former clients have relied on external consultants to write Statements of Work (SoW) or run Requests for Proposals (RFP). Consultants however are relatively expensive resources for these tasks. Why not engage with specialist service providers?
That is where Procurement as a Service (PaaS) comes in. The continuing trend of process automation and the constant pressure to further reduce procurement operations costs drive the growth of the global PaaS market. A recent study by MarketsandMarkets (MNM) expects this segment to grow by about 7.6% per annum (CAGR) until 2024. Especially large corporations are expected to adopt this concept at a high rate over the next few years. But it offers great opportunities to small and medium-sized companies as well.
- It pays off to first check automation potentials before establishing conventional Business Process Outsourcing.
- In order to preserve knowledge and expertise in the company while being more efficient, it is worthwhile to examine task-based BPO.
- Procurement as a Service is an opportunity for customers, purchasing, startups, and established service providers alike.
I am interested in your thoughts:
- What are your experiences with Business Process Automation (BPA) and Business Process Outsourcing (BPO)?
- How do you see Procurement as a Service (PaaS) develop over the next five to ten years?