Gartner: procurement outsourcing may be an alternative to e-procurement - Industry Overview

EDP Weekly's IT Monitor, Dec 9, 2002

As enterprises find it increasingly difficult to train and staff their internal purchasing organizations, many are looking at procurement outsourcing as an alternative, according to Dataquest Inc.

"Procurement outsourcing spreads out the enormous implementation cost of e-procurement software over a longer time period," said Rebecca Scholl, senior analyst for Gartner Dataquest's IT Services program. "Unlike procurement implementation, which demanded up-front investment and required back-end support, procurement outsourcing can spread the implementation cost over time and offers true purchasing expertise."

A recent Gartner Dataquest survey showed that the percentage of enterprises outsourcing procurement is still very small. Only 6 percent of the respondents surveyed in June 2002 said they currently outsource a portion of their procurement function, however, a third of those respondents expect to increase their procurement outsourcing budgets during the next 24 months.

The survey showed that procurement outsourcing is driven by the requirements to focus on core business and to improve business processes, along with gaining process knowledge, innovation, shortening implementation time and improving service levels.

"These drivers show that procurement outsourcing is in an early phase of outsourcing in which the focus is still on business process re-engineering through innovation, rather than on the benefits of re-engineering," said Scholl. "In more mature forms of outsourcing, such as HR and finance and accounting, the driver has shifted to benefits of re-engineering, such as reduction of overall costs. Reduction in costs does not yet factor in as one of the primary drivers of procurement outsourcing."

Clients expect a high level of procurement process expertise from their providers. BPO vendors must either develop this process in-house or partner with pure-player providers that have process expertise. The procurement function is a multi-enterprise process that requires specialized skills; therefore, procurement process expertise may be difficult to grow in-house.

"Providers must develop innovating pricing methodologies to showcase the value of outsourcing as a whole, relative to incremental unit cost savings," said David Hope-Ross, research director for Gartner. "Suppliers must find better ways to package/create value around their offerings. Those with aggregate pricing arrangements may require sweeping changes."

Additional information is available in the Gartner Dataquest report "After the E-Procurement Hangover: Is BPO the Right Painkiller?" The report looks at the potential demand for procurement outsourcing and looks at the competitive landscape of providers that offer procurement outsourcing.

This information is produced by Gartner Dataquest's IT Services group. This group provides a complete picture of the IT services industry including network integration and support, hardware services, consulting and system integration, outsourcing, life cycle service, strategic partnering and services marketing, vertical markets and software support.