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Companies are increasingly using third-party procurement services, even for essential purchases.
Alix Stuart, CFO Magazine
November 1, 2009
Human resources, technology, tax, and even accounting — companies have grown comfortable with buying these services rather than tackling the tasks themselves. Are they also becoming more comfortable with buying the very act of buying?
It's not a philosophical question. According to The Black Book of Outsourcing and other sources, the market for third-party services that help businesses buy smarter is poised to take off. The Black Book projects procurement outsourcing, which can entail everything from help with a single supplier decision to having an outsourcer select and pay a wide range of vendors on an ongoing basis, will hit $750 million this year and grow to $2 billion next year.
Many companies already use such outsourcing for indirect spending on noncore areas, but increasingly companies are tapping such partners for help in buying essential products as well. Karl Stillman, regional sales director for commercial-grade plastics manufacturer Rosti, dipped his toe in the market last year, when he was being squeezed between steel suppliers that wanted higher prices and customers that wanted lower ones.
"We're very good at negotiating for all the basic commodity stuff — sheet metal, nuts, bolts — but some of the specialized parts we need to buy are very sophisticated, and it's hard to see what the cost is made of," says Stillman. Enter Xerox, which supplied him with detailed cost data on the other supplier's components (not ones it made), as well as a list of alternative suppliers. Having used this approach multiple times over the past year, Stillman says it has saved him anywhere from 3% to 10% of each part's cost, depending on the volume ordered. "Table-banging can work in the short-term, but this is much more sustainable," he says.
More than 90% of 2,800 users surveyed by The Black Book cited cost-savings from labor arbitrage and quick ROI as top reasons for using a procurement outsourcing firm. One source of savings: procurement outsourcers keep better track of spending than their clients. "It gives companies more visibility into what they're spending, which then allows them to be more strategic about it," says Katrina Menzigian, vice president of research at Everest Group.
It's a burgeoning market. ICG Commerce, IBM, and Accenture currently dominate, according to Everest, but traditional outsourcers and specialized firms like General Electric spin-off Genpact are helping expand the market. Xerox entered the arena last year, hoping to leverage its data-intensive approach to supplier negotiations and a large staff in the Asia-Pacific region, where so much sourced product originates. The idea was confirmed when "one of our clients asked us to do for them what we'd done to them," quips Ginny Tucker, vice president of procurement solutions for Xerox. Stillman knows the feeling, but he isn't complaining.