Why procurement outsourcing services customers are unhappy 1 February, 2007 By Patricia Pickett

PromoPipeline Exclusive Channel Promotions Find Out How You Can Make Money Today! ENROLL FREE! >> Factory Direct Should Not be Cheaper William Vanderbilt - Innovative Learning Channels Cloud Ecosystem II: A Candid Conversation with Oracle Beth Vanni - Amazon Consulting Cloud Ecosystem: A Candid Conversation with Rackspace Hosting Beth Vanni - Amazon Consulting Channel Manager Compensation William Vanderbilt - Innovative Learning Channels Financial Expertise William Vanderbilt - Innovative Learning Channels

Business process outsourcing (BPO) analyst firm NelsonHall has released a report, titled "Indirect Procurement Outsourcing: Customer Requirements," which examined global indirect procurement business issues and attitudes toward how these issues need to be addressed. Indirect procurement involves purchasing operating resources that an organization requires in order to run its operations. It includes a variety of goods and services, from office supplies to heavier equipment or consulting services.

According to Rachael Stormonth, research director at NelsonHall and author of the report, 325 organizations from various sectors and geographies participated in the study. The report was written specifically for market managers developing strategies to target segments of the indirect procurement outsourcing market and executives researching business issues and vendor capabilities before making purchasing decisions.

Stormonth noted that there are several indirect procurement challenges for organizations that are contributing to the dissatisfaction with cost-effectiveness of indirect procurement services.

While businesses have a strong corporate requirement to reduce the cost of indirect goods and services and improve bottom line performance, they are experiencing difficulties managing large numbers of suppliers for a couple of reasons: lack of adequate breadth of internal category management expertise; and lack of common indirect procurement systems, processes and interfaces. "One major issue is having a large disparate supplier base, with local suppliers and different contracts, all coming from different areas," Stormonth said, adding that many organizations have decentralized indirect procurement operations and do not have internal shared service centres. An organization might be running multiple instances of a number of different procurement applications, often varying between business units, she said.

Other challenges include "not having the information to manage (suppliers), and not having very strong market knowledge of these areas," as well as not having enough visibility into indirect spending, Stormonth said.

According to the study, most organizations start by addressing the issue of supplier management. Typically, organizations aim to improve their ability to reduce the cost of goods and services and the cost of procurement, to accelerate sourcing cycle times and to improve vendor management. They expect to achieve improved vendor management through better spend visibility as well as through enhanced abilities to manage supplier performance through a single interface.

The report concluded that organizations need to implement best-practice indirect procurement processes and systems as part of an indirect procurement outsourcing contract. According to the study, most organizations would like to have access to external expertise and procurement best practice, and the majority of organizations would be prepared to transfer responsibility for implementing, enhancing and supporting the associated indirect procurement applications.

The report also found that internal compliance is not seen as an immediate priority. Organizations will need to improve supplier management before they will consider themselves ready to address internal compliance; however, internal compliance needs to be addressed more rapidly, and for maximum benefits, organizations should address both supplier management and compliance and internal compliance simultaneously rather than separately. In many organizations indirect procurement has been a low priority compared to direct procurement, receiving lower access to investment and specialist personnel. As a result, some organizations are now outsourcing indirect procurement services to improve the management of these processes.

The report found that organizations want an improved process compared to their in-house capability. To achieve this goal, vendors need to offer end-to-end process improvement across both sourcing and category management and purchase-to-pay processes. Outsourcing one of these processes in isolation is unlikely to deliver both the vendor management and the internal compliance required for an optimum solution, according to the study.