In 2022, the global procurement outsourcing market was valued at USD 6.73 billion. With a 9.8% CAGR (2023-2030), the industry is expected to reach USD 14.21 billion by 2030.
More and more companies are recognizing the benefits of outsourcing. Why struggle managing supply chains while maintaining quality and compliance when you can leverage third-party expertise, cost savings, and improved efficiencies?
Procurement operations outsourcing can reduce your risk, lower your expenses, and maximize your ROI. If you’re considering outsourcing your procurement functions, learn about its pros and cons to ensure you reap the benefits and mitigate the risks for a successful outsourcing experience.
What is Procurement Outsourcing?
Procurement outsourcing is the business practice of hiring a third-party agency or person to execute the procurement functions of an organization, such as sourcing, purchasing, vendor management, contract negotiation, and management, quality control, and compliance, spend analysis, and risk management.
The typical reasons why companies outsource procurement functions are cost reduction, leveraging others' expertise in procurement, increasing efficiency, and being able to focus more time and energy on core business functions.
7 Pros of Procurement Outsourcing
Why are companies outsourcing their procurement rather than managing it in-house? Below are the benefits of procurement operations outsourcing that are converting more and more companies into using this business strategy.
Cost Savings
Companies can reduce the cost of their procurement activities by leveraging economies of scale and the capabilities of their outsourcing partner. This includes reduced prices through bulk purchasing, reduction in administrative expenses, and reduction in errors and inefficiencies. The savings can be immense, and the company will be able to divert its resources to other strategic areas effectively.
Increased Efficiency
Agencies that provide outsourced procurement services mostly include advanced technologies and smooth processes, which can enhance the efficiency of procurement operations. These technologies include automated procurement systems, data analytics, and AI-driven insights that produce faster transaction times and reduce manual effort. Therefore, companies can benefit from faster procurement cycles and boost their productivity.
Access to Expertise
Procurement outsourcing service providers bring deep knowledge of specific markets and categories, lending a wider perspective to companies that leads to better purchasing decisions.
Their procurement experts would know more of market trends, of the capabilities of suppliers, and of leading practices in negotiating and managing contracts. Such insights can help companies base their decisions on knowledge and improved results from their outsourced procurement activities.
Enhanced Business Focus
Outsourcing non-core functions like procurement allows companies to focus more on strategic initiatives and core competencies. This means that internal teams can dedicate more time and resources to areas that directly impact the company's growth and competitive advantage. By offloading procurement tasks to experts, companies can improve their overall business performance and innovation.
Improved Supplier Management
Typically, outsourcing companies have large networks of relationships with suppliers and can manage those relationships more effectively. This means better terms from negotiation, ensuring timely deliveries, and maintaining quality standards.
By leveraging their partnership, companies can build stronger, more reliable supply chains and forge stronger relationships with key suppliers.
Stronger Risk Management
Outsourcing agencies, who are external to a company, are better positioned to identify, evaluate, and mitigate the risks in supply chain and procurement processes since they are equipped with the tools and experience to address supply disruptions, compliance issues, and market volatility.
By outsourcing procurement, companies will not only reduce their exposure to risks but also assure a much more stable and secure supply chain.
Scalability
Because outsourcing agencies take over the management of offshore procurement teams, companies can scale up procurement activities more flexibly in terms of business demands without having to hire or train people directly.
This scalability is particularly useful to companies experiencing growth or seasonal fluctuations in demand. An outsourcing provider can rapidly ramp up or down its services to provide only the necessary support to meet the changing business needs in an efficient way.
5 Cons of Procurement Outsourcing
There are risks associated with any business strategy. While outsourcing procurement to agencies carries many benefits, it also brings several potential drawbacks that should be considered before outsourcing.
Loss of Control
When you hire a third party to manage your procurement, you relinquish control to them, which may affect your capability of ensuring quality and compliance to the company standards. This can be mitigated by establishing clear contracts with detailed service level agreements and regular performance reviews.
Dependence On A Third-party
Outsourcing entails dependency on a third party, which may pose a problem if expectations are not met or if there are other problems with the contract. To avoid this problem, one must diversify and outsource to several service providers while maintaining some in-house procurement capabilities as a backup.
Miscommunication
When outsourcing to an offshore service provider, there will be time zone, language, and corporate culture differences, which pose communications challenges to the effectiveness of the outsourcing partnership. This can be mitigated by establishing strong communication protocols, using collaboration tools, and setting regular meetings to get things aligned.
Security Risks
Outsourcing entails sharing sensitive information on procurement processes and suppliers, which increases the possibility of data leakage and intellectual property theft. Firms can reduce these risks by implementing top-notch data security procedures, conducting periodic audits, and ensuring that the provider is following industry-standard security protocols.
Hidden Costs
Although the cost savings of outsourcing may be projected at the beginning of outsourcing, these may be offset by hidden costs, such as transition expenses or ongoing management fees, or costs associated with contract renegotiation. A way to avoid this is by doing due diligence in the planning stage; clarify contract terms and continuously monitor all associated costs to effectively manage the total cost of procurement outsourcing services.
Inconsistent Quality
As you lose some control over your procurement process, there may be inconsistencies in the quality of services provided, especially if the outsourcing provider does not have stringent quality control measures. Such a risk could be mitigated by choosing providers with proven track records and by including quality metrics and regular audits in contracts.
Impact on In-house Staff
Outsourcing can cause morale problems within in-house staff if it results in job loss or if they feel that their jobs are being undermined by the outsourced team. This can be lessened through transparency when communicating to employees. Involve them in the transition process and provide training for new roles or offer career development opportunities within the company.
5 Procurement Outsourcing Examples
If you’re considering outsourcing procurement but aren’t quite certain how it works, below are sample scenarios showcasing outsourcing different kinds of procurement functions to help you picture what this sort of strategy can do for you.
Direct Procurement Outsourcing
involves engaging an outsourcing service provider to remotely manage the procurement of key raw materials and components critical for production processes.
Example: A consumer electronics manufacturer partners with an outsourcing company to build them a remote team of procurement specialists who can manage the sourcing of essential components like semiconductors and plastics. The outsourced team leverages global supplier networks to secure high-quality materials at competitive prices, ensuring a steady supply chain.
Indirect Procurement Outsourcing
Involves hiring an outsourcing partner to manage the procurement of non-core goods and services such as office supplies, maintenance services, and IT equipment, which are essential for daily operations but not directly linked to production
Example: A financial services firm hires an outsourcing partner to build them a team of procurement specialists that remotely handle the acquisition of office supplies and technology equipment. These staff optimize procurement strategies to achieve cost savings and efficiency by tapping into extensive networks of suppliers and negotiating bulk purchase agreements.
Purchasing Outsourcing
Involves hiring an outsourcing company to remotely carry out the purchase work, which includes placing of orders, negotiating with suppliers, and managing transactions
Example: A retail chain outsources their buying function to a service provider, who builds them a remote team of purchasing specialists with deep knowledge of how to achieve better prices from suppliers. In this way, the retail chain benefits from the advanced analytics and market knowledge the outsourced team brings to ensure the best inventory levels and maximize cost savings.
Vendor Management Outsourcing
Involves hiring an outsourcing service provider to manage supplier relationships, performance, and contracts
Example: A pharmaceutical company outsources the work of managing its vendors to a specialized firm to meet the regulatory compliance standards and enhance supplier performance. The outsourcing partner builds them a team of vendor management specialists with expertise in conducting regular audits and performance evaluations to ensure that all the suppliers meet the high demanding standards of the pharmaceutical industry.
Category Management Outsourcing
Involves hiring a third-party provider to manage specific spend categories through their expertise and optimize procurement and supplier performance within those categories
Example: A global food and beverage company outsources management of its packaging materials category to get better pricing and innovative solutions from suppliers. The outsourcing partner builds them a team of category management specialists who can remotely perform market analysis and leverage industry relationships to source sustainable packaging options, reducing costs for the company and improving its environmental footprint.
Top 5 Procurement Outsourcing Companies For SMBs
Looking to outsource your procurement process, but you don’t have large-scale operations? Below are some recommendations for SMB friendly procurement outsourcing companies with a track record for providing excellent outsourced procurement services.
KDCI Outsourcing
Based in Ortigas CBD, Philippines, KDCI Outsourcing caters to small to medium sized businesses of various industries, offering custom, cost-effective, and scalable procurement solutions. They specialize in building offshore procurement teams that can deliver end-to-end outsourced procurement services and deal with the reduction of costs and improvement of efficiency through strategic sourcing and vendor management.
Una
Located in Kansas City, Missouri, Una is the perfect fit for small to medium-sized organizations seeking group purchasing advantages. Their unique value proposition comes from leveraging group buying power to negotiate superior contract terms and pricing, which promises huge savings on procurement costs.
Dragon Sourcing
Headquartered in Shanghai, China, Dragon Sourcing serves small and medium businesses through sourcing from low-cost countries. They deliver in-depth market insight and access to a wide network of reliable suppliers, supplying products in a very cost-effective manner and ensuring quality.
Source One
Based in Willow Grove, Pennsylvania, Source One's differentiator among other procurement outsourcing services is that it specializes in the needs of the mid-market. By implementing strategic sourcing and category management, they are able to enhance supplier relationship management and improve clients' opportunities for cost savings and process improvement.
Proxima
Headquartered in the UK, Proxima specializes in procurement services for SMBs, driving value through strategic sourcing and procurement transformation. Their unique approach integrates market intelligence, expert negotiation, and process optimization to yield cost-effective solutions and enhanced procurement performance.
Outsource Procurement to the Philippines
Enjoy the benefits and avoid the pitfalls of procurement outsourcing by offshoring to the Philippines with KDCI.
At KDCI Outsourcing, we build dedicated procurement teams that are not only skilled in end-to-end procurement operations outsourcing, but are also a culture fit with your organization. This ensures they fulfill your requirements and can seamlessly integrate with your environment.
Learn more about offshoring your procurement to the Philippines. Contact us today!
