What you need to know about procurement outsourcing:
- Procurement outsourcing is a type of business process outsourcing (BPO) and involves hiring a service provider to perform some or all procurement activities, including SaaS buying.
- The BPO industry expects to continue on a rapid growth path through 2028.
- Senior procurement leaders should conduct benchmarking and analysis of costs and benefits to decide if procurement outsourcing is the right decision for your company.
- Benefits of procurement outsourcing include increased expertise, improved volume leveraging, headcount reduction, optimization of supplier relationship management, and improvement of KPI tracking.
Business process outsourcing (BPO) is becoming increasingly common for fast-growing companies focused on adapting to changing landscapes. Instead of hiring in-house teams, companies are outsourcing critical business functions like IT, human resources, marketing and customer support.
This trend is not going to stop any time soon. The business process outsourcing market is expected to grow 8.5 percent by the end of 2028 and will continue to be an option for even more areas of your business.
There are pros and cons to business process outsourcing. It can mean in-house jobs lost and potential for operational failures. However, BPO can also result in cost savings, increased efficiencies, maximized performance, and taking your business to the next level of growth.
If procurement isn't already on your BPO radar, it will likely be soon. In this post, we'll offer a refresher on procurement outsourcing, the benefits, and how to identify if it’s the right move for your company.
What is procurement outsourcing?
Procurement outsourcing involves shifting all or some procurement activities to a procurement service provider. This outsourcing process often involves procurement functions that are considered non-core (think: indirect procurement) but can include more strategic functions like supplier relationship management, RFP/bid management, spend management, and contract negotiation.
Identifying ‘why’ you’re pursuing procurement outsourcing will help you better assess whether or not the benefits outweigh the costs. Your answer may include needs like:
- We need to reduce headcount.
- We need to cut tail spend.
- We need to supplement existing procurement expertise.
- We need to do a better job leveraging volumes.
By identifying these key results, you’ll be able to prioritize the value that procurement outsourcing will bring to your company.
5 benefits of procurement outsourcing
Leveraged knowledge of procurement experts
Some areas of procurement, like direct procurement and strategic sourcing (think SaaS buying), are highly specialized and require ongoing education, training, certifications, and experience to maintain a competitive advantage. Maintaining this level of expertise on your own team comes with costs of education, training, and your employees’ time.
While fostering this expertise and maintaining systems can be a part of the business's annual budget, it often gets deprioritized for more critical business operations. If you don’t have the resources to upkeep an investment in procurement education, your purchasing function will eventually suffer. In this case, outsourcing those procurement activities may be an ideal solution.
Third-party procurement service providers are responsible for maintaining excellent expertise, including category and system knowledge. For example, SaaS procurement experts maintain and grow their knowledge of software products, business systems, and integration opportunities, in addition to their expertise in the procurement process.
Budget adherence and streamlined reporting
KPIs are often a challenge, especially if teams are lean and organizational spending isn't. The procurement teams manage hundreds or thousands of suppliers and agreements, and millions in purchases. Adding results tracking and reporting to this process can be unsustainable and hard to scale. However, a results-driven approach from an outsourced team gives procurement (and the organization) what it needs for continuous improvement.
Businesses can negotiate procurement outsourcing agreements to include reporting and KPIs developed for their specific needs and goals. It then becomes one of the supplier's responsibilities is to track and report results and make necessary changes to improve those results.
Volume leveraging and cost savings
When analyzing your company's category management and purchasing, don’t be surprised to find many different suppliers and agreements for the same products and solutions. For example, perhaps you're buying project management software and discover several other departments have the same software under different agreements. Your company is missing out on volume discounts that could provide substantial cost reduction.
By outsourcing procurement to a third party, whether a service provider or group purchasing organization (GPO), you can rely on them to make organized, high-volume purchases to leverage volume and maximize savings.
Simplified supplier and spend management
Outsourced procurement teams also have access to industry-leading software that streamlines the purchasing process. Most teams take advantage of supplier relationship management software, which is widely used by third-party procurement services to manage the process in real-time. Often, procurement outsourcing will even utilize spend management software, which can further reduce organizational costs.
Cost savings through labor force reduction
Procurement outsourcing is a way to reduce headcount without heavily impacting business operations. When outsourcing procurement, you’ll likely be able to eliminate indirect procurement positions. This leaves the strategic and senior procurement labor force to handle internal activities that require face-to-face organizational involvement. Though you risk losing a level of in-house expertise, decreasing your headcount is a quick cost reduction that can easily be multiplied with the savings brought on by outsourced procurement.
3 risks of procurement outsourcing
There are some risks to outsourcing procurement functions. Here are three drawbacks to consider when making your decision.
Outsourced providers are not experts in your business
Internal procurement teams are dedicated solely to the organization’s procurement functions. Contrarily, procurement service providers dedicate their resources to many organizations. This could leave your organization feeling like attention and service have been diluted, and require a level of investment to educate your outsourced team on your business.
Creating a regular communication schedule with the supplier can help eliminate the inevitable gaps of working with an outsourced provider. Using project management and team collaboration tools can integrate your teams and align your expectations.
In-house teams must relinquish some control
Part of the effectiveness of outsourcing procurement results from handing over the day-to-day tasks to a procurement service provider, thus freeing up time for finance and procurement to focus on strategic initiatives. However, there are some areas, like data security and confidentiality, where maintaining internal standards is critical.
Setting expectations early, especially when it comes to high-risk business functions, is crucial to balancing the outsourced relationship. By clearly documenting the expectations of the outsourced firm, in-house leaders will be able to hand over some responsibilities without losing visibility into the processes.
Internal teams must manage the outsourced provider
Outsourcing procurement does not offload the responsibility of procurement. An internal stakeholder from your finance or purchasing teams must maintain the relationship with your new vendor. They will manage the transition period between the organization’s current procurement operations and the new outsourced operations. The relationship manager must also develop a continuity plan to ensure procurement functions continue seamlessly in the case of any personnel changes.
Is procurement outsourcing the right choice for your business?
Procurement outsourcing is the right choice for your business if:
- You’re looking to leverage the expertise of an outside team to help make purchasing decisions
- You’re looking to reduce your internal procurement headcount
- You need additional resources for supplier and spend management
- You need help staying on budget, establishing and meeting KPIs, and reporting on your progress
- You’re interested in leveraging volume and group-spend discounts on business purchases
How Vendr’s expertise can help your procurement team reach the next level
Struggling to scale procurement? Vendr's SaaS buying platform offers both a product and people-powered service to enable fast-growing companies to procure software quickly and with guaranteed savings.
Vendr has facilitated over $1 billion in SaaS purchases across 1,200+ suppliers for finance and procurement teams at companies like HubSpot, Brex, Canva, Reddit, Toast. With leveraged knowledge of thousands of transactions and billions of data points, the Vendr team partners with your organization to streamline your entire SaaS buying process to get your team working on better software, faster.
Looking for more? Learn how we help consolidate your tech stack, perform a free savings analysis, and identify buying process challenges all before you even become a customer with our self-guided tour of our SaaS buying approach.