Procurement Outsourcing in small to intermediate companies

Table of Contents

1. Introduction
1.1 Background
1.2 Research purpose
1.3 Choice of subject

2. Theoretical framework
2.1 Literature Review
2.1.1 Definitions
2.1.2 Overlook of Outsourcing history
2.1.3 Procurement Outsourcing: the still awaited “next big thing”
2.1.4 Options to be considered in a procurement outsourcing deal
2.1.4.1 Understand a company’s procurement maturity
2.1.4.2 Process
2.1.4.3 Spend categories
2.1.4.4 Involvement of provider
2.1.4.5 Pricing
2.1.4.6 Complexity of options
2.1.5 Outlook
2.2 Focus on a public case study: L’Oréal Xchanging Case study, An innovative approach to indirect procurement
2.3 Literature
2.3.1 Literature Sources
2.3.2 Collection of Literature
2.3.3 Critic of sources
2.3.4 Gap

3. Methodology
3.1 General approach
3.1.1 Pretention
3.1.2 Scientific approach and choice of methods
3.1.3 Ability to generalize
3.1.4 Preconception and personal bias
3.1.5 Approach to reality: subjective and self-judgment
3.2 Practical approach
3.2.1 Interview method
3.2.2 Structure
3.2.3 Empirical data collection

4 Interviews
4.1 Interview with a in house procurement professional
4.1.1 Presentation of company
4.1.2 Presentation of interviewee
4.1.3 Procurement maturity
4.1.4 Outsourcing in the company
4.1.5 Stance on outsourcing
4.2 Interview with a in house procurement head of
4.2.1 Presentation of company
4.2.2Presentation of interviewee
4.2.3 Procurement maturity
4.2.4 Outsourcing in the company
4.2.5 Stance on outsourcing
4.3 Interview with a procurement professional in the outsourcing industry
4.3.1 Presentation of interviewee
4.3.2 Factors hindering procurement outsourcing for smaller companies
4.3.3 Smaller companies seldom enter procurement outsourcing deal
4.3.4Stance on outsourcing for smaller companies
4.4 Interview with a procurement consulting professional
4.4.1 Presentation of interviewee
4.4.2 Different forms of outsourcing
4.4.3 Picture is changing
4.4.4 Factors hindering procurement outsourcing for smaller companies
4.4.5 Stance on outsourcing for smaller companies
4.5 Analyses of interview

5. Conclusion and discussion
5.1 Conclusion
5.2 Recommendation
5.3 Further research

6. References

7. Appendices
7.1 Annex 1: Interview guide for buyer within a company
7.2 Annex 2 Interview guide for procurement consultant

1. Introduction

1.1 Background

Outsourcing, Offshoring or third party contracting are terms that are more and more common in the business world regarding the management of operations. As for several decades companies have been focusing on core activities, there is a clear trend to subcontract non-essential activities. As a first step, let’s look into these terms and understand the background behind these concepts.

Outsourcing is defined as the contracting out of a process to a third party. It may involve transfer of employees or assets from a firm to another. A process can be outsourced to a domestic company or relocated in another country, in this case it is named Offshoring.

Outsourcing started in the 1980’s in the USA, mainly with the outsourcing of call centers. European companies followed the trend later; so historically USA is the most mature market for outsourcing, followed by the UK and then the rest of Europe. Other parts of the world like Asia and Latin America are still not really mature regarding Outsourcing.

As mentioned before, Outsourcing started with call centers, so this is the most mature function in outsourcing(Xerfi Percepta Le BPO en France, 2013). Later, it was followed by IT, payroll, CRM, claim processing, HRM, finance and procurement. If outsourcing is not really new, procurement outsourcing is not yet main stream. The pioneers in procurement outsourcing started in early 2000 and huge growth was expected at that time. However, more than 10 years later, procurement outsourcing did not turned out to be as massive as forecasted by the providers. Understanding why the growth of procurement outsourcing was relatively low will require tackling several industries, several sizes of companies and understanding different models of outsourcing. As well, to fully grasp procurement outsourcing, the research needs to address both sides of the outsourcing relationship: the customer and the provider.

As a background to this study, Outsourcing can be seen as a whole since procurement outsourcing is part of the Outsourcing trend. From the point of view of a company, procurement outsourcing can be seen just as a step further following the path of outsourcing. Previous experiences of outsourcing in another department will influence on the reluctance or keenness to outsource procurement. Although, from the point of view of a CPO or a provider, procurement outsourcing will be seen as a standalone project.

In this thesis, the focus will be outsourcing of procurement in small companies. Whether benefits or risks, procurement professionals have in mind the effects of outsourcing on organization, costs, governance, process efficiency and purchasing performance in small and medium enterprises, as well as intermediate companies. The European definition of Small and Medium-sized Enterprises follows: "The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro."(European Commission, 2003) For intermediate companies, I will use the French definition of “entreprise de taille intermediare” which is as follows: Any company that is not an SME, which employs fewer than 5000 persons and which have an annual turnover not exceeding 1,5 billion euro, and/or an annual balance sheet total not exceeding 2 billion euros according to the French law of economic modernization of 2008.

Embracing procurement outsourcing, several companies have achieved important savings and increased their efficiency. However this goes with risk, loose of control and a lot of change in management. Other companies had to pull back, recreating in house procurement capabilities after a terrible experience in procurement outsourcing. I think this topic if worth to research as it is a complex topic with several factors influencing success of a deal and different risks and benefits associated to a procurement outsourcing agreement.

1.2 Research purpose

Procurement outsourcing is a wide topic as there is already a lot of research looking into the benefits and the risks of a procurement outsourcing project. Outcomes like potential effects in terms of organization, costs, governance, process efficiency and purchasing performance have been the focus of different studies already. In the same way there are many variables to take into account when preparing an outsourcing project. The main questions are what elements a CPO should consider before entering a procurement outsourcing agreement. It is known that elements such as the commercial structure of the deal, the processes adopted to interact between the organization and the communication plan of the roll out have an impact on the success of these projects. Especially, providers have been looking into how and which part of procurement should be outsourced. There are several options to consider, for instance how the provider will get paid. The range of outsourcing can vary as well from S2P (source to pay) to P2P (procure to pay). CPOs afraid of losing to much control have the option to choose different models of governance as Co-sourcing or regular outsourcing.

As there are already some materials about analyzing factors and options available to get the most of a procurement outsourcing deal, I choose to look into the reasons behind the little use of procurement outsourcing in Small and Medium-sized enterprises and intermediate companies. Indeed, most of the companies daring to experiment procurement outsourcing are large if not very large companies. In recent years, there have been more and more Outsourcing deals and a vast majority of them involve large multinational companies. However, SME ( 1 to 250 employees ) and intermediate size companies ( 251 to 4999 employees) should have even more benefits than large companies.

As mentioned before, from a theoretical stand point procurement outsourcing can bring a lot of benefits to customers: cost cutting, more efficient processes, focus on core competences, contracting provider whose core competence is procurement. One could imagine that smaller companies could even get more benefit from outsourcing, as it is more difficult to build up the same competences in house.

This apparent contradiction will be the focus of this study. It will aim to identify what are the obstacles for smaller companies to use procurement outsourcing and how the situation is going to evolve.

1.3 Choice of subject

Due to all the above mentioned, Outsourcing is seen as a sensitive topic within the procurement Community. I am specialized in Purchasing and Supply Chain in my home university, so I keep my self-updated about trends in procurement community like computerization, joint procurement, shared service centers and so on. Outsourcing is a topic which aroused my interest within the different trends.

I then had an opportunity to do an internship as a buyer for a procurement outsourcing provider named Xchanging Procurement Services in Paris from February 2013 to July 2013. There, I really experienced what it meant to outsource procurement functions. I worked for 3 different customers each one under a different contract. The commercial models, governance, scope, teams involved were different, therefore I could experience how those factors influenced my daily work. At my level of organization, I cannot say exactly how these factors influence the efficiency or performances but you still get a feeling about it and about the quality of delivery. I also encountered supplier making my work complicated as they did not trust the provider with confidential information or have doubt about our expertise or the sustainability of our relationship. They had the feeling that providers come and go so that they should not be involved too much in the customer / supplier relationship. All this questions made me feel that procurement outsourcing was an interesting subject to research. Especially, it surprised me that each of the customers I worked for were large listed multinational company with a worldwide presence making billions of revenue each year. The work we were doing as provider was beneficial to the customers as we were producing savings and category experts were leading the projects. It was unclear to me why only large corporate customers were buying this procurement outsourcing services. Indeed, smaller companies could get even more benefits as it is more difficult for them to build the same capabilities in house. It is unclear to me which are the rationales behind the little use of procurement outsourcing by smaller companies. As was looking into literature I did not find research looking in this specific topic.

So, I believe that from an academic point of view, procurement outsourcing is interesting as it is relatively new within the outsourcing trend and comes with important opportunities and challenges for the companies. A performant purchasing is essential for companies in today’s global competition as only cost efficient, flexible and performant companies are able to expend and make profits. Procurement outsourcing can be a powerful tool to optimize procurement but it comes with its set of challenges. In particular, smaller companies have to keep pace with fierce competition imposed by their larger competitors. Outsourcing could be a solution but so far most of smaller companies have not undertaken this path.

My chosen career path will bring me to face this kind of challenges to optimize procurement for large and small companies. From my previous experience, I believe that procurement outsourcing will bring improvements but there are also so many failed projects that the outcome of an outsourcing project can vary dramatically. Having this subject meeting both personal and academic interests, I am glad to contribute to research on my area of expertise.

2. Theoretical framework

2.1 Literature Review

2.1.1 Definitions

First, as procurement outsourcing is a quiet complex subject, it is useful to define what it actually is with help of the literature.

There are several definitions of outsourcing across the literature; for example, Greaver (1999) describes outsourcing as “the act of transferring some of a company’s recurring internal activities and decision rights to outside providers as set forth in a contract”. The different definitions are quiet consistent and could best be summed up by the easiest and clearest definition, from a dictionary: “Outsource: to contract out” (Oxford Online Dictionary, 2013)In the same way, there are several definitions of procurement across the literature like the process required to acquire goods and services, (Project Management Institute, 2004). Likewise, a dictionary gives a simple and clear definition as the business dictionary (2013): The act of obtaining or buying goods and services. The process includes preparation and processing of a demand as well as the end receipt and approval of payment.

The procurement activity has been the subject of lot research describing the different steps. Below is a drawing describing the procurement lifecycle. It is extracted from the Xchanging Procurement Brochure, 2013.

illustration not visible in this excerpt

(Xchanging Procurement Brochure, 2013)

Obviously, the definition of procurement outsourcing is a combination of the two above definitions namely the fact to contract out the processes required to acquire goods and services. Here again literature can help to find a more precise definition. For example Hanson and Olson(2005) define it as following; “the transfer to a third party of all or part of a range of sourcing-to-settlement processes including sourcing, tactical buying, requisitioning, accounts payable and supplier management”.

Finally, regarding the range of companies coming under the focus of this thesis, there is need to define what is understood as small to intermediate companies. The European definition of SME follows: "The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro."(Enterprise and Industry Publications: The new SME definition, user guide and model declaration, Extract of Article 2 of the Annex of Recommendation 2003/361/EC). For intermediate companies, I will use the French definition of “ entreprise de taille intermediare” which is as follows : Any company that is not an SME, which employ fewer than 5000 persons and which have an annual turnover not exceeding 1,5 billion euro, and/or an annual balance sheet total not exceeding 2 billion euros according to the French law of economic modernization of 2008.

2.1.2 Overlook of Outsourcing history

The first example of Outsourcing can be found earlier than the 1980s in the US. For example, the simple fact to contract out can be found in the Roman Empire, when defense and military activities where outsourced to barbarian mercenaries. However this seems to have been poorly managed, as according to Halvey and Melby (2000), the terrible performance of the agreement, lack of control and even revolts eventually led to the collapse of the Empire. There are more successful early examples of outsourcing at the same period as for example research shown that the Roman Empire tried as well outsourcing to perform tax collection (Hirschheim & Dibbern, 2006).

Outsourcing as we know it today really emerged in the 1980s with the rise of computerization of business. Before, corporations were keen to keep control of operation, so from 1945 to the 1980’s, the trend was to vertical integration. Traditional organizations believed that they should implement a vertically integrated model where they own each stage in the design- to-delivery process, thereby controlling the supply chain (Farney, 2004).Vertical integration is quite the opposite of outsourcing, since the company is integrating part of the supply chain. The company will end up performing non-core or non-strategic activities. For example, for a manufacturing company this could be extracting raw materials, transportation, shipping or distribution.

Due to automation and computerization, companies started to outsource payroll management, IT and contact centers (call centers) in the 70’s and 80's. At this time, there were only a few pioneers daring to take the bold move and outsourcing what was not yet an industry. Even the concept of outsourcing appeared only in the late 80’s in the specialized IT press to describe the trend of major companies transferring the management of their Information Systems to specialist providers. However, it is interesting to notice that at this time the word Outsourcing was not yet used, but academic authors used “Facility management” instead. (M. Owen and D. Aitchison. 1988) (Gonzales, 2006). In the Outsourcing literature, the milestone marking the generalization of Outsourcing, and especially the IT outsourcing, is in 1989 when the Eastman Kodak Company outsourced its IT function to four vendors led by IBM (DEC, Businessland and Anderson Consulting). The data center operations to IBM (International Business Machines), the telecommunications and the data networks to Digital Equipment Corporation and the personal computing to Businessland. This deal marks the beginning of IT outsourcing megadeals and also legitimized outsourcing. (Bergkvist, 2008) Prior to this, outsourcing had apparently raised little interest. (Gonzales, 2006). After this date a lot of SME or large companies followed the trend of Outsourcing.

The reasons behind an IT outsourcing deal are mainly about costs, as significant saving are expected, but also to focus on core competencies as non-core activities are in the hands of specialized providers. (Fish & Seydel, 2006). With the IT outsourcing generalizing across business, the scope of Outsourced activities broadens progressively. From a single process agreement as for example with payroll, call centers or claim processing for insurance, the scope of outsourced activities includes much more complex processes with IT. (Bergkvist, 2008) Indeed, IT includes multiple systems, different support lines, impacts the whole company and is business critical as a failure in IT paralyzes the whole operations of a company. The IT provider bears an important responsibility for the whole outsourced activities. This kind of contracts involved sometimes the transfer of assets and employees from the customer to the provider. This new era of complex outsourcing structure where operations of provider and customer are strongly connected and where the provider’s activities goes deep into the organization of the customer opened the door to procurement outsourcing.

2.1.3 Procurement Outsourcing: the still awaited “next big thing”

In 2003 Accenture surveyed about 200 procurement directors in the US and Europe from several industries and the result was that almost half of the asked CPOs were considering outsourcing a significant part of their procurement operations within three years. (Fernández, 2007) Only half of them were actually outsourcing procurement functions, or even just some aspects, at this time. Three years after, an Everest Research Institute (Fersht and Gupta, 2006;Fernández, 2007) research backed this previous finding that the Procurement outsourcing industry is growing at an approximate rate of 30% per year. In this report, the Managing Research Director of Everest, Michel Janssen, declared that, by means of procurement outsourcing, many of the companies in their study would achieve five times the savings that would be possible through more traditional Business Process Outsourcing (BPO) fields, such as human resources, IT, financial and accounting operations, and Customer Relationship Management (CRM). In addition, according to the same study, Procurement Outsourcing is expected to bring significant savings to the companies implementing it. It is supposed to bring a competitive advantage to those companies as savings on procurement can be impacted directly on the cost of goods sold (COGS). Procurement outsourcing is expected to be a powerful leverage for a CPO to take bold moves to optimize purchasing.

Due to all the above mentioned procurement has long been expected to become "the next big thing" in the outsourcing world. Although more than a decade after the trend appeared, procurement continues to lag behind other functions in outsourcing. (Rodrigo Slelatt , AT Kearney , 2011). Despite a substantial growth in outsourcing in the past several years, procurement outsourcing is less than 2% of all outsourcing activities. The A.T. Kearney study compares the gap between procurement outsourcing projections and the reality three years later among leading businesses. CPOs were asked about what they actually outsource in 2007 and what they expect to outsource until 2010. The same question was then asked about actuals in 2010 and expectation for 2013. The study shows that the 2010 actuals were clearly under what was forecasted three years before. The values are from 2 to 5 times lower depending if it is Operational, tactical or strategic buying. Which is really surprising is that the expectations for 2013 are below the one for 2010.

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Procurement outsourcing was awaited as the big thing and a lot of companies were having big plans but it seems clear that the forecasted massive implementation of procurement outsourcing did not happen, or at least not yet.

Only a couple of companies are seen as experts at outsourcing procurement. Moreover, those corporation most often limit their outsourcing plan to selected portions of indirect spend. Companies are still reluctant to expend the scope of outscoring to all indirect spend categories and direct spend categories are not even considered for outsourcing in most cases. Expectations that procurement outsourcing will achieve substantial growth over the coming years might need to be tamped down.

The possible underlying reasons are numerous according to the A.T. Kearney study from 2011. In fact, procurement outsourcing is still an emerging practice among the wide range of functions that can be outsourced and several experiences have shown that procurement outsourcing is not an agreement to be entered into lightly. Especially during the preparation of a procurement outsourcing project, the company should undertake a formal strategic sourcing process to select the right provider, as vendor solutions and contracting methods vary widely in this relatively immature outsourcing field. If today's Head of customer service can contract a call center outsourcing provider and feel secure about the outcome, a CPO is facing much more uncertainty while outsourcing strategic sourcing or category management. In procurement outsourcing field, every service provider has specific capabilities, solutions and service offerings that vary dramatically and in some cases even still under development. In addition, vendors may have different spend categories experience and know-how among the wide range of spends categories. These categories are not linked to each other and the knowledge required to manage it is completely different. For example, managing the travel category has nothing to do with managing successfully the Facility management or MRO (maintenance, repair & Operation) category.

Besides provider selection, a CPO should have a full understanding of the value proposition in terms of costs weighed against potential savings and other benefits. In many cases, a procurement outsourcing deal did not delivered the expected outcome in terms of savings or process improvement. In some cases, a CPO can notice afterwards that he paid more fees to its provider than that what he would have spent on establishing the same capabilities in-house. In some rare case, the incurred fees can even be higher than the savings generated, therefore the procurement outsourcing deal destructs value.

2.1.4 Options to be considered in a procurement outsourcing deal

2.1.4.1 Understand a company’s procurement maturity

When considering a procurement outsourcing project, a CPO should have a clear idea of the level of performance and the maturity of the current procurement department. Provider will be keen to assist in the evaluation during the tender phase of vendor selection. However a CPO can also seek assistance form independent experts or consulting companies as the provider will be tempted to exaggerate the low performance of the department. Industry benchmark or specific procurement journals can also help to assess the performance. However procurement performance is directly linked to competitively so that companies will not share data easily. The direct consequence is that the accuracy of benchmarks can be questionable but are the only indicator available. For example, in the study The Power of Procurement, KPMG, 2012, the KPMG advisors compares different industries and one of the findings is that retail industry is the most mature industry.

Xchanging, a leading procurement outsourcing provider, measures the procurement maturity by looking at several factors. First, one of the key element is the percentage of spend under management. The more unmanaged spend there are in a company, the less procurement performance will be delivered by the procurement department. The tools used and the way the different departments interact is also an indicator of maturity. Technology and especially integrated corporate IT systems will enable smoother work between procurement department and the rest of the company. Following the maturity matrix, Xchanging defines five categories: immature, reactive, proactive, strategic and best in class.

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(Xchanging Procurement Brochure, 2013)

This evaluation of the current situation is an essential part of the procurement outsourcing process as it will determine how the deal will be structured and what can be the expected outcome. There are plenty of different options possible so that both the customer and the provider have to choose carefully how to design the relation and what amount of change will be needed to start operation.

2.1.4.2 Process

There are several options for the outsourced scope of spend and the billing in an outsourcing deal. First for process parts, procurement can be dived into three steps: Source, Procure & Pay. ( David Eakin , Alsbridge, 2013)

Abbildung in dieser Leseprobe nicht enthalten

(Source :A Research Paperon ProcurementOutsourcing : The Time is Right? David Eakin , Alsbridge, 2013 )

The Source part is most strategic part of procurement as it includes the activities needed to choose the right sourcing strategy for a spend category and to enable its implementation, until the point where the actual procurement starts. It covers tasks such as spend analysis, sourcing strategy, market analysis, agreement of requirements, bid management, contracting, vendor management, contract management and relationship management. Sourcing includes both strategic (longer term, high volume) and tactical (one off, more infrequent) deals. In addition, sometimes experts name a category in between Source and Procure called ‘Transactional’ or ‘Spot’ Buying, as it involves some negotiating with suppliers.

The procure function includes all the activities necessary to requisition goods or services and enable the organization to “consume” them, in accordance with the agreed deal. Very often, there are a large number of interactions, so that this part is heavily technology-enabled. For example, teams will use online catalogues, requisition management, order tracking, fulfilment monitoring or in the most mature companies integration in an ERP. (Enterprise Resource Planning) The procurement part is not just PO raising and keeping track of it. It is seen as a vital function to ensure compliance and disseminate a deal throughout the organization. CPOs will tell that there is no point in negotiating a great deal if no one knows about it or if no one uses it within the company.

The pay function starts with a fulfilled order and finishes with payment. It includes receiving and validating the invoice and making the actual payment. This function plays a part in insuring compliance, keeping track of payments and closing each order loop as well. This part has responsibility to take action when bills are received from unauthorized vendors. This part of the service is more commonly thought of as Finance & Accounting Outsourcing (FAO) rather than Procurement Outsourcing. Nevertheless, it is important for completeness of the end to end process.

Concerning each spend category, a CPO can choose to outsource the whole chain called Source to Pay (StoP) or a specific part. The procure to pay (PtoP) part is the most process oriented part and will best be managed by a BPO (Business process Outsourcing) specialist. The sole sourcing part requires high category specific knowhow and will best be managed by a procurement outsourcing specialist having skilled and experienced employees for each on boarded category.

2.1.4.3 Spend categories

Besides the split in processes, purchasing is divided in several spend categories as grouped below in two families.

Direct categories are all goods bought which are used directly to produce the goods sold by the company. For example for the furniture industry, the direct categories would mainly be wood and textile

Indirect categories are all the goods and services that are purchased to enable the activity of the company. In fact, this is sometimes defined by all things procured by a company except the direct categories. Due to this, the scope of cover categories is large. According to Xchanging, a procurement outsourcing provider, indirect spend can be categorized in 7 families. (Xchanging Procurement Brochure, 2013)

PROPERTIES & FACILITIES (Property Management, Facilities Services, Capital Projects, Utilities, Office Supplies, Furniture, Repair and maintenance)

TRAVEL (Air Travel, Hotels, Rental Cars, Travel card, Meetings, Car fleet)

TRANSPORTATION (Ocean freight, Rail / Intermodal, Airfreight / Expedited, Courier & messenger, Small package, Storage / warehousing)

IT & TELECOM (Hardware, Software, Services, Voice & Data, Wireless)

HUMAN RESOURCE (Recruitment, Contingent Labor, Training, Benefits, Relocation)

PROFESSIONAL SERVICES ( Consultancy, Accountancy, Financial advisory, Engineering services, Legal services, Commercial Printing, Advertising, Promotions, Trade shows & events, Public Relations, Market Research, Marketing)

MRO (Consumables, Electrical supplies, Industrial supplies, Equipment rental, Machine Parts, Uniforms, Safety equipment)

2.1.4.4 Involvement of provider

After having determined which families and which process steps to outsource, a CPO still has to choose carefully the length of the deal, the commercial model and the billing system. The provider can be more or less involved in the handling of operations and in some cases even the difference between consulting and outsourcing might be unclear. Many providers position themselves as both an Outsourcing company and a consulting company offering several types of services. (Black book of outsourcing , DOUGLAS BROWN AND SCOTT WILSON, 2005) As a result, in several cases, the limits between consulting and outsourcing might be unclear. However, the difference is supposed to be absolutely clear as consultants advise companies on how to do something; outsourcing providers “just do it.” It happens that a consultant delivers a service or product and that a provider gives advice so that there are a lot of providers marketing themselves as a combination of consulting and outsourcing.

As a result, there are several commercial models corresponding to different levels of involvement of the provider in daily operations. It can be Outsourcing, Co-Sourcing or Consultancy (David Eakin , Alsbridge, 2013) One extreme , when full parts of the process are fully handled by the provider, will be labeled as Outsourcing. The other extreme, when the provider gives advice that the customer may or may not use without any commitment, will be labeled as Consultancy. In between, there is wide range of models where customer and provider take on different levels of commitments or responsibility. These models can be branded as Co-Sourcing ( L’Oréal Xchanging Case study, An innovative approach to indirect procurement, 2012)

2.1.4.5 Pricing

Choosing the commercial model is deeply related to the choice of how the provider will be paid. A procurement outsourcing vendor can charge a fee as percentage of managed spend, a fixed price per resource (full-time equivalent FTE), percent of savings achieved or even offer to enter a gain sharing contract. (Rodrigo Slelatt , AT Kearney , 2011). An agreement based on percentage of managed spend brings clarity in incurred fees and billing, but can result in high costs and even losses if savings are not committed. In addition, a price per FTE deal brings clarity and is easy to audit for the customer. It may be suitable for the PtoP part as it is highly transactional and a cost focused activity. However, for the Sourcing part, which is a service with high added value, this pricing model occults the value of spend management skills. Gain sharing agreements gives the appearance of a partnership, although the concept tends to be hard to implement in daily business. Indeed as it relies in part on trust, disputes will come up about how much in savings were realized. Savings are hard to measure when the type of goods changes from year to year or if the purchasing performance is about limiting a price increase due to bullish raw martial market for example.

Abbildung in dieser Leseprobe nicht enthalten

(Source :A Research Paperon ProcurementOutsourcing : The Time is Right? David Eakin , Alsbridge, 2013 )