The US$297 million multi-process procurement outsourcing (PO) sector is growing at 30% per annum and will exceed US$380 million in 2006, according to new findings by Everest Research Institute, with the potential to grow into a multibillion dollar market over time. Procurement outsourcing refers to the complete or partial transfer of the business processes, infrastructure and resources associated with purchasing all indirect costs, including contracted services, by a company to third-party services providers.
Everest Research Institute's annual PO report, released in December, focuses on the emerging market for multiprocess PO transactions, in which a combination of three or more procurement processes, such as strategic sourcing, vendor management, day-to-day purchasing and accounts payable, are outsourced. The multi-process PO market currently represents a spend base of US$25 billion, according to Everest's analysis.
Says Michel Janssen, Managing Research Director at Everest Research Institute, “Our findings indicate that PO will achieve five times the savings multiples of other BPO domains, including HR, IT and offshore outsourcing, delivering a potential bottom-line saving of up to 2% of sales.” Unlike other BPO domains, the study found that procurement outsourcing does not depend on labor cost arbitrage or scale-to-pay off. “Procurement outsourcing is dependent on sector and functional expertise, with savings coming from smarter sourcing decisions, effective relationship management and legal compliance,” Janssen added.
The Everest report found that the multiprocess PO market is starting to gain traction and moving towards a more rapid growth phase, as both buyers and suppliers test the waters. Key findings indicate that:
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Procurement outsourcing is currently a buyer's market — corporate PO buyers should be able to negotiate very favorable terms at this early stage of market evolution. They are in a position to become marquee clients for prominent outsourcers, such as IBM, Accenture, Ariba and ICG Commerce, who are all expanding their outsourcing capabilities and together represent 80% of the PO market.
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Suppliers need to build global capabilities — global PO transactions have increased from 15% to 44% over the past two years, as multinational buyers seek to extend the benefits of procurement outsourcing across global operations. Suppliers will be expected to leverage flexible and virtual shared capabilities to serve major geographic regions.
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Investors should approach the PO market with a long-term view — Procurement outsourcing, with significant untapped potential and no clear winners are expected to enter a rapid growth phase within the next two years. With current market penetration of less than 1% Everest expects that the PO market will continue to offer increasing investment opportunities and returns in alignment with sector growth.
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