Procurement Outsourcing (PO) Service Providers/Vendors - 2012 Growth Opportunities & 2011 Challenges

Major Procurement Challenges 2011

Natural Disasters: 2011 was the most challenging year for the procurement departments; first it was earthquake measuring 8.9 in Japan (March 2011) and tsunami which wiped out towns, ports and damaged manufacturing facilities, nuclear reactors and infrastructure. The shutting down of the Japan's manufacturing industry led to electronic component shortages and prices of microchips rose, supply of cars to US consumers also affected as automobile manufacturing was shutdown and the affect was felt globally.  In late July 2011, major flooding occurred due to monsoons in Thailand that submerged not only manufacturing facilities that produced Hard Disk drives, electronic components, etc but also agricultural lands and also affected the tourism industry. Both the natural disasters have wrecked havoc with manufacturing faculties and led to shortages of critical components supply which subsequently led to the rise in the prices (10% to 40%) of the products like Personal Computers and Cars. Natural Disasters forced businesses to cut their revenue forecasts, increase prices of their products, due to supply shortages as businesses could not source from alternative production locations and were unable to relocate their manufacturing facilities to new locations. Natural Disasters have also highlighted the critical issues in global supply chains, lack of alternative sourcing strategies and how businesses overlooked this risk in their overall business strategy. Earthquakes in Japan and Flooding in Thailand are not new risks and these risks existed for the past hundreds of years.

Currency Volatility: In the calendar year 2011, the rupee has crashed by 18.79% vs. US Dollar and the fall is attributed to euro zone debt crisis as investors preferred dollar as a safe investment. Euro was worst performer among 10 developed-nation currencies in 2011, declining 1.7%, according to Bloomberg Correlation-Weighted Currency Indexes due to the sovereign debt crisis in the euro zone. Japanese Yen and China Yuan appreciated about 5% in 2011 against the dollar. Singapore dollar and South Korean won slipped against the US Dollar in 2011. The Japan Yen and US Dollar strengthened against most of their major currencies despite the earthquake and tsunami in Japan and US Economic slowdown, as demand increased for safer currencies. Japan and China Governments have been intervening to keep their respective currencies under control.

Euro Zone Sovereign Debt Crisis is having global effect with no solution in sight. Greece, Italy, Spain, Portugal, Ireland have huge debts which they cannot pay that led to credit ratings downgrade. The deficits in these countries are also high that forced the governments of these countries to adopt severe austerity measures and drastically reduce their public spending and increased taxes. Most of the nations in the Euro zone have seen their credit ratings downgraded by rating agencies which increased the cost of borrowings for these nations. Euro Zone nations have set up a bailout fund for the distressed nations and provided the troubled nations billions of Euros with little or no affect but has weakened Euro currency. After US, UK, France and Germany businesses outsource procurement operations. The crisis is also affecting the currencies world wide and businesses in Europe are also drastically affected which will force them to look for cost reductions and use procurement outsourcing for this purpose. The worsening euro zone debt crisis is a major concern but provides the PO Service providers opportunity for reducing costs through streamlining the procurement costs of the businesses and governments and helps them during the crisis.  

Other challenges in 2011 were wage inflation and talent retention issues in countries like India and China where suppliers and PO Service providers have operations, rising input and component costs, political uprising in Arab nations like Egypt, Libya, Tunisia, Yemen, Syria, Bahrain that has affected the crude oil prices and subsequent political uncertainty in Arab nations which is still ongoing as Egypt, Libya, Tunisia do not have democratically elected governments. Some of the clients who have outsourced their procurement operations in early-2000s and enjoyed cost savings and other benefits are asking the PO Service Providers move up and provide them with services that provide more benefits and take the procurement process to the next level. PO Service providers are seeing the PO process mature and they are looking to innovate and provide more unique services to keep the existing clients satisfied and attract new clients. Technology adoption has increased as cloud computing, real time data analytics, ERP related software products, reporting tools and applications are being used by small and niche procurement service providers to develop innovative service offerings. Large players are facing stiff competition from such small players and are partnering with small players and use their tools or acquire them and integrate their technologies.

Opportunities for PO Service Providers/Vendors 2012

There has not been much recovery in the global economic climate as the euro zone crisis is still going on with the European nations are struggling to find the solution. Currency volatility is expected to continue in 2012 and most of the businesses are well equipped to face the scenario. Japan is still having earthquakes but the manufacturing has resumed and in Thailand the floodwaters has not receded yet and manufacturing facilities are still under water and it will take time for clean up and restarting the production. The supply shortages are expected to continue in the first half of this year and production will recover in second half and supply will improve. With this backdrop the Procurement Outsourcing market is expected to see 20% YoY growth. Everest predicts the global PO market will reach an ACV of $1.8 billion in 2012, representing managed spends of US$250 billion. Since mid-2000s, PO has seen good growth as businesses were looking for cost savings and PO helped them achieve cost savings that had direct impact on bottom line. Manufacturing, CPG, retail, high tech, telecom, energy and utility verticals are driving the PO market. US followed by UK and Continental Europe dominate PO adoption but Asia Pacific and Latin America are seeing rise in adoption. . Major players in PO market are Accenture, IBM, ICG Commerce, Global eProcure, Xchanging, CapGemini, Corbus, Genpact, Infosys, etc.

Technology based: Most of the large PO Service Providers have significant IT capabilities and they are offering the clients cloud based platform offerings. Cloud based platform offerings not only provide cost savings but also drive compliance in the organizations and increase collaboration. Large PO providers are also collaborating with niche and specialized procurement solution providers and offering advanced procurement technology solutions which makes outsourcing process easier and substantially increases procurement efficiency, effectiveness and ROI. Technology also helps in tracking the suppliers, maintain relationship with them and make sure they are complying with the agreed benchmarks. Another area where technology is going to play a critical role is the Data Analytics as data that is collected has to be analyzed and provided to the procurement team in the form intelligence and reports. There are most advanced real time data analytics, spend management tools are available that provide procurement executives the necessary information needed to make decisions and reduce costs. Clients are looking for single IT platform that provides end to end solution focused on either procure to pay or source to pay and provide process efficiency, improve compliance and maintain relationship with suppliers. With the rise in use of high end smart phones like Apple iPhone, RIM BlackBerry, and Android Smart phones by the executives in the organizations applications that help them in tracking the spends, suppliers and real-time data  are being developed.

Focus shift to Direct Spend: Since Past year Chief Procurement Officers and Procurement executives are forced to focus on core direct procurement such as sourcing raw materials, components. Non core direct procurement spend related to maintenance, repairs, etc can be outsourced to PO service providers as procurement executives want to focus on the core direct spend that has more direct impact on the company profitability, more complex process and involve long term procurement cycles. Till now most of the indirect spend like IT, HR, Marketing, Facilities related spend is only outsourced. Most the PO services providers deal with this indirect spend as these spend categories are easy to outsource and involve short term procurement cycles with less complexity and this market has matured. Some of the companies that has outsourced their indirect procurement spend are moving a level up and are looking to outsource their direct procurement spend and this trend of outsourcing more direct procurement spend will pick up this year. Supplier risk has considerably increased for businesses due to the natural disasters, economic uncertainty, inflation and currency volatility, etc which provide the PO service providers an opportunity to work with clients on their direct spends. In early 2000s, the initial days of PO focus was only on direct spends (80%) but the focus shifted to indirect spend as buyers and service providers could not implement sourcing & procurement strategies in direct spends due to high volatility in raw material prices and long procurement cycles.

Business Organizations are expanding globally and setting up manufacturing facilities in various part of the world. They are finding difficult to manage the centralized procurement department alone at the company headquarters and they need to have specific expertise to manage their procurement operations in those geographies. PO service providers can be used and their specific expertise will definitely help in managing the procurement operations smoothly and the necessary cost savings can be achieved.

M&A in PO Service Providers Market: Past couple of years saw some M&A happening in this market as the source-to-contract and procure-to-pay focused providers are collaborating and other players like FAO service providers, sourcing advisory firms, supply chain management firms, and procurement shared services organizations are entering the PO market. Some of the recent M&A deals in 2011 are Infosys acquisition of Australia’s Portland group, IBM acquisition of Emptoris and Cap Gemini acquisition of IBX in 2010. Consolidation is expected to continue in 2012 where the large PO service providers looking to acquire small, niche and specialized procurement solution providers and integrate their offerings into the core offerings. Collaboration partnerships between the large and small players in terms of large PO service providers are using tools and technologies developed smaller niche players and offering them to their clients. Some of the partnerships include ICGC-Genpact, HP-GlobaleProcure, TCS-Denali, and Steria-HPI. With demand for PO increasing this year outsourcing vendors who do not have a proper sourcing and procurement offerings are looking to acquire smaller players and jumpstart revenues, acquire new clients and offer services to their existing clients.

Invest in People, Process and Platforms: PO Service providers have to acquire and retain the experienced talents that are critical for the sourcing and procurement process. Good quality people with sourcing and procurement experience particularly in niche areas like negotiations, experience in sourcing and spend analytics tools, etc are hard to find. Necessary training should be provided to the employees in the specific tools and technologies. PO Service providers have to invest in technologies and build platforms that provide clients an attractive solution for outsourcing their sourcing and procurement operations. Cloud based platform offerings are being offered by all the major vendors and clients are adopting this platform as evident from the increase in the number of deals signed in the last year. Standardization of the process and offering the same service to multiple clients is another option and Genpact Smart Enterprise Process is one example. Some of the Indian Vendors like Infosys and TCS are focusing more on the procurement outsourcing and Infosys has set up a Joint Innovation Board and TCS is offering platform based procurement outsourcing services.

Procurement has transformed from a mere functional role to a more strategic role and Chief Procurement Officers have gained prominence in the organizations and are working closely with the Chief Financial Officers in PO decisions as there is direct impact on bottom line. CFOs are actively involving in PO negotiations, leading to deals with FAO-PO bundling around procure-to-pay. Some of the businesses that have strong internal procurement organizations are also looking to outsource certain procurement operations to third party service providers in low cost countries as there are cost benefits. Procurement executives want to focus more on the core direct spending that involves buying the raw materials etc and source them at low cost and maintain a relationship with suppliers that ensure sustained availability of resources. All the indirect spending and some non core direct spending can be outsourced to PO service providers who have the necessary capabilities to streamline the processes and generate immediate cost savings. PO services providers are looking to offer buyers’ innovative services, tools and platforms that will help them reduce cost and improve bottom lines and with uncertain global economic and business climate clients have increased their focus on the global sourcing management and consolidation initiatives and are looking to profit from their existing sourcing channels. Businesses have realized that there are significant benefits in outsourcing the procurement as evident from the many success stories of businesses that profited from PO and this will lead to increased adoption of Procurement Outsourcing in 2012.