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.
