Procurement BPO - Procurement Outsourcing will see tentative growth in 2012

Procurement spending has direct impact on the organization profits as organizations spend around 50% of their revenues on procuring goods & services like raw materials, service & maintenance, etc (Direct), IT, HR, Marketing, legal services, etc (Indirect) and procurement function is responsible to acquire them at low cost and in sufficient quantities. 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 also working closely with the Chief Financial Officers in PO decisions as there is direct impact on bottom line. Procurement outsourcing (PO) to captive or third party vendors helps to reduce cost (Direct & Indirect), improve efficiency and compliance and help businesses build long term, sustainable relationships with global suppliers. PO service providers have strong expertise in procurement outsourcing, generally charge fixed price for achieving certain cost savings and provide services like transactional procurement, strategic sourcing, compliance management, category management, tactical procurement and reporting. Major players in PO market are Accenture, IBM, ICG Commerce, Global eProcure, Xchanging, CapGemini, Corbus, Genpact, Infosys, etc.

Market Segmentation

According Everest Research, PO market in 2011 is expected to grow at 15% YoY to reach a market size of US$1.5 billion for multi-process PO, representing managed spend of around US$190 billion. In 2010, PO market actual contract value (ACV) grow 13% to reach US$1.3 billion with a managed spend of US$160 billion. According to Everest's projections, the PO market in 2012 will grow at 20% year-on-year and is expected to hit $1.8bn in annual contract value (ACV) - representing a managed spend of $250bn. Post the 2008 Global Financial crisis, PO market saw increased adoption and maintained a growth rate of 13-15% YoY as a number of key new contracts were signed. Customers outsourced their procurement functions like strategic sourcing spend, transactional procurement, spot buying, etc as they are looking to reduce costs and increase their profits. Charts Source: Everest Research

US followed by UK lead the adoption of PO with more than 80% of contracts signed followed by other European countries like France and Germany and Asia Pacific adoption is raising. Manufacturing, BFSI followed by the Consumer Packaged Goods and Retail sectors lead the adoption of PO. Mid Market companies have also increased the PO adoption. With PO traction on rise many smaller and niche firms with specific expertise in the PO area are entering the market and the traditional IT Outsourcing Service providers who till now are providing limited PO services are increasing their PO offerings through platform and cloud based offerings. Larger PO services players will see tough competition from smaller players.

Procurement Outsourcing Outlook 2012

Macroeconomic Uncertainty: PO will see sluggish growth in early part of this year due to worldwide macroeconomic uncertainty caused by the Euro Zone Debt Crisis and economic slowdown in US, but the PO market is expected to pick up in second half and lead to overall 20% YoY growth in 2012. European sovereign debt crisis is a major concern as the governments in the Euro zone are still struggling to find a solution which will have an impact on the PO market but the US economy is on recovery mode which will hold the growth in the market. France, Germany and UK are actively involved in tackling the euro zone crisis and monetary and fiscal policies by these governments in the euro region will have direct impact on the PO market as businesses and governments in these countries are the PO biggest clients. Higher unemployment levels in the US, UK and other buyer regions will force buyers to look at near shoring rather than outsourcing to low cost countries.

Currency Volatility is another concern as currencies like India Rupee is depreciating against dollar and Chinese Yuan strengthening against Dollar and Euro due to US pressure. Exports to India and China are becoming costly and exports from China and India are becoming cheap and cost effective. Indian Outsourcing vendors are seeing pricing pressures where in clients are renegotiating and asking to reduce prices as rupee depreciated significantly to dollar. Governments of Japan, US, China, India etc are forced to intervene in controlling the currency volatility. Wage inflation in low cost countries like India, China is also area of concern. Price inflation is also on the rise in these countries that is not only affecting the wages but also in the rise of cost of inputs & raw materials.

Supplier Risk due to Natural Disaster & Political uncertainty: Natural disasters in 2011 like Japan Earthquake & Tsunami that caused severe disruptions in supply and production of automotive, semiconductors, electronics, etc that had global effect, Thai Flooding submerged major production facilities of Hard Disk drives that led to supply shortages that in turn led to rise in Personal computer prices & storage devices. Political uncertainty in the Arab world, there was uprising in Egypt, Libya, Tunisia, Syria, Yemen and Bahrain had a short term effect on the oil prices and economies in these countries are still struggling to cope with the new democracy. Most of the countries are still running with interim governments and are yet to democratically choose their governments as elections are to be conducted in 2012. Businesses have realized that the supplier risk has a significant impact on their businesses and are working closely with PO service providers to identify and develop alternative sourcing, manage inventory and closely monitor the suppliers and assess risks.

Demand for End to End Solutions: Procurement outsourcing have seen significant changes in the past decade like strategic sourcing mania in 2000s when despite identifying huge savings potentials nothing can be done due to implementation constraints and supplier failures after which there was a shift towards technology adoption for automating everything from spend analytics and sourcing to order placement and billing. IT is driving the procurement outsourcing, with cloud computing and platform based offerings from the IT services providers buyers are looking for more cost reduction, compliance and efficiency in the procurement processes. Buyers are expected to adopt an end-to-end approach towards source-to-contract (S2C) and procure-to-pay (P2P) processes as M&A and partnerships between P2P and S2C providers are expected in 2012 to provide complete solutions. There will be a shift in trend in both outsourcing and supply chain management and deals are expected to expand into areas such as order fulfillment, inventory management, sustainability and logistics. PO services providers are offerings based on platform and cloud will not only attract large buyers but also the SMBs. Many of the providers are also providing real-time business intelligence to the vendors through E-procurement solutions.

Shifting focus back to Direct Spend: Most of PO services providers are focused more on the indirect spend as many businesses focused more on reducing spend on IT, HR, Marketing, legal services etc and presently PO service providers handle mostly indirect spending (70%). But there will be shift in focus back to direct spends as direct spend has direct impact on the bottom line, there has been reduction in volatility in raw material prices, supply issues due to natural disasters leading to shortages and buyers are more focused on indirect spends that have bigger savings and shorter procurement cycles. 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. More direct spend categories, such as maintenance and repair, are expected to become part of procurement outsourcing deals.

Vertical & Geographical Segmentation: BFSI vertical will continue its dominance in 2012 and verticals such as healthcare, manufacturing, distribution and retail will continue to witness increased traction. Other verticals like high tech, telecom, energy and utilities are also increasing their adoption. Everest believes public sector vertical will drive significant growth in 2012 as governments are looking to reduce costs and are adopting stringent austerity measures to reduce the deficits. North America will continue to be the dominant buyer geography, followed by Europe and Asia Pacific will see good growth. Buyers will continue to look for new sourcing destinations due to talent, cost, and risk diversification-related issues as low cost countries like India & China are seeing wage inflation and rising costs and are fast loosing their low cost advantages. With India, China and South Eastern Nations slowly loosing out their low cost advantages, Central and Eastern Europe (CEE), Latin America, emerging geographies such as Africa are attracting interest as global sourcing locations. There will be adoption of hybrid captive/third-party sourcing models by buyers and will definitely look to improve captive value by focusing on high-value processes. Captive investments will be made in the majority of setups and expansions mostly in the Asia Pacific and CEE geographies.

PO is expected to continue its growth momentum in 2012 despite the economic uncertainty and Everest expects that there will be rise in contracts size, CFOs will bundle Finance & Accounting Outsourcing & PO deals and increased focus on the global sourcing management and consolidation initiatives as buyers seek to profit from their existing sourcing channels. Everest also expects to see growth momentum due to the emerging technologies such as social media, mobility, green IT and cloud computing which will also foster innovation and evolution of new specialty providers. PO services providers will offer buyers’ innovative services that will help them reduce cost and improve bottom lines. There have M&A activity going on in the PO market since past couple of years and  expected to continue in 2012 as PO Services providers looking to acquire new capabilities and offer clients more services. PO market a critical component of overall BPO market has seen some significant changes in the past decade and success stories of buyers who profited from PO will lead to rise in adoption.