Procurement Outsourcing market expected to continue double digit growth in 2013

According to Everest Group an advisory and research firm on global services, the Procurement Outsourcing market saw a growth of 10 percent in 2012, reaching US$1.72 billion in annualized contract value representing US$220 billion in terms of managed spend. Consumer goods followed by manufacturing companies are the major adopters and financial Services, hi-tech and telecom are increasing their adoption which is helping the growth in the market. The growth is not only fueled by increased buyer adoption in major verticals as highlighted above but also there are other factors like investments in new technologies, volatile economic conditions forcing business organizations to control their spends and also increase in the depth and breadth of service offerings offered by the major vendors like IBM, Accenture, GEP, Infosys, Procurian, Xchanging, Genpact, etc. IBM and Accenture are still the leaders in the PO market with more than 50 percent market share (by ACV) but competition particularly from Indian players is increasing. Along with the geographic expansion PO is also expanding to downstream Finance & Accounting processes and adjacent supply chain activities.

Since 2007, the PO market has maintained an 18 percent compound annual growth rate in terms of Total Contract Value (TCV), according to Everest’s Procurement Outsourcing Annual Report 2013. The average contract size has remained the same for the past few years where as the other types of outsourcing have seen fall in the average contract sizes. Small and Medium Businesses have significantly increased their adoption but the market is dominated by the large buyers. Another fact highlighted by the report is that PO contracts serving buyers in multiple continents are on the rise with thirty-eight percent of the new TCV signed in 2012 has a global spread forcing the vendors to expand and create capabilities across the globe particularly Central and Eastern Europe, China and South East Asia. TechNavio's analysts forecast the Global Procurement Outsourcing market to grow at a CAGR of 23.14 percent over the period 2012-2016 fueled by business organizations need for significant cost reduction and changing pricing models and lack of domain understanding, couple of challenges for growth in this market. ( Data Source: Everest Group)

Spend reduction drives the demand for outsourcing upstream sourcing activities while operational cost reduction is the key driver for the more transactional Procure-to-Pay scope according to Everest Annual report. Another increasing trend is buyers starting a PO relationship with spend analytics and analytical tools are also being leveraged for minimizing payment errors and improving planning/forecasting. Buyers are increasing to outsource direct spend categories as traditionally most of the focus has been on indirect spend and which also leading to rise in outsourcing Maintenance, Repair Overhaul (MRO) spend and tail-end spend. “Arbitrage-led operating efficiencies account for only 15-20 percent of the overall savings potential from PO,” said Saurabh Gupta, vice president at Everest Group. “A majority of savings in PO is derived from procurement spend reduction and compliance. This only now is becoming efficiently enabled by indirect category expertise and access to new technologies that service providers are now beginning to invest in. With the success and growth that PO has had over the last few years, it provides new lessons in value creation to the entire BPO industry.”

Overall satisfaction has been good but the clients are looking for more service offerings from the vendors particularly in the direct spend categories. Direct spend categories are highly challenging as it requires domain experts and specialists who are very hard to find. Emerging technologies like mobility, cloud computing, social media and big data analytics are also impacting the procurement outsourcing market. Clients want vendors build category and domain expertise, and offer services that will have a significant impact on their business outcomes, clients want vendors to be critical stakeholders in improving their business efficiencies and ultimately profitability. Outcome based pricing and nonlinear strategies like products, platform based offerings and intellectual property like patents are also being used by major PO vendors to increase their revenues. Overall procurement outsourcing will play a key role in the overall growth of the Business process outsourcing industry growth in the coming years and will be a key driver for revenue and margin growth for major players in the industry. All the major Indian BPO vendors like TCS, Infosys, Wipro and HCL Tech have invested significantly invested in procurement outsourcing market and are expecting to increase their share of revenues in future.