PROCUREMENT OUTSOURCING A COST REDUCTION SOLUTION FOR COMPANIES

Transcription

1 How State of the Art Purchasing Techniques have Saved Billions of Dollars and Can Help Your Company Reduce Costs and Improve Your Bottom Line. Written and Compiled by: Ted Landgraf, CEO, Above the Standard Procurement Group, Inc. PROCUREMENT OUTSOURCING A COST REDUCTION SOLUTION FOR COMPANIES In these trying economic times, anything short of a strategy for measureable cost savings is at best, leaving money on the table, and at worst, endangering a company s viability. Source: CFO Magazine In today s challenging economy, as companies attempt to grow, and many struggle to stay in business, outsourcing some, or all, of a company or organization s purchasing activities can provide a proven, no-risk solution to reduce costs, improve bottom lines, increase compliance and quality, and enhance a company s competitive position Above the Standard Procurement Group. Do not use or copy without written permission from Above the Standard Procurement Group/Ted Landgraf

2 Table of Contents Table of Contents... 2 Introduction... 3 Net Margins and Costs are hurting Companies... 3 Procurement Outsourcing Provides Solutions and Answers... 3 Who are some of the larger Procurement Outsourcing Firms?... 3 Choose Procurement Outsourcing... 4 Procurement Outsourcing... 4 What is Procurement Outsourcing?... 4 Procurement Outsourcing Equals Cost Reduction... 4 Other Procurement Outsourcing Benefits... 5 Large Company Cost Reduction/Productivity Outline Example... 5 National Personnel/Staff Centralization Example... 6 Small Company Outcome Example... 6 Procurement Outsourcing Process and Steps Example... 8 Almost All Goods and Services Can be Outsourced... 8 Procurement Outsourcing Market... 8 Future Growth What is Causing Procurement Outsourcing to Grow? Market Procurement Outsourcing Benefits Cost of Requisition-to-Order Cycle Companies are Beginning to Understand Procurement Outsourcing Beyond 2011 and 2012 Amount Paid to U.S. PO Companies Who are U.S. companies choosing to conduct their procurement outsourcing? In Conclusion Contact Citations A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 2

3 Procurement Outsourcing A Proven, Cost Reduction Solution that Generates Real Hard Dollar Results Introduction Ted Landgraf is the Founder and CEO of Above the Standard Procurement Group, Inc. Over the course of his 31 years in the procurement field, Mr. Landgraf s cost reduction services and methodologies have helped hundreds of clients save billions of dollars. His clients have ranged from small companies to U.S. Government departments, Fortune 500 businesses, non-profit organizations, schools, and many more. This White Paper is designed to provide practical suggestions and insights to help your company or organization reduce your costs, streamline your procurement operations, and increase your bottom line. The White Paper is by its nature generic, and therefore certain aspects of this article may not apply to your company s unique situation. Accordingly, for personalized answers to your questions, more information on this topic, or to receive a free, no-obligation Cost Reduction Assessment, please contact Daniel Barlette, Jr., CEO, of Above the Standard Procurement Group in New Jersey, at (855) This report defines and explains the ins and outs of procurement outsourcing, why it is growing rapidly as a practice among companies, its benefits, and why more and more companies are utilizing procurement outsourcing to solve a range of challenges and dramatically reduce their costs. Net Margins and Costs are hurting Companies Most companies have not been able to increase revenue, credit is harder to come by for expansion, employees have been downsized to cut costs (less people are doing more work), global competition has increased, raw materials continue to increase annually, and the bottom line for many companies is not what it used to be. Procurement Outsourcing provides a solution to reduce costs, improve bottom lines, increases compliance and quality, and help strengthen companies Procurement Outsourcing Provides Solutions and Answers Companies are looking for ways to innovate, with many struggling to stay in business. Procurement outsourcing is a viable means to help companies, with cost reduction being the largest single benefit. A few of the many other benefits are: Compliance; Enhanced ability to Compete, Efficiency improvement; and Overall performance. Who are some of the larger Procurement Outsourcing Firms? Leading companies such as IBM, Accenture, ICG Commerce, General Electric, and Xerox are a few of companies in the procurement outsourcing business. Most of these concentrate on serving only extremely large client and do not typically provide cost reduction services to reduce costs on individual products or services. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 3

4 Choose Procurement Outsourcing As this report will show, procurement outsourcing is growing, companies are becoming more aware of its many benefits, the outcomes have been documented and substantiated, and results from procurement outsourcing are improving company bottom lines. With procurement outsourcing, companies are becoming more competitive, companies are focusing on what they do best, and most importantly, more companies are staying in business, and in many cases jobs are being saved as procurement outsourcing reduces costs and increases profits. Procurement Outsourcing Many companies do not know what procurement outsourcing is and why it can become a vital part of their operations. In the 1990 s, the AT Kearney consulting firm started procurement outsourcing and began offering procurement outsourcing consulting services. Since then, procurement outsourcing has gained both acceptance and momentum. The main reason that the field of procurement outsourcing has begun to expand rapidly in recent years is its ability to generate hard dollar cost reduction savings. As procurement outsourcing has continued to mature, cost reduction has increased and continues to be the main reason why companies continue to outsource all, or part, of their procurement. What is Procurement Outsourcing? Procurement outsourcing is the action of a company to outsource some or all of their procurement functions, and/or the acquisition of goods and services, through a third party. This does not mean that the company loses control of the procurement process, but merely that is utilizes the services of third party service provider. By taking this approach, the company which elects to implement outsourced procurement can realize cost reduction, improved efficiency, improved compliance, and enhanced performance. Procurement outsourcing can involve some or all of the company s staff, technology, systems, and vendor management. In most cases, the procurement outsourcing firm will report to the company which has engaged its services. (Sigaria, Ltd., Procurement Leaders) Procurement Outsourcing Equals Cost Reduction With cost reduction being one of the main driving factors for companies, procurement outsourcing helps meet this need. Even with economic upturns in certain industries and geographical areas, profit margins are likely to remain low, and global competition will continue to increase. In addition, raw material costs have increased and are expected to continue increasing, and the world s economic conditions will continue to affect more and more nations, companies, and people. With companies spending more than half on their external goods and services for every dollar earned there is the potential to reduce a great deal of costs. (Aberdeen Group, Accenture, PurchasingData.com) A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 4

5 Other Procurement Outsourcing Benefits Due to cut backs in the procurement area, many companies lack the internal staff or have no staff to conduct the necessary procurement processes. Because of this, companies are leaving billions and billions of dollars on the table in terms of potential savings. In addition, many smaller companies cannot afford a purchasing department, or at best, they have one person who buys for the company. Accordingly, little or no cost reduction, vendor negotiation, updating of contracts, or price analysis takes place. Even larger companies are at not immune. For example, one $8 Billion Fortune 500 has six people in their procurement group, while another which buys $100 Million a year has a procurement staff of just three full time people! Large Company Outcome Example One large company with annual revenues of more than $5 billion U.S., had cost over runs, budget problems, compliance issues, very little communication, and supply problems. With 252 purchasing personnel across their entire operations and more than $1 billion per year spent for goods and services, their situation offered a major potential for procurement outsourcing. What was the outcome? Due to our involvement, the company realized centralized procurement, better communications, increased production at each location, cost reduction of more than $50 million per year within two years, increased staff competencies, expansion of certain areas, closing of other areas that were a drain on the company s resources, and streamlined purchasing personnel across the U.S. which provided greater outcomes in all areas of each region. (Above the Standard Procurement Group) The first graph below shows the cycle of this company. The second shows the beginning and ending staff amount and labor costs after procurement outsourcing took place. Large Company Cost Reduction/Productivity Outline Example $5 Billion Revenue Increased Productivity $1 Billion Annual Spend Second Year Spend Savings $30 Million First Year Spend Savings $20 Million A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 5

6 National Personnel/Staff Centralization Example 252 Purchasing Staff Before Procurement Outsourcing 149 Purchasing Staff After Procurement Outsourcing Centralized and Reduced Nationwide Staff by 103 = $8,940,000 Estimated Annual Savings Small Company Outcome Example Above the Standard s cost reduction methodology was used to conducted work for a smaller company where they had no procurement department and only one person was buying for their company. This company was unable to effectively engage the procurement process for their goods and services. Procurement outsourcing was conducted in several areas for this business. Above the Standard was able to reduce costs by almost $1 million per year in three different areas. This not only helped their bottom line, but it provided needed working capital, and they did not have to lay off a people. With all types of companies and organizations a significant opportunity exists to increase the percentage of savings. Many of these companies listed below already had some type of procurement department and procurement process already taking place. Despite this, Above the Standard Procurement Group s experience brought about many positive savings outcomes when goods and services were outsourced our procurement techniques. For example: A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 6

7 Percentage Savings Dollar Amount Saved 32% $ 38,000 17% 298,000 15% 32,000 24% 252,000 34% 354,000 47% 602,000 45% 104,000 13% 321,000 28% 266,000 31% 1,200,000 37% 359,640 43% 905,000 23% 52,000 7% 1,820,000 31% 299,000 17% 36,040 62% 2,100,000 11% 244,581 28% 22,064 Good, Services, Company Type, and Size Office Supplies, Federal Contractor ($38 Million Company) Travel (air, hotel, car rental), Aggregate/Construction ($12 Billion Co.) Promotional Items, Cement ($ 2 Billion Revenue) Furniture, Quarry ($100 Million Company) Office Supplies, Toner, Paper, Federal ($140 Million Company) Telecom/Network, Construction ($1 Billion +) Copiers, Educational Youth Organization ($50 Million Organization) Fuel/Gas, Asphalt Filters (MRO), Fleet/Machinery Explosives, Quarry Fleet Finance, Fleet Cellular, Construction Uniforms, Federal Food, Tribe/Casino ($380 Million +) Chemical, Cleaning, Janitorial, Casino Personal Computers, Educational Facility ($28 Million) Credit Card/ATM, Casino IT, Computers, Banking ($2 Billion Banking Organization) Landscaping, Facilities ($ 1 Million Company) 6% $ 486,000 Food, Retail Gas Stores A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 7

8 Procurement Outsourcing Process and Steps Example Phase 1 Phase 2 Phase 3 Gathered Data for all office supplies (vendors, items purchased, spend, outlined needs, specifications, and goals) Total annual spend for office supplies was $122,000 Implemented Request for Proposal/Bidding Process with all data from Phase 1 with deadlines and expectations to vendors who wanted the business Proposals were submitted by some of the companies invited to participate Those proposals submitted were evaluated for all expectations (price, warranty, returns, service, contract, ordering, delivery, online and a vendor was selected as the winner The winning vendor started the contract with a cost reduction of 38% annual/$45,800 savings per year Almost All Goods and Services Can be Outsourced Procurement outsourcing can be utilized to reduce costs for just about all goods and services. Some examples are: Utilities/energy; Office supplies; Telecom, Computers; Paper; Toner; Fencing; Electricity; Natural gas; Property management; Maintenance; HVAC; Software; Information Technologies; Payroll; Accounting; Legal; Flooring; Asphalt; Credit; Banking; Cement; Steel; Financing; Fleet Automobiles and Trucks; Human Resources; Signs; Printing; Cellular; Shipping, Travel, Raw Materials, and many other expense areas. The bottom line of procurement outsourcing is that when the acquisition of goods and services can be outsourced through a third party (the procurement outsourcing company), this will result in cost reduction, enhanced compliance, more efficiency and production, an opportunity for the company to focus on their core competencies, increased competitiveness, and increased profits. Procurement Outsourcing Market Everest Research Institute, a well known global consulting and research firm, predicted that U.S. procurement outsourcing would grow by 20 percent to a total managed spend of more than $170 billion in In 2011, we saw more than $190 billion under management just in the U.S. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 8

9 Even though 2009 was a tough year for many companies and many swayed towards being conservative buyers, the report conducted by Everest showed solid growth in the procurement outsourcing field in (Everest Research Institute, Everest Group) As the market has shown, in 2010 and 2011, the Procurement Outsourcing market has come of age as the number of new contracts for these two years has been the best. This equates to market of more than 300 contracts and service providers managing more than $190 Billion (US) for their clients. The table below shows a ten year snapshot of procurement outsourcing growth from 2002 to 2012 identified in the number of new multi-process contracts. (Everest Group, 2012) PO Contracts Yr 2002 Yr 2003 Yr 2004 Yr 2005 Yr 2006 Yr 2007 Yr 2008 Yr 2009 Yr 2010 Yr 2011 IBM, one of the largest procurement outsourcing leaders, stated on January 10, 2010, Challenging economic times and intense global competition have placed increased pressure on company balance sheets. More than ever before, businesses are refocusing on core activities and carefully managing cash. By natural extension, this has led to detailed scrutiny of procurement spending with suppliers which can equal as much as half of a company s annual revenue. As pressures continue to mount, businesses must ensure that they are realizing the optimum values from their procurement spend or they may find themselves at a competitive disadvantage. Companies can only reduce so many staff positions in order to reduce costs. Moreover, it is increasingly difficult to grow revenues in today s economy and given the growth in global competition. Accordingly, where do companies find more capital and resources? One highly effective way is to reduce costs on the goods and services they are already purchasing. This has led to a surge in procurement outsourcing. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 9

10 Future Growth The Aberdeen Group Report, one of America s premier business management research groups, stated that one of the biggest growth areas in Business Process Outsourcing will be procurement outsourcing. This has proven to be true. This study of more than 260 companies in a wide variety of industries found that internal purchasing departments are increasingly seeking the involvement of third-party experts to leverage their abilities to drive down costs. In fact, 40% of the organizations surveyed indicated that they planned to outsource all or part of their procurement functions in the next two years. The top four reasons cited for why these companies would engage in procurement outsourcing were: 45% Pressures to lower procurement transaction costs; 41% Increased global competition; 36% The need to gain access to improved pricing; and 34% Pressures to refocus personnel on more strategic activities. What is Causing Procurement Outsourcing to Grow? The future is bright and profitable for procurement outsourcing, as companies continue to look for ways to improve performance, bolster bottom line revenues, and lower operating costs. As the procurement outsourcing industry continues to grow, traditional outsourcing functions like fleet maintenance; payroll processing, legal services, and local delivery continue to expand. Other areas that had never been outsourced are also experiencing record growth, such as recruiting, hiring, and human resource management functions. In all reality, business outsourcing will continue to grow because companies are looking to refine their missions and business models looking for cheaper, better, and faster. Procurement Outsourcing is being utilized and growing the fastest in companies in BPO. Three of the top reasons, according to Everest Group are: Unit Price Reduction; Demand Management; and Supplier/Price Compliance Market The events and happenings of 2011, such as the global natural disasters, currency volatility, Euro debt crisis, supply chain difficulties, vendors, technology changes to the cloud, focus shift to direct spend, M&A in PO service providers market, and the need for companies to become leaner, healthier, and retain core competencies without letting more key people go (global competition), has positioned Procurement Outsourcing in a place to grow more and more in the years to come. (Kaila, Rajesh Prabhakar). A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 10

11 Procurement Outsourcing Benefits There are many benefits that can occur from procurement outsourcing. Depending on the needs of a specific company or organization, these can include: Reduced costs and increased quality; Centralized procurement; Improved access to goods and/or services; New market development; Just-In-Time Inventory (JIT); Increased supply chain efficiency; Best value Improved competiveness ; Government compliance; Supplier performance improvement; Support of day-to-day buying activity; Policy/Procedure creation, implementation, validation; Transaction automation and processing; Ability to focus on core competencies; Strong end-user to provider relationship developed; Lower procurement related labor costs; Overall procurement performance improved; Greater control, reporting, and vendor compliance; Organization and internal cost performance; Data for benchmark analysis, goals, and results; Enhanced procurement personnel training; Hedges against future cost increase of raw materials; and Procurement department creation and implementation. for each dollar of spend brought under outside procurement management, companies were able to realize cost savings of between 5% and 20%! Cost of Requisition-to-Order Cycle A study by Aberdeen measured the costs of the requisition-to-order cycle in many companies. What they found is that procurement outsourcing generated lower costs through lower transaction costs, as well as from lower absolute costs on the items purchased. In one example, before outsourcing the cost of an item was $33.00 after outsourcing, the cost was $14.15 a savings of more than 57% in staff resource costs. Aberdeen s research found that for each dollar of spend brought under outside procurement management, companies were able to realize cost savings of between 5% and 20%. Keep in mind that this is an average in terms of larger companies. With smaller and medium sized companies, there is an opportunity for even greater percentage savings. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 11

12 Companies are Beginning to Understand Procurement Outsourcing One of the biggest factors causing procurement outsourcing to grow is a greater understanding of the benefits. Companies are beginning to see that there are more positive than negative impacts from procurement outsourcing. The fear of a company Companies are beginning to see that there are more positive than negative impacts from procurement outsourcing billion in 2010, and more than $2 billion plus in (CFO.com) losing control by utilizing procurement outsourcing in their company is fading away. Companies implementing procurement outsourcing are seeing smarter buying, reduced costs, and continued control of their company. In other words, procurement outsourcing enhances companies and supports their core competencies. As seen below, in 2009, more than $750 million was paid to outsourcing companies, $2 According HfS Research, Ltd., from the 2011 data they collected, Procurement Outsourcing (PO) has become accepted and is a viable and fundamental part of many businesses. In fact, more than 400 Chief Procurement Officer s made the decision to utilize PO to improve their scope, savings, and ROI, and they are finding incredible success. HfS Research collected detailed data points on more than 430 procurement outsourcing engagements, indicating that procurement outsourcing is a viable option for companies of all sizes. In each of the past three years, 60 new companies have leveraged procurement outsourcing services. (HfS Research, Ltd.) Beyond 2011 and 2012 Amount Paid to U.S. PO Companies 2009 $750 Million 2010 $2 Billion 2011 $2+ Billion The amount of procurement outsourcing deals and sourcing deals have grown steadily over the last several years, according to Global Services/Equaterra. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 12

13 Who are U.S. companies choosing to conduct their procurement outsourcing? It is interesting to note who U.S. companies are choosing for their procurement outsourcing as documented in a survey that was conducted by the Brown-Wilson Group. The survey found that 74% of all U.S. CFO s and Procurement Executives would prefer domestic service providers instead of offshore companies to provide their procurement outsourcing. (SDC Exec, Page 19) In Conclusion In conclusion, while procurement outsourcing is in its infancy, it is an emerging trend and continues its rapid growth and acceptance. This trend has been helped by the cost cutting debate in Washington, D.C., which has brought the issue of cost reduction to the attention of millions of people given the extensive coverage of the national cost cutting debate on CNN, Fox News, and MSNB, and in major newspapers such as the Wall Street Journal. With procurement outsourcing helping companies to reduce costs from 5 to more than 20 percent for the goods and services they buy, this can make a big difference to a company s bottom line. To illustrate this fact, Above the Standard Procurement Group, Inc. has averaged more than $534,000 in cost reduction for each procurement project outsourced over the last several years. Because of the necessity for companies to survive and reduce costs, procurement outsourcing has grown substantially over the last few years from $750 million in percentage fees paid out to U.S. procurement outsourcing firms in 2009, to more than $2 billion in 2010, more than $2 billion in 2011, and continued exponential growth expected in the future. The figures regarding procurement outsourcing will continue to increase in 2012 as demand for PO grows. With procurement outsourcing, companies are able to focus on what they do best, retain more money for their bottom line, and realize the real and substantial benefits outlined in this White Paper. Procurement outsourcing helps all parties involved in procurement outsourcing come out ahead the company needing the outsourcing, the third party company conducting and managing the outsourcing, and the vendor/supplier who provides the goods and services. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 13

14 Contact Thank you for investing the time to read this White Paper. For questions, more information about Above the Standard, a leader in the cost reduction field, or to receive a free, noobligation Cost Reduction Assessment, please contact Daniel Barlette, Jr., CEO, of Above the Standard Procurement Group in New Jersey at (855) or by at DBarlette@atscostreduction.com. IMPORTANT: This White Paper may not be reproduced or used for other than informational purposes without the express written permission of Above the Standard Procurement Group, Inc. A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 14

15 Citations Aberdeen Group Inc. Procurement Outsourcing: Mid-Market is Truly Middling. Sector Insights. December 31, Above the Standard Procurement Group, Inc. Clients Outsourced through Accenture. Outsourcing Seizing the opportunity: Achieving high performance in today s economy through procurement outsourcing Blanchard, David. Transformation is Out; Optimization is in. A look at What to Expect from the Global Supply Chain in Supply Chain & Logistics. Industry Week. January 20, Dwyer, Christopher. Strategic Sourcing, The 2010 Guide to Driving Savings and Procurement Performance. Aberdeen Group Inc., March 31, Everest Group. Top 10 Best Practices in Procurement Outsourcing (PO). EGR R Everest Global, Inc. Gupta, Menon, Menzigian. PO Annual Report in 2010 PO in 2009: A Year of Prudent Growth. Everest Institute, Everest Group. March 18, IBM, ftp://public.dhe.ibm.com/common/ssi/sa/wh/n/mbw03007usen/mbw03007usen.pdf HfS Research, Ltd. Broadening the CPO Mandate Through Procurement BPO. January, Industry Week. Procurement Outsourcing in Manufacturing, Manufacturers realize significant savings. September, Page Kaila, Rajesh Prabhakar. Procurement Outsourcing (PO) Service Providers/Vendors Growth Opportunities & 2011 Challenges. January 14, Purchasing.com. Buyers continue to increase near-shoring as risk management strategy. May, Page PurchasingData.com. Transaction Price Forecasts, Price index for raw materials will jump 17% in April 1, SDC Exec., Supply & Demand Chain. Sourcing/Procurement Trends. BPO U-turn: Outsourced Procurement Seen Bucking Offshore Trend in Going Protectionist. Cygnus Business Media. December, 2008/January, Page Seen-Bucking-Offshore-Trend-and-Going-Protectionist/13$10845 Sigalia, Ltd. Procurement Leaders, the Executive Network. April, Stuart, Alix. Buy It for Me. Companies are increasingly using third-party procurement services, even for essential purchases. CFO Magazine. November 1, Verma, Prathibha. Global Services. BPO, Procurement Outsourcing, Procurement Outsourcing is Maturing but Getting Riskier. March 23, Outsourcing-Is-Maturing-but-Getting-Riskier/23/10/9434/GS A b o v e t h e S t a n d a r d P r o c u r e m e n t G r o u p Page 15