What is Procurement Outsourcing?

Procurement outsourcing is a general term used to describe a situation where a business or organization purchases procurement services from an outside company. Outsourcing has been around as a business model for a very long time, but it gained notoriety in the mid-1990s as large companies began reducing well-paying positions in favor of outsourcing administrative functions to companies located in other countries. The primary goal of outsourcing is to improve efficiency and reduce administrative overhead costs.

The term procurement is used to describe a wide range of activities, primarily focused on the purchase of goods and services from other suppliers. The methods and processes used vary slightly by industry, but for the most part are fairly generic. Many firms take a phased approach to outsourcing, allowing a procurement firm to complete all the transactions below a specific threshold without approval from the client. Any negotiations or contracts for over a specific dollar value can be completed by the client, with the assistance and advice of procurement specialists, as required.

When looking for a procurement outsourcing company, there are three areas that should form part of the review process: payment method, exact services to be provided, and metrics to evaluate performance. Companies that outsource procurement to firms located overseas need to review legal contractual obligations, hours of operation, and managerial input or access. Selecting a procurement services firm should be completed through an open contract tendering process. The quality of tender responses can be very revealing, as this type of work is the primary function of a procurement services firm.

There are two different payment methods commonly found in procurement outsourcing: percentage of purchases or flat rate per purchase order. The percentage of purchases is a flat percentage invoiced based on the total spending processed through the services firm. An invoice is typically submitted each month, indicating the dollar value of all orders processed, total amount of savings achieved, and the amount due for services rendered. Flat rate is based on sheer volume of transactions. Both methods can be manipulated to inflate invoice values and must be carefully managed.

The list of services that the procurement services firm will provide should be clearly defined. The terms of payment, reporting requirements, escalation procedures, and level of service are all important in this type of agreement. Make sure that they are included in the contract at a very detailed level. Metrics that the company will provide should be tied to the contracted services. These values are used to determine if the procurement outsourcing firm is meeting its contractual and service level agreement.