Sramana Mitra: It’s stuff like office supplies that you are outsourcing. It’s more of a cost consideration. Whereas, a more strategic procurement issue would be dealing with parts and technology, and that’s where it becomes more complicated.
Ed Cross: Let me be more direct. To outsource indirect stationery, for example, can be a fairly simple decision, but not to outsource direct materials. If you are an automotive manufacturer, to outsource the procurement activities associated with buying automotive parts that go into vehicles is a bigger decision.
It would be perceived as a very strategic one because they feel that they get their competitive edge from the procurement of direct products. This remains a dilemma for the customer, whether they’re prepared to let go and pass the problem on to somebody else. This is a major consideration.
If you look at indirect goods and services, which are things that don’t go into the end-product, the decision to outsource stationery is straightforward. However, outsourcing IT in a bank is a major consideration because IT is essential to the fabric of the business and to the delivery of banking services to their own customers. There’s still a hesitancy to outsource areas of spending that are seen as core to the business and to the consumer. It comes down to the view of risk and confidence in the provider landscape and their ability to provide the service and mitigate that risk on behalf of the buying organization. That’s probably the biggest risk.
The other big challenge is that procurement outsourcing might not be high on the agenda of the CFO or the CEO. There might be another area of the business that demands the management’s attention and procurement outsourcing might not be a strategic consideration for the business. I think that’s the case with any business. They’re worrying about other areas.
The third point is that businesses generally worry about letting go and the procurement professional, in some businesses, is hesitant to outsource because they see that as a threat to their livelihood. There are different dimensions to this. There’s a strategic dimension where the business has got bigger things to think about. There’s a strategic dimension from the point of view of risk management, “I don’t want to outsource that because I’m worried about losing control.” At the tactical end, there is also the issue that the procurement professional may feel that outsourcing parts of procurement is a threat to their own livelihood. There’s a range of factors that impede procurement outsourcing.
Sramana Mitra: Where are the opportunities? For example, if a new entrepreneur wanted to get into the procurement outsourcing area, what are the open problems or blue-sky areas where they could build the business?
Ed Cross: There’s a multi-layered answer to that. If you’re an entrepreneur and you’re looking at the procurement marketplace, there’s a clear-cut opportunity to look in the technology landscape. If you want to place orders, analyze the market for supplies, or understand how much money you spend, there is no one solution. You have to utilize a range of services from a range of technology providers.
If you’re looking at it from the high-end, there’s a clear-cut opportunity for a business to create a one-stop shop for procurement. One system that is married to the multi-faceted procurement challenge, so that it understands what we’re spending in the business, what we’re going to spend in the future, helping with the acquisition of suppliers, negotiation and the deal-doing process, contracting process, and helping in the order fulfillment process. There’s no system that converts a requirement in a business into a fulfilled and paid for order. There are several organizations in the marketplace that would suggest that they do, such as BDO and ERP players like SAP and Oracle but frankly, their systems don’t do it.
At a high level, the technology landscape is where an investor or an entrepreneur might want to focus on. Of course, there are a myriad of suppliers in all those areas of procurement contending for the buyer’s spend. That’s the first piece. The second is there’re clearly components of that process like supplier–relationship management, its automation through systems, and contract life-cycle management that are under-represented in the marketplace. There’s a clear opportunity for organizations to provide solutions in that area.