Procurement outsourcing (PO) market has been changing for the last two years and 2008 specially reflected this change. In this year, new PO spending was significantly low but overall spending increased 30 percent due to strong growth in contract extensions. Suppliers’ managed, non-core PO spend was up $16 billion over the previous year, crossing $110 billion, according to the Everest Institute study, ‘Shifting buyer Preferences Dictate New Engagement Models’.
Everest Research Vice President Katrina Menzigian says, “Uncertainty, stemming from recession, has drawn their attention to cost saving opportunities and a decreased appetite for risk. Until this uncertainty clears up, we don't expect more aggressive use of outsourcing. So, buyers start off with narrow scope and slowly expand it in an organic way.”
An increasing number of contracts initially launch with a procure-to-pay (P2P) focus but with a broader source-to-pay (S2P) vision. Annual contract value of PO spend surpassed the $1 billion mark in 2008, with large companies signing 54 percent of new contracts.
Organic growth is increasingly becoming an important growth driver for procurement outsourcing suppliers and is going to be on the cards in 2009. Buyers come into procurement outsourcing space looking for complete end-to-end solution that is a complete source-to-pay solution and over time, they move on to a more expansive scope. A significant value creation opportunity is coming for buyers, as nearly 45 percent of contracts in the PO market are coming up for renewal over the next few years that are worth more than $1.3 billion in total contract value (TCV).
Everest suggests that the organic growth path is very important for the suppliers to focus on. The initial scope with them is likely to be smaller than it has been in the past when they engage new clients.
“Suppliers need to focus on pursuing organic growth opportunities, leverage Finance and Accounting Outsourcing (FAO) to expand into PO services and create differentiation through strategic use of global sourcing,” says Saurabh Gupta, Research Director, Everest Research Institute. “Delays in decision making will continue and challenges will temper the rate of source-to-pay adoption. Combined with emerging phased adoption, PO suppliers should expect the continuation of lengthy sales cycle and complex buyer decision-making processes.”
The supplier landscape is segmented along procure-to-pay and source-to-pay areas of procurement outsourcing. Sourcing segment has activities such as category management where products are determined of who wants what, supplier relationship, supplier sourcing like which supplier you want to work with when you start off. These make up the sourcing value chain as there is a whole strategy of how company structures its buying processes.