Xchanging, a major procurement outsourcing provider, has announced profit warnings after cancelled contracts sent its share price spinning. Perhaps this signals a broader decline in the uptake of procurement outsourcing deals?
Two years ago, Forbes wrote a piece on the death of Indian technology outsourcing. It argued that the twin threats of increased technological innovation and increased Indian salary levels will make the continent redundant as a low-cost sourcing destination.
Similarly in procurement, there is the same long-term trend. The increasing sophistication of software applications, such as ERP, and especially spend analysis programmes lower the transactional costs of a single contract.
The administration of low-cost, high-volume contracts are time-consuming and non-strategic. Nevertheless, they are still important and a key component of procurement's role. The future may see a time when the cost of administering an outsourced contract may excel its in-house provision.
Xchanging's decline may be partly due to accounting problems and other difficulties in running the businesses, but its stark fall in US business is suggestive of a broader move away from outsourcing.
In another well-known example of underperforming procurement outsourcing from the UK, DHL operates the National Health Service's supply chain. DHL claimed that it could generate savings of up to £1 billion by 2016. Unfortunately, it has only managed £100 million savings in two years. A recent government report claimed that the dysfunctional supply chain is also producing £500 million in procurement inefficiencies.
Many outsourcing contracts fail to deliver the savings that are often promised. The oft-quoted headline figure is that outsourced services save 10% in costs. Yet, there are also increased costs that accompany the new contract. Ironically, these costs are most immediately borne by procurement.
By outsourcing more services, the buyer company also increases the need for procurement staff to administer these contracts. Paradoxically, outsourcing procurement services may increase the purchasing headcount.
Although such spend is technically under management, scope for innovation and development is limited and where these factors are stipulated elements of a contract, they increase the price and administrative costs of the deal.
Perhaps the cheaper option for organisations is to back their own procurement staff and continue to generate savings in-house?