The Procurement function isn’t what it used to be. Once relegated to an obscure position in the back office, Procurement has found itself growing increasingly strategic and increasingly valuable over the last decade. Thanks to evolving solutions and emerging risk factors, more and more organizations are looking to increase their investment in the function and make it a value generator.
Unfortunately, organizations that have spent generations neglecting Procurement are probably lacking for internal expertise. While they might have what it takes to oversee the function’s tactical workload, a true strategic evolution would require time and resources they simply don’t have.
In all likelihood, these companies could benefit from third-party support in the form of a Procurement Services Provider. Whether they’re looking to offload tactical labor or supplement their capabilities for key, strategic initiatives – they’ll find a valuable helping hand in a PSP.
If you’re unfamiliar with PSPs, or scarred by memories of bad engagements, you’ll want to make sure you assess your options effectively. It comes down to doing your research and asking the right set of questions. Here’s some information that should help you enter into these conversations with confidence and identify a best-fit provider.
Will a Procurement Services Provider replace our team?
It depends. While some providers will enable you to totally outsource Procurement’s workload, that’s just one way to leverage a third party.
In many cases, a PSP can supplement your team rather than fully replace it. Think of tricky spend categories like Marketing and IT for example. Your team knows these are categories full of impactable spend, but it’s possible they lack the expertise (and time) necessary to generate savings. A great PSP will fill in those knowledge gaps to help your internal resources identify savings opportunities and act on the quickly.
Do Procurement Services Provides rely on off-shore resources?
Again, it depends. There are lots of PSPs out there who outsource their workload to professionals overseas. In general, this helps them to keep costs low. Never forget, however, that you get what you pay for. This sort of provider is typically a good inexpensive solution to tactical problems. They’re far less effective in carrying out more strategic initiatives. Establishing a category management plan or conducting a Procurement Transformation, for example, tends to demand a bigger investment in on-shore subject matter experts.
Are Procurement Services Providers paid by the suppliers they recommend?
Once again, some PSPs are simply re-sellers or agents for a small network of suppliers. These groups will generate savings, bill you for their work, and ultimately collect additional compensation from the supplier. Collecting money on both ends presents an inherent conflict of interest. A PSP that’s collecting a commission will always push recommendations that maximize their own earning potential. As such, it’s important to ask your provider how they’re compensated to ensure they’re supplier agnostic.
What is contingency-based cost reduction?
In a contingency-based agreement, a PSP will perform its work through a gain sharing model. Typically, they are billed at a percentage of savings dollars once a project is complete. In theory, this provides the client organization with a risk-free opportunity to reduce costs and refine its approach to procurement.
Not all contingency-based agreements provide this same sense of security. It all comes down to how savings are defined. One PSP might collect payment on any savings they’re able to identify. Others (Source One, for example) bill clients exclusively on the savings they actually realize.
Author: Tom Rogers
Job Title: CEO
Organization: Vendor Centric
Tom is a trusted advisor on procurement and third-party management to organizations across the United States. Having worked with over 120 organizations over his 30-year career, he has a unique ability to bring both creativity and discipline to finding solutions for even the most complex challenges his clients face.