A guide to outsourcing procurement

What is meant by procurement outsourcing?

Procurement outsourcing, or outsourced procurement, refers to the practice of hiring an external third-party provider to manage and handle all or some of an organization’s procurement processes.

This could include:

• Tactical procurement outsourcing – This typically involves the operational aspects of procurement, for example the short-term, transactional tasks that support day-to-day procurement activities. This could include negotiating tail spend or handling the purchasing of low-value, high-volume goods.
• Strategic procurement outsourcing – This could include the procurement of cloud services, software licenses for higher-value, business critical applications, or those with greater security and compliance risks.
• Category-specific procurement outsourcing – Companies may opt to outsource a specific area of procurement such as IT purchasing, or even more specifically, SaaS. This type of outsourced procurement can be particularly beneficial given that the average organization now uses 110 software applications – each of which take an average of 37 days to renew.
• End-to-end procurement outsourcing – This involves delegating the entire procurement process, from sourcing to payment, to a specialist provider.

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Each of these examples can be considered a type of business process outsourcing (BPO), enabling companies to focus on their core competencies while reducing operational costs and improving efficiency.

By delegating procurement activities such as sourcing, purchasing, vendor management, and contract negotiations to an external provider, companies can free up a substantial amount of time, while benefiting from their specialized knowledge, advanced technology, and resources.

What are the key components of outsourced procurement?

While the exact offering of a procurement outsourcing company will depend on a number of factors, including whether they specialize in direct or indirect procurement, a provider focused on the latter would typically cover:

• Sourcing and supplier selection – Many outsourced procurement providers will be able to assist in the supplier selection process, utilizing their industry knowledge and leveraging peer benchmarking data to make recommendations.
• Procurement process management – Many will also typically oversee the end-to-end procurement process, ensuring that the steps are executed efficiently, on time, and in compliance with company policies.
• Spend analysis and cost management – Any reputable procurement company will not only analyze spending to identify areas for savings and efficiency improvements, but they will also find ways to consolidate purchases, pinpoint areas of wasted spend, and optimize procurement processes for better cost control.
• Contract management – Many third-party procurement providers will not only negotiate contracts on your behalf, leveraging data to secure you the very best price and terms, but will also manage your renewal calendar.‍
• Technology integration – The best procurement companies will leverage automated technologies and advanced analytics to streamline processes, enhance visibility, and enable real-time decision making.

Benefits of outsourcing procurement

There are several key benefits to outsourcing procurement, all of which improve competencies across the entire procurement process. These can include:

Cost savings

Procurement outsourcing providers will be able to deliver cost savings in a number of ways.

• Greater purchasing power – Procurement outsourcing firms typically manage large-scale volumes of purchases across multiple clients, which allows them to leverage greater purchasing power.
• Negotiation expertise – One of the biggest advantages of delegating procurement to an expert is that you benefit from the team’s knowledge and expertise. As an example, they will have a far better understanding of each vendor, while also knowing which levers to pull and when.
• Rich benchmarking data – Many reputable providers will have their own benchmarking data, which can be leveraged to negotiate the best possible pricing and terms on any contract.   ‍
• Spend analysis – Procurement outsourcing services will also have the capabilities to analyze spend and identify cost-saving opportunities. This could include highlighting underutilized licenses, instances of duplicate or redundant software, or contracts that are more expensive than they need to be – Vertice’s own data indicates that companies pay 20-30% on average for software than they could be.

Access exclusive pricing and discounting insights for thousands of SaaS vendors.

‍Time savings

Another benefit of outsourced procurement is the time savings that it can deliver. Most procurement teams are under immense pressure to deliver value, but simply don’t have the time to manage complex procurement processes, evaluate vendors, negotiate each and every contract – the average organization uses 110 software applications – and track every aspect of the procurement cycle.

By working with a procurement partner, companies stand to:

• Spend significantly less time negotiating deals – See how one company saved 115 hours on negotiations in the space of a few months, freeing up valuable time to focus on more strategic initiatives.‍
• Spend less time chasing stakeholders to approve purchases – Automated approval workflows and notifications can streamline the process from the point of requisition, in turn eliminating delays and enabling faster procurement cycles.  

See how one company accelerated their procurement cycle by 55% with Vertice.

Expertise

Procurement service companies have vast amounts of experience, from streamlining processes to handling negotiations. By partnering with an external procurement company, you can take advantage of:

• Access to specialized knowledge and skills – Most providers will employ seasoned professionals who know which negotiation tactics to apply and when, as well as the procurement optimization strategies that will be most effective for both time and cost-savings.
• Greater negotiation leverage – With an understanding of the intricacies of each vendor, these providers will know how to navigate complex contract clauses and secure more favorable terms. They’ll also understand hidden costs associated with each vendor, as well as the less obvious opportunities for savings, for example the pricing models that go unadvertised. ‍
• Shuttle diplomacy – By acting as a mediator between both parties, a procurement provider can create a sense of impartiality in negotiations, acting as the go-between to communicate proposals, ask questions that bring up overlooked details, and facilitate discussion without you needing to be involved. According to Vertice’s Head of Procurement, shuttle diplomacy can also help to ensure that your own expectations aren’t totally unrealistic

Scalability

By outsourcing procurement, you can effortlessly scale both your business and procurement operations without introducing added complexity.

• Adaptability –  An experienced procurement partner will be able to quickly adjust to accommodate the needs of your business, ensuring that processes remain streamlined, even as procurement needs become more complex.
• Risk management – Larger organizations face greater risks related to procurement, including supplier performance issues and regulatory compliance. External partners can help mitigate some of these risks, for example by flagging potential compliance issues within contracts, and providing templates that are aligned with regulatory standards.
• Cost efficiency – As spending increases, companies must implement stronger cost management practices to avoid inefficiencies. Outsourced procurement providers are equipped to negotiate better prices by leveraging benchmarking data, their expertise, and their knowledge of each vendor. In addition to this, they can optimize existing spend by identifying cost-saving opportunities, ensuring that every dollar spent delivers maximum value.  

See how much SaaS spend goes to waste within the average organization by visiting our spend insights hub.

The challenges of outsourcing procurement – and how to mitigate them

As with anything, there will always be challenges associated with procurement outsourcing that are important to be aware of.

Procurement providers don’t know your business

While providers are experts in procurement, they’re not experts in your business or industry, and it’s likely that you’ll have to take the time to bring outsourced teams up to speed.

Certain procurement providers can also be stretched too thin, managing many clients and contracts, which can lead to feelings of neglect. We’d therefore recommend partnering with a procurement company that provides a dedicated buyer, whose job it is to fully understand your business and unique requirements.

Supplier management

Switching from an internal model to outsourced procurement is a transition that must be managed and will rely on internal resources. For procurement activities to remain optimal, effective communication and collaboration with the outsourced partner are essential to ensure alignment on expectations.

Relinquishing control

Working with a procurement provider doesn’t have to mean relinquishing control. Instead, it should be looked at as an opportunity to collaborate with experts while retaining strategic oversight. In fact, with the right provider, organizations can maintain control over key decisions and high-level strategy, leaving the experts to handle the operational execution.

Things to consider when evaluating procurement outsourcing services

• Understand exactly what is included – While almost all procurement companies will offer negotiation services, not all of them will provide it as part of their core offering. In our experience, the providers that do tend to deliver better outcomes.‍
• Determine the quality of their data – Again, many outsourced procurement providers will have their own benchmarking data, however the quality and breadth of this data can vary significantly. Those with a global presence, for example, are likely to have access to more comprehensive, diverse data across markets, which can help them deliver better savings.‍
• Savings guarantees – If you’re outsourcing contract negotiations, you want some reassurance that you’re going to achieve cost savings. Understanding whether or not the provider offers a savings guarantee can give you the reassurance that they are committed to delivering measurable value and incentivized to achieve optimal outcomes.

Read how Vertice reduced one company’s software spend by 32%, while saving $155,000 on a single contract.

• Whether you will be assigned a dedicated buyer – Some procurement companies will assign customers with a dedicated buyer, whereas others will rotate them depending on the vendor. In our experience, this creates friction with the customers having to deal with multiple contacts and typically doesn’t drive the best outcomes.
• Platform capabilities – When you outsource procurement, you’re not just outsourcing negotiations, you’re also investing in the technology they use to handle your procurement processes, optimize your spend, and manage your SaaS. Ensuring the provider has a breadth of capabilities and that the platform enables advanced automation is therefore crucial to ensuring you’re getting the best possible results.‍
• Be cautious of companies acting as resellers – We’re seeing an increasing number of procurement software providers now operating their own marketplaces and acting as resellers on behalf of the vendors. While this can provide end-users with fast access to discounts, these savings are often generic. Independent providers that negotiate on a case-by-case basis can generally secure more personalized and flexible deals.‍
• Consider the long-term relationship – It’s worth noting that some procurement companies acting as resellers may actually be the signing party for vendor agreements. Should you choose to stop working with the provider down the line, you may be required to either renegotiate net new agreements with each vendor, or pay list pricing which is often 26% higher than the average company pays.

Seamlessly manage procurement outsourcing with Vertice

As a procurement orchestration platform, Vertice not only has the capabilities to optimize your spend and streamline your procurement processes for maximum efficiencies, but we can also handle negotiations on your behalf, leveraging our extensive pricing database to ensure the very best deal on any contract.

By partnering with Vertice, you can gain the hours back in your day to focus on more strategic initiatives, leaving us to handle the rest, while retaining full oversight of your outsourced procurement processes and contracts.

See for yourself how we helped one company save 115 hours on contract negotiations in the space of a few months, or how we saved another $155,000 on a single contract through our white glove service.

Alternatively, take a self-guided tour of our platform to get a better idea of how we can help you simplify your procurement efforts.

• ‍Why your procurement team needs expert support
• How working with a SaaS procurement partner benefits all parties