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03/06/2012

Outsourcing: Prior Integration of Purchasing

Given the increasing competitive pressure, outsourcing is becoming an important issue for ever more companies. Purchasing and its role in this respect – that had been the subject of a talk between Daniel Zabota, Editor in Chief of Beschaffung-aktuell and Oliver Kreienbrink, Partner at Kerkhoff Consulting, the purchasing consultancy, and Andreas Pasing-Husemann, staff member of business development at BUW Group, both companies just having submitted a study on the subject.

 
 
Beschaffung aktuell: Why is "outsourcing" as a subject becoming ever more important?
Andreas Pasing-Husemann: Primarily concerned are competitive advantages in increasingly more global markets. Today, companies must be especially economical to stay competitive. Together with Kerkhoff Consulting, we interviewed 150 companies in all industrial sectors with more than EUR 50 million in sales. Altogether 87 percent of them said that they want to reduce process costs by means of outsourcing. Four of five companies thus want to be more flexible in the future.
Oliver Kreienbrink: Outsourcing provides companies the opportunity to move corporate areas outside which do not directly contribute to the corporate result and thus be able to concentrate on their core business. There are specialized companies for all other areas, and they have the experience to provide optimum quality with economical cost structures.

Beschaffung aktuell: What will be outsourced?
Pasing-Husemann: According to our study, 95 percent of the interviewed companies do not want to have facility management done internally within the next five years; and still 86 percent aim at the collaboration with external security services. Telecommunications is to be outsourced with 73 percent of those interviewed; logistics with two thirds. Half the companies want to discharge their internal IT department. And at least two of five of the interviewed companies want to outsource their personnel and accounting within the next five years.

Beschaffung aktuell: What are the different types of outsourcing?
Pasing-Husemann: We talk about internal corporate cooperations if specific functional areas within the group are assigned to other operations or certain areas will spin-off to form a separate company, but also with regard to third-party awards within the own operation, for example temporary work. The award of functional areas to third-party companies is called external corporate cooperation.
Kreienbrink: The last mentioned can take place internationally. But the study shows that 80% of the companies concentrate on the German-speaking area in their outsourcing measures. Outsourcing in foreign countries can provide considerable cost benefits, but it requires intensive preparation and good quality management.

Beschaffung aktuell: But many companies are reluctant not only in international outsourcing – despite the benefits you indicate. How does that fit together?
Kreienbrink: We'll see in the study that 86 percent of those interviewed are afraid of cost increases and accordingly do not introduce any outsourcing measures. Nine of ten companies expect quality problems; more than four fifth are afraid of higher control expenditures. Many companies shy away from the expenditures which an outsourcing project may entail.
Pasing-Husemann: The study showed that companies are only satisfied with their outsourcing decisions if they had prepared the process in detail – from its concept to its realization. If an outsourcing process is to be successful, the ordering party should primarily invest a lot of time and diligence in the planning of its project. In this respect, it is recommended to use a clearly defined system for the evaluation of services.

Beschaffung aktuell: To what extent has purchasing been integrated into the outsourcing activities?
Kreienbrink: Altogether 91 percent of the interviewed companies consider it important or very important that purchasing will be integrated as a supporting department in the outsourcing process. And that's also right and correct. But reality shows: Purchasing departments are mostly actually involved on an operative level but less when strategic orientation is concerned. Yet, costs could be significantly reduced if purchasing were included early on and if purchasing measures were used such as the preparation of tender invitations and specifications, the evaluation of service providers, tactical negotiations and finally the contract awards.
Pasing-Husemann:  After all, outsourcing can only be successful if purchasing has been involved in the process from the start. We can clearly gather this connection from the recorded data. However, this function does not seem clear to all those responsible. It seems that many companies develop the right feeling only now.

Beschaffung aktuell: What about the outsourcing of purchasing itself?
Kreienbrink: Of those interviewed, 93% consider purchasing an important department in the company which should not be outsourced. It thus ranks first –together with sales. Only one fifth of the companies polled had already once outsourced a purchasing department. Reasons for it were primarily an increase in transparency and the reduction of process steps. Many companies simply don't have a sufficiently large purchasing team to satisfactorily cover all areas both operatively and strategically. If parts of purchasing are outsourced, it will concern in many cases the procurement of indirect material. That includes materials and services which do not directly enter into the company's products – i.e. office supplies, consumables or services. The purchasing team will thus be able to concentrate on the procurement of products which directly contribute to the company's success and results.

Beschaffung aktuell: What is your advice to companies?
Kreienbrink:  It might be sensible to outsource specific parts of a purchasing department. However, prior to such a decision, it would be advisable to first do an internal purchasing and supply chain optimization and set up processes.

Beschaffung aktuell: Thank you very much for talking with us.