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Pros and Cons of Procurement Outsourcing

6 min read Sanjay Krishna

SaaS Procurement takes time, energy, expertise – and it’s always changing. Sounds exhausting right? It is. That’s why many companies are relying on procurement outsourcing to handle their SaaS sourcing. Here’s why you should, too.

What is procurement?

Procurement is a business function that oversees all of the goods and services that a company purchases. In a general sense, procurement refers to business spending. The procurement process usually involves researching vendors, contract negotiations, and payment processing. Anything that your company buys goes through procurement—that includes everything from Post-It notes to a new SaaS platform. 

Procurement activities fall into three main categories:  

  1. Direct procurement 

This involves the direct purchase of items needed to produce a company’s end product, such as raw materials and machinery.  

  1. Indirect procurement 

This involves the purchasing of goods like office furniture, office supplies, and kitchen goods. In other words, they’re purchases that don’t directly apply to your product or impact your bottom line. Some companies have an office manager who will handle indirect procurement. 

  1. Services procurement 

Services is the broadest of the three types of procurement. It covers sourcing for software subscriptions, paying for event services like catering, and bringing on short term or contract workers. 

SaaS has changed the procurement game

Before software as a service (SaaS), the technology landscape had fewer product options and the market was controlled by a handful of large vendors.  Businesses generally purchased a suite of products, or partner products, from providers like Oracle, SAP, or Microsoft. 

Other areas of business operations have improved and adapted to a SaaS world, with procurement lagging behind—both in outdated processes and buyer know-how. Instead of a collaborative and integrated approach to vendor selection and evaluation, IT teams and procurement make decisions in silos. The result is bloated a tech stack and wasted spend.

SaaS procurement approaches IT purchasing very differently. Instead of buying and owning your entire tech stack outright, and around one major vendor, companies can combine best in breed products that provide the right features for their needs. (For example: one tool focused on procurement and another focused on Accounts Payable.) 

SaaS also requires continuous oversight because of the subscription licensing model. Without constraints, companies unknowingly spend money on Shadow IT and SaaS waste. They also open themselves up to IT security risks when new tools are added to their tech stack without IT’s knowledge. Modern SaaS procurement helps companies avoid these scenarios and get the most out of their existing tools. 

What are the benefits of outsourcing procurement?

For the right companies, outsourcing your procurement function is worth the expense. Here are the main benefits of using an outsourced provider: 

  • Experts in procurement hello avoid costly mistakes. How? By negotiating the right contractual protections, designed to prevent you from being upsized. 
  • Some types of procurement are specialized, including direct procurement and strategic purchases like buying SaaS products. If you have a small procurement team, your department heads, such as your VP of Engineering or CTO, will have to spend their time sourcing vendors and evaluating tools. Outsourced procurement providers are category experts and can help you make the right choices when sourcing things like SaaS. 
  • Streamlined spend management makes budgeting much easier. Outsourced service providers will have spend management software that makes your budgeting and purchasing far easier. Today, SaaS spend management systems are becoming more popular for end customers, too. Pro Tip: Make sure your spend management tool answers these 12 questions
  • Overall cost savings. Procurement outsourcing makes its biggest impact by allowing your company to reduce headcount. During unpredictable economic conditions, outsourcing can help you save money on additional headcount so you can retain your existing employees. 
  • Outsourcing providers can leverage their brand recognition to access better discounts, contracting terms, and service level agreements. They can also take advantage of economies of scale which lower your overall transactional costs. 
  • When it comes to strategic purchases, like SaaS procurement, outsourced vendors have the industry knowledge to help you evaluate your vendor options, narrow down your shortlist, and negotiate better terms much faster than your internal team can deliver. 

How can procurement be outsourced?

Procurement outsourcing lets businesses shift the responsibility for some or all of their procurement activities to a services provider. It’s typical to outsource transactional procurement tasks, like invoice management, that are time consuming and straightforward, rather than strategic sourcing. 

Now, there’s a growing need for outsourcing procurement of more strategic projects like vendor relationship management, spend management, and even contract negotiation. Companies take advantage of procurement providers that have expertise in certain categories to get better pricing.

Outsourced procurement services take advantage of four value levers that might be out of reach for your growing business, bringing data-driven procurement and price benchmarking into the equation:

  1. Volume aggregation 

Outsourcing providers have the option to bundle demands across all of their clients. This volume of spend helps them negotiate better pricing and secure volume discounting. 

  1. Expertise 

Access to expertise and product know-how can help your business when purchasing items that you’re less familiar with. For example, a small company may only procure SaaS tools a handful of times a year. Your in-house procurement team doesn’t have the time to become experts themselves. They can benefit from outsourced procurement specialists and learn and improve their own capabilities and skill sets. 

  1. Labor Arbitrage 

Outsourced providers frequently hire their labor force in low cost of living areas around the world. Not only do you see the benefit of reduced labor costs, but your company also saves time and money on hiring, onboarding, and providing benefits. 

  1. Demand and specification management 

Demand management helps companies control their consumption levels by setting up processes and optimizing specifications that will minimize total cost of ownership. This allows companies to forecast and contain their spend more accurately over time.  

What are the disadvantages to outsourcing procurement?

Outsourced procurement can be a great way to offload time consuming, low value work. But that doesn’t mean that it’s without disadvantages. Here are the main drawbacks of outsourcing your procurement team: 

  • Your outsourced service’s employees may need too much support from your in-house team. If your specialists are constantly guiding and fixing any problems, this negates the purpose of outsourcing procurement in the first place. 
  • Outsourced providers are not experts in your business. They don’t have the tribal knowledge that comes from working within and growing a company. Some of their purchasing decisions may not be in line with all of your company goals and policies and you have no control over processes and culture.
  • You’ll have less overall control. Your company won’t have visibility into the day to day procurement activities of your outsourced provider. You’ll need a detailed service level agreement in place that provides regular updates and ensures there aren’t any major issues

Want to manage procurement with ease?

SaaS spend is growing. With dozens of SaaS applications in use simultaneously, most companies are struggling to manage their SaaS procurement. If outsourcing your procurement function is not an option today, ask us about our partners. If you want to manage procurement yourself while arming your team with data, we can help, too. Using Quolum as your spend management software can help you become a procurement pro in no time.

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