Outsourcing vs. Insourcing Procurement Functions: Making the Best Choice for Your Organization

Mar 13, 2023 | Best practices

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Mar 13, 20233 mins

Outsourcing vs. insourcing procurement functions is a critical decision that takes into consideration core competencies, cost analysis, technology, and risk. Examples from Nike, Siemens, Unilever, and Coca-Cola demonstrate how sustainable outcomes can be achieved by making the right choice and following a structured approach, leveraging technology, and optimizing operations.

Procurement is a critical function for any organization, and the decision to outsource or insource procurement functions can have significant implications for its operations, costs, and overall performance. On one side, outsourcing can provide access to specialized expertise, reduce overhead costs, and increase flexibility. Conversely, insourcing can provide better control, alignment with the organization's values, and the ability to build internal capabilities. So, how can organizations decide which option is the best for them? In this article, we'll explore some of the factors to consider when making this decision, based on insights from leading consulting firms and real-world examples. 

Factors to Consider for Procurement Outsourcing or Insourcing 

  • Core Competencies: One of the primary factors that companies consider while deciding whether to outsource procurement or insource is their core competencies. If procurement is not a core competency, i.e., a function that drives significant value for the organization, and it does not provide any strategic advantage, then outsourcing may be a better option. On the other hand, if procurement is a critical component of a company's operations, insourcing may be a better option. According to a report by McKinsey, companies should consider outsourcing procurement when they lack the necessary expertise, have limited resources, or when procurement is not a core competency. In contrast, they should consider insourcing when procurement is a key driver of value creation, has strategic importance, or when they require greater control over the procurement process.
  • Cost: Companies should analyze the total cost of ownership, including the costs associated with hiring, training, and managing procurement staff. Additionally, companies should consider the cost of the procurement process, including the cost of technology, process improvement, and supplier management. A report by Everest suggests that companies can reduce procurement costs by up to 30% by outsourcing procurement operations to a third-party service provider. The report also suggests that companies should focus on core procurement activities, such as supplier discussions, identifying strategic vendor options etc. and outsource non-core activities, such as vendor research, transactional processing etc. to achieve cost savings.  
  • Technology: Companies should consider the level of technology required for procurement operations and whether they have the necessary technology infrastructure and expertise to manage the procurement process. A report by Forrester suggests that companies can benefit from outsourcing procurement operations to a third-party service provider that has a robust technology infrastructure and expertise in managing procurement technology. The report also suggests that companies should consider the benefits of cloud-based procurement solutions to achieve cost savings and improve procurement efficiency.
  • Risk: Outsourcing procurement operations to a third-party service provider can introduce a level of risk to the procurement process, including the risk of supplier failure, security breaches, and data breaches. On the other hand, insourcing procurement operations can also introduce risks such as lack of expertise, high turnover rates, and compliance risks. A report by Bain suggests that companies should assess the risks associated with outsourcing procurement operations, including the risk of data breaches and supplier failure. The report also suggests that companies should establish clear risk management processes and protocols to mitigate the risks associated with outsourcing procurement operations. 
  • Scalability: Companies should assess whether their procurement needs are likely to grow or shrink over time and whether they have the necessary resources and expertise to manage procurement operations in-house. As we've explored, outsourcing versus insourcing procurement functions comes with its own set of advantages and disadvantages, and determining the right choice hinges upon the distinct circumstances of each organization.  

Examples of How Companies Navigate Outsourcing vs. Insourcing in Procurement  

Nike: In 2009, Nike announced that it would be outsourcing its entire procurement function in order to increase efficiency and reduce costs. By outsourcing, Nike was able to streamline its procurement processes and gain access to new technologies and expertise. As a result, the company was able to save $500 million over the course of the outsourcing contract. 

Siemens: In 2018, Siemens announced that it would be insourcing its procurement function, bringing it back in-house after previously outsourcing it to a third-party vendor. The decision was driven by a desire to gain more control over the procurement process and improve transparency. By insourcing, Siemens was able to implement new technologies and processes that resulted in faster and more efficient procurement, as well as better cost management. 

Unilever: In 2017, Unilever announced that it would be outsourcing a portion of its procurement function, while also maintaining some in-house procurement capabilities. The decision was driven by a desire to reduce costs and increase efficiency, while still retaining some control over the procurement process. By outsourcing certain procurement activities, Unilever was able to focus on its core competencies, while also gaining access to new technologies and expertise. 

Coca-Cola: In 2020, Coca-Cola announced that it would be outsourcing its procurement and supply chain functions, in order to improve efficiency and reduce costs. The decision was driven by a desire to streamline processes and gain access to new technologies and expertise. By outsourcing, Coca-Cola was able to achieve significant cost savings, while also improving procurement processes and gaining greater visibility into its supply chain. 

The decision to outsource versus insource procurement functions is a complex one that requires careful consideration of various factors, including the organization's strategy, goals, culture, capabilities, and risks. By following a structured and data-driven approach, leveraging the latest technologies and best practices, and continuously monitoring and optimizing their procurement operations, organizations can achieve sustainable and value-creating procurement outcomes, whether they decide to outsource, insource, or a combination of both. 

The benefits of our comprehensive, end-to-end procurement solution can be leveraged by in-house teams and outsourced agencies alike to transform your source-to-pay and procure-to-pay journeys via automation and analytics. Inhouse teams can continue to collaborate and maintain oversight across their procurement cycle, while outsourcing agencies can increase their efficiency significantly by reducing manual entry and having easy access to all information stored in once place. 

With FactWise Source-to-Pay, procurement teams can reduce cycle times and procurement costs while increasing supplier collaboration and process efficiency, standardize processes and utilize data analytics that provide insights into areas for improvement, while continuously reviewing and improving procurement practices to stay ahead of the curve. Implementing procurement solutions with these strategies can result in significant savings, improved supplier relationships, and streamlined processes. 

At FactWise, we are committed to building truly distinctive procurement software solutions that delight users and provide sustainable positive impact to the organizations we serve. We do this by providing transparency and insights to leaders (31% increase in governance), streamlining and automating processes to improve efficiency (20% increase in efficiency), and driving bottom-line impact by unlocking savings potential (25% cost reduction for direct spend).  

About the Author

Stawan is the founder and CEO of FactWise. Before founding FactWise, Stawan was the NA TMT-Procurement Leader at McKinsey. Passionate about procurement, Stawan has 15 years’ experience in enabling clients of all sizes to achieve business impact via procurement.


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