Supplier Management BPO breaks a billion

I wanted to share a few early snippets from our forthcoming market landscape on Supplier Management BPO services, which is due to hit the shelves next month.  We've defined this market as managed strategic sourcing and procure-to-pay services, the bulk of which are indirect procurement services, but also includes some direct strategic sourcing and supplier management analytics processes.

And we can exclusively reveal here, that the market surpassed a billion dollars in expenditure for the first time last year with a 30% hike in expenditure on new multi-scope BPO contracts:

So what's driving this growth?

Major shift of indirect procurement work to India.  The labor arbitrage is enabling new contracts to be set up with limited upfront costs as a result of the lower cost labor.  Several new contracts have been implemented with immediate cost-reduction, where the service provider has streamlined the costs over the course of the contract.  In past years, many firms evaluated supplier management BPO options, but were put off by the upfront investments in technology to optimize managed spend.  Now they can mitigate this investment risk.

More service providers scaling up and offering supplier management services.  While the incumbent service providers, namely Accenture, Capgemini and IBM, have all ramped up their global delivery resources and scaled their businesses, the entry of new offshore-centric service providers, keen to take on deals at low-cost to kick-start their operations, has significantly driven growth over the last 2 years.  For example, Corbus, Infosys, TCS, Wipro and WNS have all picked up market share, and we now have HCL/Xerox and Genpact competing for deals.  I'll reveal the market share shoot-out in the report, and there are a few surprises...

What's the outlook for this year and beyond?

We've experienced a lull in all outsourcing activity since the recession hit, as companies delay decisions and wait to see how their competitive position unravels as the fog lifts.  However, we expect some marginal improvement in new deal activity this quarter, with a marked increase in Q3 and Q4, as many delayed projects get the go-ahead.  Early indication from our new adoption survey already indicates aggressive BPO and ITO intentions for later 2009/2010.

Will this market continue to grow in the long-term?

My short answer is yes, but with some caveats.  80% of current live engagements are largely people-process "lift and shift" deals, with limited process transformation and tie-in to new procurement technology investment, which is essential if customers are going to reap cost-savings through better managed spend in the future.  While they may be saving a few dollars now through low-cost labor, these costs will sprout back if they fail to follow-through with better processes and technology.

What do you think?

Comments

[Jerry Willard]

Phil,

I'd imagine we'll see some softness in this market this year while companies tighten up on outgoing spending and prefer to keep this function inhouse in the interim. But expect many firms to explore broader external supplier management options as the economy recovers and they seek to change the way they procure non-strategic items. Like all types of outsourcing, if you can find someone to do it better, and save you money, it's a logical move. Much depends on these BPOs incorporating procurement technology into their offerings,

Jerry Willard

[Brian Ellis]

Phil,

The major challenge for US businesses is training onshore procurement staff to manage offshore employees, whether in an outsourced or captive model. With so much reliance on local knowledge and expertise for many of these processes, companies have to develop internal skillsets to work in a global model. You can't just throw work over to places like India and force it to operate effectively,

Brian

[Alan Johnson]

Phil,

It's not a surprise that the Indian-based providers have got into this market. The transactional nature of the work is well-suited to a BPO model. My concerns are that it's mainly a low-cost labor move on behalf of multinationals, with little foresight into future value, or process transformation. I'd be curious to know the nature of the work being conducted offshore versus onshore,

Alan