Outsourcing indirect procurement spend: The case of BAE Systems

Abstract

The previous chapter explored the use of outsourcing to transform human resources. The opportunities for cost savings are vast because HR is a labor intensive activity. Thus, the creation of technology-enabled shared services allows dramatic reductions in headcount. This chapter explores in depth the use of outsourcing to transform indirect procurement. (Procurement of direct materials and services is still considered strategic and kept in-house by most firms). This is a very different transformational model because procurement is not a labor intensive activity, but the dollars transacted are enormous. A handful of purchasing agents may transact US$100 million worth of indirect goods and services. Typically, a purchasing agent may be responsible for dozens of categories of indirect spend, and thus cannot gain deep expertise in each category. Thus, savings from indirect procurement outsourcing come from the supplier’s deep category expertise, as well as rigorous sourcing methods, tools, consolidated buying power, and the ability to attract and retain good suppliers. Studies have shown that customers have experienced significant cost savings from outsourcing indirect procurement. Aberdeen Group, for example, found that 83 percent of 720 senior executives reported achieving significant price reductions after outsourcing procurement.¹