Procurement Outsourcing Market Saw Second Consecutive Year of Record Growth

The multi-process Procuring Outsourcing market will grow about 15 percent and reach $1.8 billion in annual contract value (ACV) in 2012, representing managed spend of about $220 billion, according to a new research report, Procurement Outsourcing Annual Report 2012 – The PO Market: Steadily Marching Forward, published by Everest Group, a global consulting and research firm.

In 2011, the PO market experienced a second consecutive record year for new contracts and extensions, marked by a record high 60 new multi-process PO contracts signed. Last year saw ACV grow 14 percent to reach US$1.6 billion. Cumulative total contract value (TCV) for existing and new engagements reached $11 billion, an increase of 17 percent from 2010. Mid-market buyers, defined as companies with revenues between $1-5 billion, continued to be significant adopters that contributed to deal volume comparable to large market buyers with revenues above $5 billion.

Everest Group’s PO market projections for 2012 include:
· End-of-term activity will be significant as 57 percent of PO contracts, valued at nearly $6 billion, are up for renewal within the next four years.
· Adoption will be led by companies with revenues over $1 billion while adoption by small/medium-sized businesses (SMB) segment will remain sporadic.
· Adoption in the public sector is expected to grow.
· Geographic adoption will also continue to expand in terms of global contracts as well as adoption by source geographies such as Asia-Pacific and South America.

“For the second consecutive year, we’ve seen the PO market set record numbers for new deals, renewed contracts, and a significant rebound in mid-market adoption,” said Saurabh Gupta, vice president, Everest Group. “Spend reduction, process optimization and compliance remain the primary drivers for PO adoption. The business case is attractive as it can address a cost base representing 5-15 percent of the company revenue compared to 0.5-1.5 percent for most other BPO (business process outsourcing) opportunities. Thus, a 5-10 percent cost reduction represents a significant return on investment.”

In an interview with Gupta, he said CFOs will play an increasingly important role in PO related conversations, leading to integrated F&A-procurement outsourcing deals bundled around the procure-to-pay function.

“The domain of PO deals will expand beyond sourcing and transactional procurement to cover other areas of the supply chain such as order fulfillment, inventory management, logistics and after-market services,” he told SCMR. “Beyond indirect spend, more direct spend categories that are non-core such as MRO (maintenance, repair and overhaul) will increasingly become part of PO deals.”

Other developments in the 2011 PO market included:

• Average contract size continued to remain similar to last few years with a slight downward trend; most contracts signed last year have a TCV less than US$13 million.
• Manufacturing, consumer packaged goods and retail, and financial services sectors together accounted for nearly 80 percent of TCV signed in 2011.
• North America accounted for 43 percent of PO contracts in 2011, followed by Rest of Europe with 27 percent and the United Kingdom with 14 percent. Operations of Asia Pacific, Central America and South America are increasingly being outsourced in global contracts.
• More than 50 percent of contracts signed in 2011 had a fairly end-to-end scope across the source-to-pay process.
• There is an increasing trend in Finance and Accounting Outsourcing (FAO) contracts with accounts payable in scope to also include elements of the upstream procure-to-pay process.
• The market is shifting from classifying spend as direct versus indirect to core versus non-core.

IBM, Accenture and Procurian together account for 70 percent of the PO market in terms of ACV. In 2011, IBM, Accenture, and GEP signed nearly 45 percent of new multi-process PO contracts. IBM, Accenture, and Xchanging accounted for about 60 percent of total contract value signed in 2012, including new contracts, renewals and extensions.
“We expect to see acquisitions and partnerships between procure-to-pay and source-to-pay providers as well as a continued expansion of the service provider landscape,” said Gupta. “While the market is dominated by three providers, competition will intensify as the major contenders invest in capabilities and experience rapid year-over-year growth.”

Other service providers’ performances analyzed in the report include Capgemini, Corbus, Genpact, HCL, HCMWorks, HP, Infosys, Optimum, Procurement, Proxima, TCS, Wipro, WNS, and Xeorx.

Other organizations cited include ADP, Agrega, Aquanima, DHL, EXL Service, Steria, and Vodafone.

Everest Group’s analysis includes multi-process PO contracts with a minimum of three procurement processes, over $1 million in ACV, and a minimum contract term of three years. Typically, managed spend is greater than $50 million.

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