What is a Procurement Service Provider?

By: William Dorn
Submitted: 2007-01-17 12:17:03
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The State of Massachusetts has defined Procurement as "the process to obtain materials, supplies, contracts at the best price reasonably available through open and fair competition."

The use of Procurement Service Providers is rapidly increasing due to global market conditions and the need for businesses to maintain and reduce costs without eliminating resources. Many world-class organizations have already contracted with PSP's and estimates show that nearly half of U.S. companies are considering using PSP's in the next five years. Please read the information below to learn more abut Procurement Services Providers.

Defining a Procurement Service Provider?

A Procurement Service Provider, or PSP, is a third party organization or consultant which is used to supplement internal procurement departments. PSP's have their own staffing which assist in a variety of tasks for their clients. These tasks include: strategic planning, implementing best practices, supplier rationalization, supplier collaboration, strategic sourcing and negotiation.

"Enterprises utilizing PSP's have been able to improve spending coverage, reduce costs for goods and services, employ industry best practices, leverage the latest procurement technologies, and streamline source-to-pay processes - all without taking on the risks and assets required to achieve such results."

Aberdeen Group Research Abstract You Will Outsource Procurement: Here's Why and How - October 16, 2002

Why use a Procurement Service Provider?

At most organizations, it is very expensive and difficult to maintain domain expertise in every category of spend. Using a PSP avoids the burdens of procurement infrastructure for non-strategic categories. A Procurement Service Provider can provide a rapid analysis of an organizations spend and implement changes, negotiate with suppliers, and use proven industry best practices. A good PSP will become an extension of the organization's existing procurement resources, in a non-obtrusive fashion.

In a recent article titled "Strategic Sourcing in the Mid-Market Benchmark: The Echo Boom in Supply Management", the Aberdeen Research Group wrote about potential new approachs of Mid-Market company's sourcing initiatives due to findings showing that they currently have mostly fragmented or limited sourcing efforts. Specifically, to remain competitve, Mid-Market companies should have "Increased reliance on third-party consultants to help define strategic sourcing process and train internal employees on commodity costing models, sourcing automation tactics, and category and supply market assessments."

Additional research shows:

"...research of enterprises that have outsourced management of specific procurement processes and/or specific categories of spending have been able to achieve material cost reductions that average between 10% and 25%. In some cases, material cost reductions topped 30%."

Aberdeen Group Research Abstract You Will Outsource Procurement: Here's Why and How - October, 16 2002

How do I use a Procurement Service Provider?

The answer is: It is up to you. Some organization choose to completely outsource their procurement departments to a dedicated procurement company. However, this is not possible for most customers due to the complexity of their business and the goods/services that are purchased to support it.

Every organization is unique, and there is no single answer that works for any organization. Procurement Service Providers can be used in any of the following scenarios: replace your current procurement department, supplement your current resources in strategic or non-strategic product areas, provide electronic tools to make your procurement department more efficient, or simply as consultants for implementing best practices.

Keep in mind that you do not have to outsource your entire procurement network, it is usually best to select a target area, and gain top-level support within your organization before contracting with a Procurement Service Provider.

How do I decide who to use?

There are a large variety of Procurement Service Providers in the market, and new companies are moving into the market every day.

Many Procurement Service Providers only offer a "piece" of a solution, such as electronic tools or commerce, or they take over your process, produce some results, and never transfer the knowledge back to your team.

When selecting a Procurement Service Provider, it is recommended you follow these steps:

Select an Organization that has a variety of product offerings. (try to select an organization that offers a combination of tools, consulting, or implementation skills. This will provide your oganization with the best possible result, as each piece individually does not provide the results that an entire solution can offer)

Select an Organization that has been established longer than 5 years. (this may help to eliminate the new consultants that have moved into the market recently and are simply looking to make a profit off of your organization, often at the expense of your vendor relationships)

Select a Procurement Service Provider that covers a variety of Procurement Product & Service Areas (instead of contracting multiple procurement service providers, find a single provider that has had experience or qualifications to handle all of your target procurement areas. It is not advisable to hire multiple consulting firms that each specialize in 1 or 2 target areas. It will be draining on your resources to manage the multiple contacts and projects, and most single product area service providers do not respect your relationship with your vendors) .

Check Reference (Any established Procurement Service Provider should be able to provide you with references that are in some way related to your organization)

William Dorn is the Director of Operations for Source One Management Services. William Dorn has experience in areas such as quality assurance, business analysis, mechanical and manufacturing engineering, infrastructure design, business process reengineering (BPR), project risk analysis, best practice consulting, and extensive experience in large scale (COTS) systems implementations.

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