Some interesting research would have hit the desks of procurement professionals earlier this week. A study, published by consultancy firm Demica, suggests that Procurement heads are going to have develop closer relationships with CFOs, if, as looks likely, supply chain finance becomes ever more popular over the next 12 months.

Demica’s research ‘Steady Supply: The growing role of Supply Chain Finance in Europe’, found that nearly three-quarters of large corporates are looking to extend payment terms with their suppliers in 2007 and that, increasingly, buyers are looking to Supply Chain Finance solutions to extend payment terms without affecting supplier cash flow.

Their findings come after a recent study by the Aberdeen Group claimed that many companies are ill-prepared to deal with supply chain problems. Their survey of 150 companies, carried out in Spring 2006, found that while 82% of respondents said they were concerned about the resiliency of their supply chain, only 11% are actively managing this risk.

So is the booming mark et in supply chain finance, particularly in Scandinavia , the answer to these issues?

Phillip Kerle, the CEO of Demica, certainly thinks so. “Although corporate buyers are still seeking extended payment terms, there is the growing realisation that they cannot simply squeeze suppliers to achieve this,” he says.

“It seems that ‘supply chain finance’ is now recognised by corporates and their relationship banks as the most important tool for freeing up working capital currently trapped in the process. Whilst the US is undoubtedly ahead of Europe in its awareness and use of SCF techniques, demand is growing strongly in Europe , with the Nordic countries appearing to be the most enthusiastic early adopters.”

The Demica study does, however, suggest that Heads of Procurement do not feel completely comfortable investigating Supply Chain Finance, and says that greater co-ordination is needed between Procurement heads and CFOs.

The study concludes: “…close collaboration between these two business areas – supply chain management and financial management – will be necessary to enable successful implementation of a Supply Chain Finance programme and its continued effective operation.”

With that in mind, and with Supply Chain Finance demand likely to grow strongly in 2007, challenging times lie ahead.

With 2006 rapidly drawing to a close, and Christmas soon to be upon us, as I take stock of the last 10 months, I am beginning to seriously wonder whether there is a revised model for procurement outsourcing for indirect categories.

Having been actively involved in outsourcing procurement functions for over five years and sat on both sides of the fence as a buyer and seller of offerings, there are two issues that are becoming very apparent;

• Very few CPOs will voluntarily decide to outsource their own function
• The complexity of procurement outsourcing deals is hugely underestimated

Outsourcing of services evolved to allow organisations to do things that they themselves would not or could not do competitively. For functional areas such as IT, HR, Facilities Management, and Finance there are mature category specific offerings in the market place that appear to be successful - this is not to say that there are bad deals in the market, but I would suggest that this is down to poor execution rather than the underlying principle.

Now, based on the fact that Dun and Bradstreet estimate that the global outsourcing market is worth some $4 tn p.a. there appears to be no shortage of CIOs, CTOs, CAOs, CFOs or COOs who are willing to sanction an outsourcing arrangement of some kind. The question is why hasn’t procurement taken off, after all it is nothing more than a mix of offerings that are already available in the market place. I would suggest that there are three parts to the answer.

• Firstly, offering maturity is an issue; service providers and clients are still feeling their way into the solutions, and word of client experiences to date travels fast on the grapevine.
• Secondly, procurement outsourcing is poorly understood. Value is generated from two components - savings resulting from improvements in sourcing and raising levels in compliance. When comparing these drivers to the value generated from transferring procurement headcount to a third party, the run rate reductions from headcount savings are minimal. And it should not be forgotten that procurement outsourcing is a form of transformational outsourcing, structured in the form of a multi – year finance deal, focused on remediating the procurement function. Procurement outsourcing is not undertaken to reduce the run rate of your procurement function and is certainly not a ‘your mess for less’ offering.
• Thirdly, procurement outsourcing is legally, and technically complex. My first experience of presenting the concept to a seasoned CIO brought me down to earth. His considered view was that there were very few, if any industry specialists who could successfully pull off a project involving category process re-engineering, change management, strategic sourcing and technology rebuild and roll out in one fell swoop. This does not mean that the problems are insurmountable – the body of knowledge exists to address them – it just means that the risk profile of the project is slightly greater than what would normally be encountered.

So where next? Is there an opening for a procurement outsourcing market segmented vertically, rather than horizontally? Conventional procurement BPOs require the service provider to deliver a purchasing capability across all categories from the simplest to the most complex, which requires a huge breadth of technical, market and process expertise, (the horizontal solution). Category specific solutions have evolved quite successfully in areas such as print, travel, office supplies, temp labour, and mobile phones, each having their own niche providers running their own technology platforms very successfully, (the vertical solution). This concept is even more interesting when you consider that embedded within major outsource arrangements, (IT, HR, FM etc) there are vertical buying solutions; each IT heldpdesk needs to be able to buy PCs, each temporary staff helpdesk needs to be able to request temps etc. And to my knowledge they all seem to work successfully.

Is this the way forward? Is there a more defined role for procurement functions to adopt the role of portfolio managers having responsibility for a range of vertically outsourced buying processes that support non-core and even core categories? I would say there is. The horizontal offerings are still developing, and require a strong balance sheet to fund. Vertically segmented offerings, aligned by category, would allow greater competition in this space, provide greater flexibility and allow processing risk and expertise to be shared across a number of service providers. The added competition would also help drive the price of the offerings down. Such a development aligns well with trends in the procurement technology market with the advent of category specific solutions to cater for the huge differences that categories present in capturing and processing underlying orders.

One thing is clear – procurement remains an area rich with opportunity, with organisations still keen to explore novel solutions to address the same old problems. May be 2007 will be the year when we see a procurement group tender some or all of their indirect buying processes to a portfolio of service providers.

Let’s see what the next 12 months holds…