Wednesday, March 4, 2009

Offshoring Everything: Procurement Edition

ThinkGlobal comments on the rapid rise in offshore procurement sourcing. From almost nothing a few years ago, the latest figures show that nearly 70% of procurement work is now being offshored to India, with 30% going to the US and 29% to EU providers.

Procurement has traditionally been a laggard in the Services Shift because it is difficult to standardize -- i.e. every firm does procurement in its own unique way. This lack of industry standard platforms or processes limits the opportunities for straight labor arbitrage.

AMR Research (which runs the blog) cites three factors for the recent acceleration of offshore procurement:

  • Service providers have successfully shifted their delivery resources to India;

  • The onshore vs offshore mix for procurement is successfully materializing;

  • Procurement BPO is being taken on by new customer sectors

This is a phenomenon discussed in Chapter 4 of the Services Shift -- specifically the discussion around Figures 4.6 and 4.7.

The idea that most commentators miss is that when firms engage in offshoring, they learn by doing. Moving a few processes offshore builds capabilities (internal skills, familiarity with potential providers, new IT systems etc.), and makes sequential moves easier. That is, small initial steps expand your options in the next period.

This is a powerful argument for testing the offshore waters. If you don't and your competitors do, you find yourself behind in the current period, but also in all future periods as well because of lack of capabilities.

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