Procurement outsourcing involves purchasing services from an external company to improve efficiency and reduce costs. When selecting a procurement services company, review payment methods, services provided, and performance metrics. The contract should include detailed terms and metrics linked to contracted services.
Purchasing outsourcing is a general term used to describe a situation where a company or organization purchases purchasing services from an external company. Outsourcing has been around for a long time as a business model, but it gained notoriety in the mid-1990s when large companies began to reduce high-paying positions in favor of outsourcing administrative functions to companies located in other countries. The main purpose of outsourcing is to improve efficiency and reduce administrative costs.
The term procurement is used to describe a wide range of activities, primarily focused on purchasing goods and services from other suppliers. The methods and processes used vary somewhat by industry, but for the most part they are quite generic. Many companies take a phased approach to outsourcing, allowing a purchasing company to complete all transactions below a specified threshold without customer approval. Any trades or contracts above a specific dollar amount can be completed by the customer, with the assistance and advice of purchasing specialists as needed.
When looking for a procurement outsourcing company, there are three areas that should be part of the review process: method of payment, exact services to be provided, and metrics to measure performance. Companies that outsource purchases to companies located abroad need to review legal contractual obligations, hours of operation and managerial information or access. The selection of a procurement services company should be completed through an open bidding process. The quality of responses to bids can be very telling, as this type of work is a primary function of a procurement services company.
There are two different payment methods commonly found in procurement outsourcing: percentage of purchases or flat fee per purchase order. The purchase percentage is a fixed percentage billed based on the total spend processed by the service business. An invoice is typically sent each month, indicating the dollar value of all orders processed, the total amount of savings achieved, and the amount owed for services rendered. The fixed fee is based on the large volume of transactions. Both methods can be manipulated to increase invoice amounts and must be managed carefully.
The list of services that the procurement services company will provide should be clearly defined. Payment terms, reporting requirements, escalation procedures and service level are all important in this type of contract. Make sure they are included in the contract at a very detailed level. The metrics that the company will provide must be linked to the contracted services. These values are used to determine whether the procurement company is meeting its contract and service level.
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