Procurement Outsourcing, the process of outsourcing a company’s procurement processes to an outside partner, is a US$2.4 billion dollar market. According to Everest Group’s 2017 Procurement Outsourcing Annual report, the growth of the procurement outsourcing market in the United States slowed down somewhat in 2016, but it still showed a nine percent growth.

Considering that market penetration is still only somewhere between 12 and 15 percent, however, it is definitely expected for the market to continue to increase in size and prominence for a long time to come. 

As more and more companies turn to procurement outsourcing (both at the moment and in the years to come), there is an increasing number of managers and C-suite members who are trying to learn more about this possibility. One of the more common questions that they want answered before they commit to a procurement outsourcing service provider is which service model will best suit their needs, provide them with value and be as cost-effective as possible.

At the moment, the two main types of procurement outsourcing service (POS) models are the fee-for-service model and the gainsharing model. More recently, a third model has started gaining popularity, the per-transaction model (also referred to as the ad-hoc model). 

Today, we will be looking at these three models with special emphasis on what they offer to end customers.

The Fee-for-Service Model

The fee-for-service model is the most standard and most straightforward of the POS models and it entails customers paying an agreed-upon fee to the companies they outsource their procurement needs to, the procurement service providers (PSPs),  

This model has a few traits that make it very appealing to customers. For one, it allows for better expense planning, as the customer knows in advance how much they will be paying their PSP. It also enables easier comparison of different PSPs as they provide bids for your procurement needs. Furthermore, it is easier to turn a contract into a long-term relationship with this model. Finally, the customer can easily track and evaluate the performance of their PSP and the value they have added to their bottom line. 

On the other hand, the fee-for-service POS model has its downsides as well. For one, it is often said that this model does not provide enough incentive for procurement service providers to innovate or even try hard since their fee is not directly tied to their performance. In fact, even though PSP’s in this model try to keep the cost of goods purchased as low as possible, there is no requirement or guarantee that the cost of goods procured on your behalf provide any savings.

In addition, the fee-for-service model requires a rather substantial initial investment that can be too much for smaller companies who might just be interested in giving procurement outsourcing a try.

The Gainsharing Model

The gainsharing POS model is a model where the customer pays their procurement service provider only when the provider can demonstrate that they have added value for the customer, i.e. when they have delivered realized savings. With this model, the PSP is paid a proportion of these realized savings. Because of this, this model is also sometimes referred to as the no-win no-fee model.

The most obvious advantage of this POS model from the customer’s standpoint is that they only pay their procurement service provider when they demonstrably benefit from the service provided. This model also incentivizes the PSPs to go out of their way to deliver savings to their customers, which often results in some truly beneficial relationships for the customer. In addition to this, the customer is not concerned with how complex the procurement process is for the PSP as they only pay for the end result.

Of course, not everything is perfect about the gainsharing POS model. For one, analyzing and calculating the realized savings and the proportions of the savings that are paid out to the PSP can become extremely complex, especially for larger companies. In many cases, this model actually requires the customers to hire new staff, just to keep track of all the data.

Furthermore, the gainsharing model is often maligned for being too savings-oriented, with PSPs paying little attention to other aspects of procurement outsourcing, such as customer service, the quality of the goods procured and time to deliver. When savings overtakes value as the dominant goal, procurement risks generally increase.

It should also be pointed out that the gainsharing model takes much of the process out of the hands of the customer, leaving them in the dark about too many aspects of the actual procurement.

The Per-Transaction Model

The third procurement outsourcing service model and one that is definitely garnering more attention than ever before is the per-transaction model or the ad-hoc model as it is also called. This model actually entails no long-term contracts signed between the customer and the procurement service provider. Instead, the customer reaches out to the PSP with a list of required items and the provider then applies their procurement expertise to get them the best deals on those items. The PSP is then paid per individual transactions.

For the most part, this POS model is used as a supplement to already the existing procurement functions of a company. It is perfect for such practice as it requires no modification of the existing procurement setup within the customer’s company.  

This model is also the superior one in specific cases, such as international procurement or sensitive items procurement, where the PSP’s expertise will help handle these sensitive transactions in the most beneficial way possible for the customer. Another common use for this POS model is in tail-end procurement which often takes disproportionately large amounts of time to make significant savings with the existing procurement systems. 

Furthermore, this model provides a level of agility that the other two models simply cannot, oftentimes unearthing suppliers that may not have been identified otherwise.

The major drawback of this model from the customer’s standpoint is that it is very difficult to establish a complete procurement system with it. It would require too much hassle to outsource all procurement this way, even though the actual savings might be substantial. 

Closing Word

Perhaps the most obvious deduction to be made from this overview of procurement outsourcing service models is that none of them is perfect. They will all make sense for certain companies in certain situations. 

Despite being the most recent model developed, the per-transaction model stands out as the most streamlined, agile and flexible model, entailing the lowest level of risk and the easiest to start-up. This model can be utilized both for companies that already outsource all or parts of their procurement processes and for those who are only thinking of entering the market.

Click here to learn more about how our per-transaction procurement outsourcing services can help you gain extra value.