ISG Provider Lens™ Procurement BPO and Transformation Services - BPO Services - Large Accounts - Global 2023

Global Vendor Revenue Growth Smooths as Enterprises Take a Breath

Investment in procurement services (and software) by user enterprises continues to grow, albeit not at the breakneck pace seen in recent years. Service providers report an average growth of 15–20 percent in client engagements and revenues year-over-year. Although the growth is noticeably high, it is considerably less than the global average of around 30 percent seen from 2020 through 2021.

What’s behind the decreasing pace of growth? During the pandemic, firms worldwide were exposed to the breadth and depth of complexities and issues in their sourcing, procurement, purchasing capabilities and operations as supply chains broke, prices skyrocketed, and organizational management models shifted. The benefits of outsourcing procurement and the need for digital transformation became clearly evident to more enterprises. Anxious to take huge strides in improving their procurement infrastructure, many enterprises adopted outsourcing procurement operations while some invested in transformation initiatives.

In late 2022, the energetic pace of activity began to slow in most markets as supply chains began to rebuild, prices stabilized somewhat and firms became accustomed to new business structures and management models. Many service providers faced difficulty in hiring and training procurement experts to support clients while expanding their portfolios.

Meanwhile, global economic and political conditions diminished significant IT investment at many firms. Hence growth continues at a somewhat more measured pace in many markets.

However, the now-widespread acceptance of procurement outsourcing, especially BPO, has prompted even more user firms to investigate and invest. Pricing levels have dropped somewhat. ISG expects that the current pace of growth will accelerate once again as service providers bring in more skilled experts and global economic conditions improve.

We could see the growth of 2020-era pace return in 2024 – depending on what happens through 2023.

Headwinds Continue to Buffet Procurement Organizations and Leaders

Global unrest remains the macro trend buffeting procurement organizations, disrupting costs, goods and services availability, and supplier reliability. Ongoing economic disruptors include global inflation and interest and exchange rate volatility. Political tension remains high, with the Russia-Ukraine war, U.S.–China tensions, the Middle East, Asian and African political unrest and so on. Social issues such as high population, poverty, poor sustainability and climate change also affect procurement. These challenges drive procurement organizations to reduce costs in the short term and avoid cost increases in the long term.

As part of enterprises’ strategic response to these challenges – including finding means to smooth supply and use cost variations – ISG sees chief procurement officers (CPOs) getting involved in their enterprises’ business innovation agendas. This represents a huge opportunity for providers to contribute directly, with their advanced and adaptable services and platform offerings and/or by taking over management of day-to-day procurement operations so that in-house procurement organizations can help accelerate enterprises’ business innovation, in part by building strategic supplier relationships.

BPO and Transformation Trends by Type and Vertical

A review of engagement data service providers provided to ISG indicates that clients in manufacturing dominate the global utilization of providers’ procurement services. Manufacturing clients account for nearly 30 percent of procurement BPO and transformation engagements reported to ISG, which is more than twice as many engagements as the next-highest vertical group, healthcare and pharmaceuticals. This is in keeping with previously noted procurement services usage trends in recent years. As providers (and their solution platform partners) expand more into direct sourcing, manufacturing is likely to retain this lead for years to come.

Previous ISG studies have indicated that BPO engagements accounted for approximately 60 percent to two-thirds of procurement services engagements globally. Several providers have reported that since 2021 there has been a change in this percentage. Some indicated last year that they expected the percentage split to reverse by the end of 2022, with BPO accounting for 40 percent and transformation 60 percent. However, the above data suggest that the change has not yet happened; BPO still accounted for approximately 65 percent of engagements reported by providers for 2022.

We believe these percentages have remained constant because the overall number of engagements has increased globally. BPO engagements deliver near-immediate improvements at less time and cost than transformation engagements. We do expect a shift to a higher percentage of transformation engagements over the coming years, given that most clients will use BPO as a gateway to procurement transformation.

Procurement Advancements Benefiting Clients

Analysis of client and provider activity indicates the following trends and impacts for user enterprise clients:

• More direct-spend activity: Procurement BPO historically had been primarily involved in indirect spend. But since mid-2022, more providers have been offering (and more clients have been buying) direct sourcing and spend management as part of procurement BPO. This enables more direct control over goods and materials critical to clients’ business operations and outputs, increasing clients’ ability to more effectively manage core vendor relationships and supply chains overall.

• ESG compliance made easier: The inclusion of environmental, social and governance (ESG) management in procurement greatly enhances clients’ ability to meet current and future regulatory needs while advocating, enforcing, and streamlining ESG policy within client and supplier firms. More than 80 percent of enterprises report moderate-to-significant commitment to sustainable procurement; 100 percent of service providers offer ESG compliance management as a service in their procurement portfolios.

• BPO as a gateway to transformation: Most technology capabilities formerly included in procurement digital transformation services are now part of providers’ BPO portfolios. Increasingly, BPO engagements serve as a means to improve efficiencies in operations while also acting as a template for future and ongoing transformation. Provider sales pitches increasingly position BPO as a first step to long-term, continuous improvement. More BPO engagements are laid out in fourto five-year plans that include long-term transformation. The typical plan begins with spend management improvement in the first year, proceeds through category management and expansion of intelligent automation in years two and three, and into ongoing improvement (transformation) beginning in year four.

• Transformation becomes more consulting, less tech: As BPO absorbs many leadingedge and disruptive technologies, transformation engagements now focus more on change management and associated business/organizational consulting. The power of procurement to shape how the enterprise does business becomes more of the consulting focus. The ability to efficiently implement and sustain changes in organizations, operations, responsibilities, reporting, relationships, and organizational structure and culture becomes a primary focus.

• Automation is everywhere; intelligent automation is emerging: Robotic process automation (RPA) has been an important capability in procurement operational improvement for years. A rapidly emerging advance in technology is the implementation of “intelligent automation” that uses machine learning and other AI applications. Client firms seek not only speed, but also improved accuracy through error checking and data cleansing. This can lead to automating more basic evaluation and decision-making tasks, simultaneously improving the workflow and eliminating costly errors at every stage. Several providers assessed in this study have declared intentions to automate as much as 95 percent of clients’ procurement operations within the next three years.

• Software platforms remain a foundational element of BPO: All procurement BPO and transformation offerings are built around a core procurement software platform. Platforms harmonize data and functions, standardize user experiences and enable rapid integration and interoperation of multiple systems. The importance of platforms has led several service providers to develop their own procurement-focused software platforms, enhance the capabilities of their existing cognitive platforms, or both. This adds diversity to client software choices. It is likely to create conflicts between service providers and their (current) software platform partners and potentially engender conflicts of interest among service providers, software vendors and client firms. Objective guidance regarding providers and platforms will become even more important.

What is Next?

Given the above market conditions and trends, here is what ISG sees as the next most likely, major market developments affecting clients through at least 2025:

• Master data management becomes a critical need: Data analytics is so important to procurement operations, let alone transformation, that master data management (MDM) becomes a critical requirement for procurement services providers. Providers (and platform vendors) agree on it but differ in how they plan to implement and manage MDM solutions. In fact, much of the demand to transform to platform-centric BPO arises from clients and service providers seeking to improve data cleanliness, uniformity and availability. Longer term, Leaders will provide data cleansing and error checking at every step in every process.

• Seamless progression of procurement BPO into transformation: The core differences between BPO and transformation have blurred over the past three years. BPO portfolios increasingly absorb more leading-edge technologies and services that once were part of transformation. As more procurement BPO engagements lead to long-term digital transformation of procurement organizations, we expect that what is now considered transformationfocused consulting services will blend into a majority of engagements. Standalone BPO will continue, but with a declining percentage of engagements.

• Procurement integrates into finance–SCM continuum: As procurement BPO and transformation unify, procurement systems, data, and operations will extend inwardly into enterprise finance and outwardly into supply chain management (SCM). Approximately half of the providers assessed for this study strongly consider procurement as part of their larger SCM practices. Leading procurement platform vendors such as GEP consider SCM capabilities and modules as core components of their products. As supply chains and networks become highly integrated into social fabrics, a practical separation between SCM and procurement will further fade. Improved master data management and UX will further blur boundaries among SCM, procurement, ERP and finance systems.

• Low code/no code becomes a disruptive standard: Finally, we note above that many procurement service providers build or enhance proprietary software platforms, putting them in a strong position but running them into conflicts with their software partners. As seen in our procurement Software Platforms study, Leaders in procurement platforms are moving more rapidly toward low code/no code versatility to enhance their attractiveness to non-IT procurement, finance and SCM professionals. This should greatly empower clients and as such is likely to affect the value of some providers’ services – and their proprietary procurement platforms.

What Makes a Leader?

Given the developments above and the critical characteristics of the providers discussed in each quadrant of this study, what should clients look for in procurement BPO and transformation service providers? Currently, immediate and short-term benefits for procurement costs and efficiencies are table stakes providers need to show before starting a negotiation. They must demonstrate what improvement they can offer and commit to easily measurable outcomes, including cost improvement.

Leaders clearly explain the scope, execution and impact of change management to the client, whether in BPO engagements or large-scale transformation initiatives. Given the growing role of BPO as a gateway to transformation, leaders will also show (and commit to deliver) a seamless transition from BPO into long-term, continual business improvement.

This includes a vision of integrating procurement more deeply into finance and supply chain management (SCM) systems, organizations and operations – and a solid track record of accomplishments in the area. Procurement digital transformation Leaders strongly emphasize this and provide wellarticulated roadmaps explaining how and why these transformations improve clients’ business growth.

Leaders also articulate a holistic view of how procurement is changing and shifting within enterprises and how the provider translates that into business value for the client. Clients should insist on a well-rationalized roadmap of the providers’ vision for client improvement, including how any changes will affect finance, SCM and other business functions and systems in the procurement continuum.

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