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Procurement business process outsourcing (BPO) transfers all or some of the tasks associated with vetting, securing, and managing the vendors that supply the raw materials needed to manufacture a business' products to a third party company. Businesses that outsource their procurement departments hope to realize cost savings and increased productivity by hiring functional specialists to handle tasks usually performed by employees and reallocating business resources to core operations. Consultant companies that offer procurement BPO take primary responsibility of the department and operate in the marketplace on behalf of the client business.
Outsourcing has reached new heights of popularity because technological advances and access to the Internet opened up the labor markets in countries with wage thresholds that are much lower than in mature labor markets, such as in the US and UK. Businesses are constantly experimenting with new types of outsourcing projects in an effort to save money. Procurement BPO is an outgrowth of this outsourcing popularity and transfers control of an important operational process to an outside company.
In an ordinary business, the in-house procurement department is staffed by sourcing and purchasing agents, relationship managers, cost analysts, and other employees who are responsible for interacting with outside vendors that supply the components the business uses to make its products. This department functions as an integral part of business operations, but it is not involved with the direct manufacture of products or the delivery of services. When business managers look for ways to increase efficiency and cut costs, procurement is often viewed as an appropriate area for outsourcing because of its administrative nature.
Firms that specialize in procurement BPO either undertake responsibility for the whole department or a key component of the procurement process. The scope of work on the front end typically includes determining the best place to obtain the raw materials needed, evaluating potential suppliers, making an informed choice regarding the best supplier for the job, negotiating prices, and awarding contracts. On the back end, the BPO consultant handles the ongoing relationship with the suppliers and develops a system to evaluate performance.
There are a number of technology companies that offer software solutions to help manage the procurement process. Although in some instances procurement tasks are transferred to the technology company through the integration of the software system, this is not considered procurement BPO. Outsourcing transfers complete responsibility for a business process to a third company. The BPO provider has operational control over the outsourced department's work product and functions as an agent of the client business. This relationship is much more extensive than what exists through the implementation of a software solution.