Strong interest and expansion of existing contracts has lead to a 30% annualgrowth rate in PO(procurement outsourcing) contracts, says a study on PO market by Everest Research Institute.
Although the number of new contracts for PO services declined in 2008,the annual contract value of PO spend surpassed the $1-billion mark, with large companies signing 54% of the new contracts.
Non-core PO spend rose to $16 billion over the previous year, crossing $110 billion, according to the institute?s annual report on procurement outsourcing. Last year saw the emergence of a more granular process and category scope in multi-process PO contracts, along with doubling of the number of single-process contract signings. The manufacturing sector, especially consumer product companies was a key growth driver last year, whereas transaction activity slowed in the financial services sector.
?Last year?s drop in new contract spending is the result of a changing buyer approach, not a lack of interest in PO,? said Katrina Menzigian, vice-president, Everest Research Institute.
?The average size of multi-process contracts nearly halved last year as buyers began adopting a cautious, phased approach, but the expansion of existing contracts and increased signings of single-process contracts were significant drivers of market growth. Looking forward, a significant value-creation opportunity is on the cards for buyers, since nearly 45% of contracts in the PO market are about to be renewed over the next few years. These contracts are worth more than $1.3 billion in TCV.?
Other highlights of the annual report include a significant increase in offshore adoption across procure-to-pay (P2P) as well as sourcing-focused contracts. Nearly half of all PO buyers leveraged supplier-owned IT systems, while about a third also leveraged supplier-provided add-on tools.
End-to-end PO suppliers such as Accenture, IBM and ICG Commerce hold nearly 80% of the market share. IBM accounted for 70% of new TCVs signed last year. Top P2P-focused performers in 2008 were Wipro, Infosys BPO and EDS-HP.
?Suppliers need to focus on pursuing organic growth opportunities, leverage finance and accounting outsourcing (FAO) to expand into PO services and create differentiation through strategic use of global sourcing,? said Saurabh Gupta, research director, Everest Research Institute and co-author of the report.
?Delays in decision making will continue and challenges will temper the rate of source-to-pay adoption. Combined with emerging phased adoption, PO suppliers should expect the continuation of lengthy sales cycles and complex buyer decision-making processes,? he added.
