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The next ‘next big thing’

Procurement outsourcing is the next big thing after the BPO boom in India, writes Narayanan Madhavan.

india Updated: Jun 29, 2007 04:36 IST
Narayanan Madhavan

About 400 Indians are at work off the expressway that connects Noida with Greater Noida near Delhi, to make next generation Boeing aircraft get faster on to runways.

That might seem like an exaggeration, when you learn that all they are doing is to reduce the cost and assure the timely delivery of the nuts and bolts that would go into the new Boeing jets. There hangs the tale of procurement outsourcing. This is one of the newer stories in the larger theme of business process outsourcing (BPO). The simple fact is that virtually anything that can be done by using a combination of skilled workers, telecommunication links and involves high costs can now be offshored to India. Companies like Corbus LLC, based in Dayton, Ohio and founded by former Delhi College of Engineering student Raj Soin, are trying to unlock value for Fortune 500 giants by trying to manage complex tasks involving dealing with a global network of suppliers .

Corbus has a $100 million 10-year contract from General Electric Co (GE) to manage supplies for customers like Boeing for which GE makes aircraft engines. Increasingly, giants source as much supplies as possible from the best and the cheapest wherever they are on the earth—and procurement is a complex puzzle in the game. An offshore-based procurement outsourcing company promises to cut costs by as much as 20 per cent a year.

“The product-wallahs have become assemblers. So your ability to manage suppliers is important,” says Rakesh Mittal, president of Corbus. “It is a complex supply chain. I have seen a situation where the nut comes from Cambodia and the bolt from Vietnam.”

Business-to-business (B2B) was a favourite theme in the late 1990s but often, the headaches to be resolved lie in coordination and delivery, with an eye for detail on specifications, schedule and efficiency. In the twenty-first century version, procurement outsourcing involves a nitty-gritty management service done from a corner of the globe, very much resembling the supply of components it coordinates.

Players in the procurement service game include giants like Accenture and IBM, and have been joined by Gurgaon-based Genpact, which was spun off from GE’s own international services arm that ran call centres, and also Scandent Solutions in Bangalore. Unlike call centres, procurement outsourcing involves management and often, engineering skills.

While sourcing of components that go directly into finished products involve “direct” spending, typically, every company also ends up spending huge amounts on stationery, computers, furniture, office supplies, taxi services and other costs that swell the overall corporate budget—inviting a need to cut bills of which its specialist executives know little or less.

Mittal says what is done in the US by a high-school graduate promoted to management levels for $65 an hour can be done in India at under $25 an hour by a college degree holder proficient in English.

Engineering companies like GE spends 60 per cent of direct spending on parts like nuts, bolts and other small items that cost under $1,500 per unit, supplied by various manufacturers dotted across the globe.

For an outsourcing partner to make sense, it must achieve what is called the “QCDC” formula—covering quality, cost, delivery and compliance. Indirect spending can be as much as $100 million per year in a company with annual revenues of $1 billion, says Mittal. Earlier this year, the National Association of Software and Service Companies (Nasscom) said that offshore services were expected to boom, driven by offshoring of “large white spaces in major industries.” Procurement is one of them. Telecommunication and automobile sectors are among those that offer strong promise in procurement outsourcing.

Nasscom says the current size of the global BPO industry is about $14 billion (India accounts for nearly half of it) but the addressable offshore market that could slowly be ripped off from its origins in advanced markets to low-cost countries like India estimated to be as high as $120-150 billion a year.

Mittal says the procurement outsourcing services market is currently worth about $1 billion a year now, growing at a compounded annual growth rate of around 22 per cent, while his own company is aiming for about 27 to 28 per cent.

If the business grows, demand would grow for engineers, certified purchase managers and other agents whose skills are qualitatively different from the smooth-talking, fake-accented post-teen women who started the BPO revolution about a decade ago.