A recent Hackett Group study claims that Fortune 500 companies could save more than $10 million annually by off-shoring procurement to far-away lands like India.

According to the report, advances in technology now offer the transparency and controls to allow enterprises to monitor spend and transactional activities managed by a third-party outsourcer. Much of Hackett’s business case for outsourcing is built upon the labor arbitrage savings of offshoring procurement. The benchmarking firm estimates that offshore labor costs run 60% below stateside rates.

Hackett specifically recommends outsourcing of transactional activities — such as purchase order (PO) processing — and sourcing execution, estimating that moving these tasks offshore would help the average Fortune 500 company shave 275 procurement FTEs.

Argues report co-author Michel Janssen: “Today companies can turn to established off-shore resources that deliver labor cost reductions while maintaining or even improving the skill level of staff. The potential savings are simply too compelling to ignore.”

Are they? No doubt that many business process outsourcers (BPO) offer economies of scale and technology infrastructures that far exceed those accessible (or affordable) to most companies. And BPO’s in emerging markets like India, China, and Eastern Europe continue to offer considerably lower labor costs compared to more established economies. However, Hackett’s strong promotion to offshore procurement operations is somewhat misguided and even sensationalistic, possibly by design.

(Imagine if your CFO or CEO got ahold of the above stats and recommendations. As a supply management executive, you’d certainly need to defend your existence, let alone your initiatives to improve your organization.)

I do not dispute that procurement outsourcing can deliver significant efficiencies and cost benefits. I have witnessed first hand how orangizations outsourcing procurement have realized reduced supply and operational costs, and improve compliance, performance, and cycle times.

However, I do take issue with the lack of clarity offered as to how enterprises should outsource procurement. I also would warn against building a business case solely on labor arbitrage — especially considering the labor shortages cropping up in many offshore hot spots, such as India.

Having assessed the procurement outsourcing preferences and strategies of a number of companies in my day, I am well aware that the leading companies are incorporating outsourcing as a method to augment and accelerate their supply management transformation — not in lieu of creating a world-class capabilities. These firms are outsourcing to leverage economies of scale and improve execution and control of underperforming or non-core tasks and poorly managed spend categories. (I’ll withold comment as to whether these tasks are better performed in Omaha or Bangladesh.) This allows them to refocus their internal resources on high-value activities, such as strategic sourcing or supplier development.

For example, as noted in a previous Supply Excellence post, Sun Microsystems, which is widely viewed as a leader in supply management and the use of online sourcing methods, runs billions of dollars of online sourcing projects each year. Sun’s Worldwide Operations Group internally manages online negotiations and reverse auctions– what Sun calls “Dynamic Bidding Events” (DBEs) — for all its direct material and assembly purchases. Looking to drive similar volumes and benefits on its indirect side last year, Sun has augmented its internal Global Sourcing Services group capabilities for indirect goods and services with support from an Indian-based procurement service provider. The approach has added 20 additional resources to provide support for dynamic bidding events — all of whom Sun has trained in its standard dynamic bidding methods. Early returns indicate that the unorthodox approach is a success. Evidence: Sun sourced $1.7 billion of indirect goods and services via dynamic bidding in the first year of the program.

I have also witnessed how companies, wooed by many of the same labor and cost-benefits noted by Hackett above, have rushed to outsource underperforming procurement operations without giving any real thought to whether they had the processes, policies, and controls in place for effective procurement operations and ongoing governance. Just this week a senior supply management executive told me, “We eventually want to outsource our tactical and transactional procurement activities. But I won’t even consider that until we get our own financial shared services and [procurement] systems in place because I know [the outsourcing initiative] would be doomed to failure.”

Bottom-line: as with much in life, procurement outsourcing can be a valuable strategy when used in moderation.

Interesting side note: I was amused that the one point the report doesn’t address: if we’re outsourcing procurement to third-world regions, what do we need U.S.-based procurement advisory firms for? Maybe Hackett’s procurement advisory all stars Pierre Mitchell and Chris Sawchuck should brush up on their Hindi and Cantonese.

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