Are procurement, purchasing and outsourcing all the same?

One of the returning topics when I talk with people about ‘outsourcing’ is what the difference is with ‘purchasing’. The short answer is that the typical purchase officer a) focuses to much on $$$ and b) lacks the required knowledge and skills that sets outsourcing apart from buying pencils and the light bulbs.My search for a more comprehensive answer resulted at first in the following quotes:

• Procurement: ‘obtaining from external sources all goods, services, capabilities and knowledge necessary for running, the company’s primary and support activities (Weele, 1995)
• Outsourcing: ‘refers to the process whereby activities traditionally carried out inside the firm are contracted out to other organisations’ (Domberger, 1998).
• Sourcing: ‘finding sources of supply, guaranteeing continuity of supply, ensuring alternative sources of supply, and gathering knowledge of procurable resources’ (Vollman et al, 1984).

I don’t know about you, but it did not help me all that much. It is still too much overlap between the various terms to be able to differentiate between them.

Looking further resulted in the information captured in the following figure. At the top you can see the various confusing terms related to ‘buying’ while the vertical access depicts various dimensions which describe them in terms of ‘low’ to ‘high’. The message in a nutshell is that ‘purchasing’ is more operational and repetitive in nature while sourcing looks from a more strategic and long term perspective at make versus buy decisions. Procurement can be projected somewhere in the middle and outsourcing is in my opinion a flavour of ‘sourcing’. For those readers that have not yet fallen asleep or clicked to another page a little bit of additional theoretical info (don’t say I did not warn you…).

Purchasing looks at buying services and products from a ratter limited perspective by defining a objective (e.g. less 20% cost), input (e.g. an existing supply contract), process (e.g. renegotiation) and output (e.g. a new supply contract). This is called the system theory and pays little or no attention to the effects of (irrational) human behaviour from those who are involved in the process. In contrast to (out)sourcing is also hardly any knowledge transfer required between 'customer' and supplier.

The theory around (strategic) sourcing adds various elements to the system theory by incorporating various ‘soft’ elements including conflict management, principles of game theory and decision making theories. As a result is the focus of sourcing in contrast to purchasing more on the inherent conflicts of interests between buyer and seller and their dilemma’s. Furthermore does (strategic) sourcing include the following elements into the decision making process:

• entry and exit from supplier markets,
• capacity development,
• selection and management of sources of supply,
• innovation and,
• cost development over a long term.

Sourcing from suppliers, vendors and providers of services and solutions is referred to as outsourcing. Sharing services in a captive or a joint venture are other forms of ‘sourcing’.

So to answer the question of this posting: no procurement, purchasing and outsourcing are not the same, and now I have a story to support it. This does however not mean that a purchase officer should not be involved in outsourcing engagements. On the contrary, but he or she should have a specific role within a well balanced team to ensure any short term financial gain is balanced against accompanying short and long term risks that are introduced when saying goodbye to part of the company.