Creating a centralised approach to procurement: a first time journey
Welcome to your new role as global head of procurement - and how are you feeling today?
Recent research (see KPMG, PwC, McKinsey) indicates that the majority of global organisations now subscribe to centralised procurement models.
There is a logical rationale behind this, with centralised procurement enabling businesses to leverage their international buying power, gain greater control of their spend, support transformation and drive improved consistency, compliance and value.
However, such models are not to be found everywhere.
For some organisations, procurement remains a decentralised activity.
In certain instances, such as in the legal industry, this is actually the norm - with over half of America's largest law firms reporting that they have no dedicated internal procurement function at all.
But times are changing and attitudes towards the role of procurement have been changing too.
And as such, a growing number of large, complex, international organisations are taking their first steps towards a longer term, centralised vision...
...often appointing a single individual to work out how - on earth - to go about it all.
Which can be a daunting task:
Global Procurement Lead, Financial Services Business
My background is operational. I've done some procurement but not in any advanced way and I've certainly never created a procurement function from scratch
The journey to a centralised approach
All organisations will have a unique set of challenges - and opportunities - when it comes to creating a high performing, centralised procurement function.
Some will have limited experience, or none at all.
Some may already be familiar with the benefits, with pockets of 'good procurement practice' at a regional, divisional or category level.
The ultimate goal, whatever the starting point, will be to move procurement along the 'maturity curve' - and that process involves a journey.
Which could take months or several years.
Working out where you are starting from is a logical place to begin.
And a number of subsequent activities can provide useful milestones and points of navigation throughout this journey.
Some of these are captured below.
What do we spend?
In many instances, when going about this type of exercise for the first time, organisations will rapidly become aware that they have virtually zero visibility of spend. Any data that actually exists will usually be scattered, globally, throughout different systems and contain all manner of different languages, currencies, names and codes.
Piecing this jigsaw together can seem like an incredibly tough nut to crack in order to get things going:
Head of European Procurement
This is a huge undertaking. We have over 50 individual business entities, each with their own ways of capturing spend data and each with varying levels of cooperation in providing us with what we need
However, the reality is that good procurement decision making relies on strong spend analytics and actionable insights.
The task may seem daunting but - with the right expertise, analytical resource and stakeholder support - it is possible.
It just takes time.
A highly effective way of setting this exercise up to succeed is in the clever use of early stage, senior level stakeholder input.
A carefully constructed message from an influential CFO, communicating what is being done and why can play a crucial role in shaping early stage expectations at a local level - encouraging cooperation during the data gathering process and unblocking resistence.
Once all of the necessary data has been extracted, cleansed and categorised, the fog starts to clear and visibility of spend begins to emerge.
The outputs of this are two fold.
- The overall 'shape' and purspose of a future function will become more apparent. As a visual 'map' of spend is created, it may be become clear that certain categories require a regional focus for their longer term management; for example, a dedicated IT category manager might be better based in New York, than London as the data is showing this is where the lions share of the spend is based.
- Opportunities to create enhanced procurement, greater value for money and financial savings will become evident - usually quite strikingly so.
Who are the stakeholders and how should they be engaged?
For procurement to operate to its full potential, stakeholders must be effectively identified, brought on board and engaged.
Again, this can seem daunting, especially when being done for the first time.
But it can - and must - be done. And the key to its success is time investment.
The time required for effective stakeholder engagement is often underestimated, with many early stage functions wrongly believing that more time should be spent with the supply market - when in fact this should be the other way round.
One of the biggest challenges that new functions will face concerns a common stakeholder misconception about the role of procurement:
Global Procurement Director, Top 100 Global Law Firm
There is an incorrect perception that procurement is there just to clobber suppliers and batter down the price. But good procurement is not all about price, rather about careful selection, enhanced supplier relationships and getting the best value for money
These misconceptions must be addressed.
One of the most effective ways of doing this is by taking individual stakeholders through the outputs of the spend analysis. This fresh ability to be able to accurately examine the spend profile and opportunity for enhanced procurement can be a hugely impactful way of gaining buy-in.
Creating early stage wins and putting 'money on the table'
With spend analysed, opportunities identified and stakeholder support established there is no better time than to get on with the task in hand and show what can be achieved.
In instances where procurement has been decentralised, with little professional management and virtually zero competition in the supply base, there will be excellent opportunities to create significant financial savings.
Leveraging global purchasing power, opening up supplier competition, introducing e-sourcing, leveraging strategic relationships...
...the payback will be substantial and rapid.
This is a crucial part of the procurement journey.
It shows what can be achieved - usually generating further stakeholder interest, engagement and a willingness to try the 'harder to crack' categories.
It also creates savings which can be used to fund 1) the activity to date (e.g. any spend analytics programme and/or time spent meeting and developing stakeholder relationships) and 2) the ongoing creation of the function (recruitment, onboarding and training expenses etc).
A particularly effective way of getting results at this stage is to involve an external partner who can rapidly assess the opportunity, do a lot of the 'heavy lifting' and get results over the line.
Once achieved, the business case for the resources required for the future internal team will be much more compelling.
Defining the future vision for procurement
With a ‘starting point’ for the journey defined and budget on the table through early stage savings, an informed view can be made on how the centralised function can most effectively support the wider business strategy.
By this stage, it will be clearer to define:
- the structure and size of the team required
- what level of spend should be actively managed through procurement
- what cost saving/cost avoidance/value-for-money objectives can be targeted
- a broad strategy for supplier relationship management, category management and contract management
- the role of e-procurement
Hiring the right people
Different organsiations will begin embracing the talent challenge at different points in the journey.
Some may have budget and agreement to begin hiring seasoned procurement professionals, category specialists and leaders from the off set. Executed well, such talented individuals will be able to bring much to the early parts of the journey we have reviewed so far.
In some cases, the wait will be longer.
Again, stakeholder perceptions about what is involved in good procurement need to be challenged:
Head of Procurement, US, Professional Services Business
The view from the board is we have enough resource already. But the reality couldn't be further from the truth. We spend almost all of our time on day-to-day transactional activities; the interesting strategic stuff remains offline
An excellent way of bridging the talent gap is in team augmentation and the recent development of 'co-souring'.
In this instance, a specialist external partner provides experienced category resource to work in conjunction with incoming internal hires.
Much of the heavy lifting is done by the external partner, with the internal team coming up to speed through a mentoring approach which ensures a transfer of knowledge, stakeholder techniques and best practices are taken on board. The internal team is essentially upskilled while at the same time the function punches above its weight in terms of procurement savings - helping to build the case for further resources.
Ongoing spend transparency
One-time visibility is great for planning, but refreshing spend data is crucial in enabling the long term optimisation of any procurement function.
Pulling spend data together into a single system is only the beginning of the 'transparency challenge' – it’s how these financial numbers are turned into meaningful insights that will become increasingly crucial as the function continues to evolve and the challenges become harder.
A growing number of organisations are combining expert consultancy input with clever spend analytics platforms as a way of achieving this.
The output is an intelligence solution that delivers immediate insights.
Not just into exactly how much is being spent, what on and with whom - but how factors such as current trading conditions, currency changes, commodity prices and supplier performance are likely to influence the options available for sound procurement decision making in the long term.
Points to consider
- Centralised procurement functions have been shown to deliver significant benefits
- Although the majority of global organisations have centralised functions, many still do not and remain under resourced
- Spend transparency, stakeholder engagement and proof of what can be achieved are key components of success
- Augmenting early stage teams with specialist external resource can be an excellent way of ensuring success and building the business case for more resources in the future