Procurement’s new operating model

Introduction

By now, most companies have ridden one or more strategic sourcing waves that have collectively saved their organizations billions of dollars. Yet even after having benefited from these initiatives, the average company still leaves on the table unrealized savings equaling 5 to 10 percent of its total spending. These savings are not lost because of ill-conceived strategies or organizational incompetence; rather, their loss is inherent in flawed or incomplete procurement operating models.

There are many reasons that the operating models constructed to procure and pay for goods and services prove inadequate. They may not include the processes, tools, or resources needed to fully execute the sourcing strategy. They may not be properly connected to organizational decision making or sufficiently integrated into key corporate planning processes. Decision making authority and accountability may not be clearly defined. Or the IT systems that enable them may be fragmented, impeding efficiency and clouding the visibility necessary to ensure compliance with overall purchasing policies and objectives.

In order to mitigate these problems and deliver on purchasing’s cost, quality, and service commitments, companies must evaluate and design their procurement operating models along four fundamental dimensions: organization, processes, technology, and performance management (Exhibit 1). Together, these four elements determine an operating model’s effectiveness at executing a company’s sourcing strategies. And because any model is only as strong as its weakest link, each element must be developed fully and aligned properly. A company may develop a series of nearly perfect procurement processes, but without clearly defined mechanisms for managing and measuring performance, procurement will struggle to ensure compliance and achieve its overall strategic goals. Similarly, procurement technology may provide all the information needed for executives to make well-informed purchasing decisions, but that capability is largely meaningless if the procurement organization has not also clarified the decision rights that identify who will make those decisions and be accountable for their outcomes.

Most procurement organizations excel along one, two, or even three of the operating model dimensions, but very few have fully developed and aligned all four of them. Some companies need to travel only a short distance to properly integrate the four dimensions; others face a more arduous journey. But no matter how long or difficult the road ahead, the best way to begin is to view the purchasing function as a broad, cross-enterprise activity incorporating all elements of the procurement process, from sourcing through contract negotiation, demand management, procure-to-pay, supplier relationship management, and measurement and tracking. Such a view enables companies to better see the gaps in their operating models and address each of the four dimensions.