Perspective
Patrick W. Houston
Robert Hutchens
Procurements
New Operating Model
Contact Information
Florham Park, NJ
Patrick W. Houston
Partner
+1-973-410-7602
pat.houston@booz.com
New York
Robert Hutchens
Partner
+1-212-551-6499
robert.hutchens@booz.com
Booz & Company
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. Decisionmaking 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 purchasings cost,
quality, and service commitments,
companies must evaluate and design
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their procurement operating models
along four fundamental dimensions:
organization, processes, technology,
and performance management (see
Exhibit 1, page 2). Together, these
four elements determine an operating
models effectiveness at executing a
companys 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.
Exhibit 1
Todays Procurement Operating Model
Exhibit 1: Todays Procurement Operating Model
1. Organization
Capabilities
Structure/alignment
Roles and responsibilities
Decision rights
4. Performance
Management
Metrics
Management process
3. Technology
2. Processes
Systems functionality
Decision support tools
Accessibility/usability
Strategic
Tactical
Executional
Client relations
Supplier management
Source: Booz & Company
Source: Booz & Company
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Organization
The top priority in putting together
a powerful operating model is not
the issue of overall centralization or
decentralization; it is determining
how best to structure procurements
various roles in corporate, business
unit, and functional-level purchasing. Should the procurement function
own, control, and manage the entire
process for every corporate stakeholder? Should it participate actively
in the purchasing decisions and processes of the individual business units,
functions, and geographic regions
in which the company operates? Or
should it merely carry out those purchasing decisions?
Deciding where to land on this
spectrum of options, from managing
to facilitating to supporting, involves
sorting out a complex mix of issues:
How will the decision affect a companys ability to get the most bang for
its buck? How will it affect the choice
of suppliers, their degree of engagement in the procurement process, and
the nature of the companys relation-
ships with them? Would complete
ownership of the function allow for
greater process efficiency, or would
the potential resulting inflexibility
make the process less efficient?
Would purchasings alignment with
overall strategic goals suffer if procurement were to take on the role of
passive supporter?
In our view, the ideal procurement
organization must balance the desire
to leverage purchasing power through
complete ownership with the need
to maintain the flexibility of the
individual business units, functions,
and regions. That balance is struck
not only in the way procurement
and its accompanying processes and
technologiesis structured, but in
how the various roles, responsibilities, and decision rights are allocated
between the corporate procurement
organization and the various procurement functions attached to the
business unit, functional, and regional
stakeholders.
Procurement organizations must
balance the desire to leverage
purchasing power through complete
ownership with the need to maintain
the flexibility of the individual
business units, functions, and regions.
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The amount of influence exercised
by corporate procurement should ary
depending on what is being purchased
and by whom (see Exhibit 2). When
specific business units or functions
must purchase complex, businesscritical, nonstandardized items such
as specialized production equipment
and materials or customized finished
parts, the business units and functions
should conduct most of the sourcing
and procurement activity because the
effective purchase of such goods and
services depends on the knowledge of
the user. Central procurement could
play a support role, performing
cost modeling or providing industry
and market research, but the business
unit or function would make the
actual supply decisions and structure
its own implementation strategies.
For products or services that are
less business specific but still must
be somewhat tailoredsuch as
temporary labor or maintenance,
repair, and operational needs
procurement might play a facilitating
role on behalf of a wider variety of
business units or functions. It might
establish, for example, the guidelines
for evaluating and scoring requests
for proposals, while the business unit
determines the exact specifications for
the products or services it needs.
Finally, for purely standardized
purchases that are not critical to
business success, such as travel, office
supplies, and utilities, procurement
should completely manage the process
from start to finish.
Every purchasing department must
identify where and how to exert its
influence and leverage its knowledge
of process and technology, managing
where necessary, facilitating where
desirable, and supporting where most
helpful. Doing so will allow it to
determine the structure best suited
to its various roles and the processes, tools, and capabilities needed
to ensure that it has the maximum
impact on overall spending.
Exhibit 2
Procurement Organization
Exhibit 2: Procurement Organization
High Degree of Business
Unit/User Involvement
Item is complex,
nonstandardized, and critical
to business success
Support Model
Procurement team
provides support to
users of item
Typical Examples
Creative services
Specialized production equipment
Customized finished parts
Facilitate Model
Procurement team
facilitates effort across
multiple users of item
Printed products
Temporary labor
Maintenance, repair, and
operational (MRO) needs
Manage Model
Low Degree of Business
Unit/User Involvement
Item is standardized and not
critical to business success
Procurement team
manages process on
behalf of users of item
Travel agency
Office supplies
Utilities
Source:
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Company
Source:
Booz
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Processes
Every purchasing organization
that stands out from the pack
maintains carefully defined and
disciplined processes at every level,
from strategic to transactional,
across the entire procurement life
cycle. Just as important, end-users
across enterprises that manage the
procurement process successfully
understand those processes and
willingly adhere to themeven
when purchasing does not own
the procurement decision. Wellstructured, widely understood
processes enhance transparency and
ensure compliance with procurement
guidelines, thus enabling companies
to capture even more savings.
Purchasing processes break down into
three categories: sourcing strategy,
execution, and ongoing supplier and
customer management. Sourcing
strategy processes typically harbor
a great deal of value, because they
determine spending patterns, define
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requirements for products and
services to be purchased, structure
relationships with suppliers, and
develop supporting contractual
arrangements and internal policies.
The challenge in optimizing sourcing
processes lies in clearly defining and
implementing them in such a way that
they consistently drive fact-based,
cross-functional decision making.
Ultimately, these processes must
generate the insights into economic
and market conditions and internal
demand needed to select the right
supply structure and supplier pool for
the company as a whole.
Procurement execution processes
encompass activities such as requisitioning, purchase orders, goods
receipt, and invoicing. Here, procurement should seek to establish
clearly structured, easily understood,
and easily used systems and tools to
streamline execution and manage
compliance on the part of end-users.
Often overlooked, procure-to-pay
processes generally deserve close
attention, as the benefits of consolidating and streamlining them can
reduce a companys total spending by
1 to 5 percent. Still, many companies
have yet to holistically review the processes (many of which are fragmented
legacy structures) that support procure-to-pay activities. This inattention
can undermine compliance, weaken
adherence to favorable pricing terms,
and encourage maverick buying
among end-users.
Finally, the processes for ongoing supplier and customer management are
vital to the success of any procurement operation. The new paradigm in
dealing with suppliers is collaborative
relationships, which allow companies
to work closely with vendors to best
meet both parties needs. However,
the cooperative nature of such
relationships demands far greater
participation on the part of procurement professionals in order to capture
the hoped-for gains in cost savings,
service, quality, and innovation.
At the same time, procurement must
design clear processes for actively
managing its relationships with business unit and functional end-users,
as well as internal demand. This will,
in turn, allow procurement to play
a greater role in the improvement of
end-users decision making. To do
this, procurement needs to be integrated both at the front endaiding
end-users in developing their sourcing
strategies and processesand at the
back end, assessing whether end-users
are complying with procurement policies and contract terms.
Procurement must design clear
processes for actively managing its
relationships with business unit and
functional end-users.
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Technology
Ultimately, procurement processes are
only as good as the systems and tools
that support them. There are multiple
approaches to procurement IT, but
the objective is invariably twofold: to
enable the wide variety of purchasing
transactions on which every company
depends, and to arm decision makers
at every level with meaningful
and actionable information in a
predictable, easily accessible manner.
Minimally, procurement IT systems
must ensure that all transactions
both internal and externalare
carried out consistently, and that
decision makers have a clear view
of all elements of the companys
purchasing. Surprisingly, many
highly sophisticated procurement
systems cannot boast either of these
attributes, typically because they
were built for financial reporting and
budgeting purposes and are not set
up to furnish sufficient data about
procurement performance or to
facilitate procurement transactions.
Fortunately, the solution to the technology challenge in procurement is
not as sweeping or cost prohibitive as
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many procurement executives might
fear. Companies do not need a stateof-the-art, end-to-end ERP system to
effectively support their procurement
objectives. Instead, they can use the
companys existing IT infrastructure
in combination with various bolt-on
systems.
The advent of powerful, best-ofbreed Web-based applications allows
for easy integration of any number
of functions into the procurement
system: supplier portals that let endusers source products and services
on their own; end-user interfaces
that manage the actual procurement
process through purchase order and
payment; even performance management systems that provide increased
transparency throughout the entire
process. Through a combination
of policy and systems adjustments,
supplements to existing IT architecture, and improved data management
techniques, these renovated systems
can boost transaction accuracy and
compliance while generating more
accurate and timely spending analyses
to support both supply and demand
management decisions.
Performance
Measurement
The final dimension of a successful
procurement operating model is measurement and assessment of performance. Although specific procurement
metrics vary, top companies typically
adopt a common management process
and framework to assess not only
the cost savings generated through
procurement programs but also how
much value procurement is generating
on an ongoing basis.
Aided by the technology infrastructure described above, a common
framework is typically designed to
illuminate a companys procurement performance against specific
objectives. To be effective, however,
performance management systems
must provide stakeholders with the
transparency needed to see and interpret the results, conveying sufficient
information to generate confidence
and buy-in among decision makers.
The systems must enable these key
constituencies to provide feedback
regarding methods and results.
The goal is to stimulate a dialogue
with business units and functions
concerning realistic goal setting,
joint accountability, and continuous
improvement.
A combination of procurement
dashboards, budget data, and continuing assessment against global
benchmarks can help in measuring,
setting, and refining overall performance goals. The secret to success in
performance management, however,
can be captured in three words: Less
is more. Metrics should be focused,
practical, and actionable. They should
furnish insight into both procurement efficiency (such as spending per
full-time employee and procurement
organizational costs as a percentage of spending) and effectiveness
(including savings and cost avoidance,
cost index performance, percentage
of spend under purchase orders, and
percentage of spend with procurement
influence). Dashboards dedicated to
individual spending categories should
highlight not only absolute spending
and savings but, more important,
the state of and trends in cost and
performance drivers for that category.
Tracking performance is an integral component of procurements
new operating model if for no other
reason than that it helps procurement
establish credibility with its business
unit and functional clients.
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Procuring
Competitive
Advantage
The benefits of adopting the right
procurement model for your organization are substantial, not only in
terms of cost reduction but also in
the ability to better focus resources,
enhance value from supplier collaboration and innovation, and more fully
capture contractual promises.
However, despite having launched
successful procurement initiatives,
too many companies, in too many
industries, find that they have yet to
complete the journey. They may have
made many of the right moves in
implementing the latest capabilities
across the procurement life cycle,
yet they rightly suspect there is
still significant value to be realized.
That value, we believe, will come
not through a better or brighter
strategy, but through more consistent
execution of existing strategies.
Companies that successfully execute
a procurement agenda can deliver
a great deal of value, but only if they
have the right operating model, one
that integrates organization structure
with best-practice processes supported by appropriate information
technology and performance measurement systems. Of course, the right
operating model will vary from
company to company. It depends on
the organizations existing structure
and culture, as well as the role that
procurement plays in managing the
purchase of goods and services across
categories, business units, functions,
and geographies. How much a new
operating model will affect overall
spending varies by business strategy
and the broader corporate agenda, but
the impact is invariably positive and
significant.
Companies that successfully execute
a procurement agenda can deliver a
great deal of value.
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Booz & Company is a leading global management
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