The need for companies to procure goods and raw materials in order to create market-ready products is virtually as old as business itself. Much has changed in regard to enterprise operations in past years, but up until very recently, the way companies approach the procurement process has remained relatively static. However, with the availability of transformative new technologies such as cloud computing, sourcing strategies have begun to exhibit major shifts similar to those experienced in other areas of business.
In a recent report, research firm KPMG highlighted how sourcing practices have moved from a perfunctory aspect of enterprise operations to a dynamic endeavor that, if undertaken correctly, can create major change for the better. These improvements are possible both in companies' internal operations and in their standings within their respective markets.
"Procurement's journey from an also-ran, back-office tactical function to a key lever of competitive differentiation is a story that has been receiving greater attention the past several years. With an ever-increasing focus on costs, firms have begun taking a closer look at the procurement function as a driver of value and innovation," the researchers wrote.
The shift in procurement operating models
As business reevaluate their strategic sourcing initiatives to determine if these are up-to-speed with advancements that technology is making possible in other aspects of corporate operations, the majority of companies are finding that they need to take procurement in a new direction. KPMG found that 83 percent of firms have changed their procurement operating models (POMs) within the past five years. The question remains, though: What is the POM of choice in the contemporary, cloud-powered business landscape?
KPMG's study revealed that a "center-led" POM - that is, one that blends a largely centralized approach with aspects of decentralized procurement - is the dominant model among today's businesses. However, it's also important to understand that there is considerable nuance in regard to how these strategies actually work in practice. KPMG noted that the starting point for many center-led models is often a "decentralized construct."
"Even though a procurement organization might describe itself as 'center-led' or 'centralized,' it is likely that its operating model contains elements of other models (decentralized, for instance)," procurement expert Jason Busch wrote in a recent column for Spend Matters.
KPMG also noted that while savings remained consistent across models - between 5 and 6 percent for centralized, decentralized, center-led and hybrid POMs - cost reductions spike when the procurement strategy is first changed, then flatten out over time. This insight reminds firms that effective spend management is holistic, as opposed to focusing solely on savings.