The Incredible, Replaceable Procurement Department (AKA The Demise of Procurement)

Virtually every procurement department in a large organization has been founded on two basic premise.  First, from an objectives perspective, the primary goal of the function is cost savings.  While there are other drivers (ensure supply, minimize risk, etc.), the most visible, most measured and most consistently tracked metric is cost reduction or the cost impact of the function.

Second, most procurement organizations, particularly large ones, build out their org chart using a category management structure, where category managers are assigned to different verticals or departments, and source/buy specifically for those groups. 

These two foundations of procurement, if they continue on their existing path, will lead to the outsourcing and/or demise of the function as a whole.  Inherently, both of these concepts, which are now considered Standard Operating Procedure, which are evangelized by consulting firms and are a key component of many Procurement Transformation efforts, lead to diminishing returns, fragmented, inconsistent service levels, vertical-ized staffing structures that are too rigid and specialized, and failure to align with long term business objectives.

Cost Savings

Let’s start with cost savings - the Gold Standard by which Procurement is measured.  It’s the primary reason for our existence as a function, otherwise, why not just let departments buy for themselves?  I am not hear to argue that Procurement shouldn’t be a cost focused entity, but the amount of time we spend measuring, analyzing and justifying cost savings, aligning with finance on numbers, making projections and tying numbers back to budgets provide little, if any, value to the organizations we are supporting.  No other department within a company, save Sales, is so focused on their own measurement as Procurement. 

Further, cost savings can only go so far.  If a Procurement group saves the organization $50 million this year, they will be tasked with $55 million next year.  But is that really possible?  Without access to additional spend, probably not.  Logic dictates that eventually, available cost savings should go to $0.  Yet I’ve never seen a Procurement goal decrease year over year.

So what’s the solution?  Well, the best fix would be to stop measuring.  I’ve actually worked with one company that didn’t measure Procurement savings.  The thought process of their CFO was that it is Procurements job to help keep costs in line.  As long as Procurement is involved in the process, he felt comfortable that the bottom line was being considered.  To this CFO, the exact amount of “savings”, “cost avoidance”, or “procurement impact” was not relevant, as long as stakeholders were satisfied with the result, a rigorous process was followed, and total cost was within budgetary parameters.

Just imagine a world in which you didn’t have to measure, account for and be judged on cost savings!  How much time would that free up, allowing procurement to perform more detailed supplier risk assessments, meet with suppliers about new innovations, or better aligning with the business.  Think of it this way – you can go to the CEO and tell them you can pull another 10% out of office supply spend, or you can tell them that you can partner with a supplier on a new technology that will increase market share by 10%.  Which one do you think that CEO will care more about?

Category Management

Most large procurement organizations are structured using a category management based org chart – where resources are assigned to specific categories of spend and aren’t responsible for work outside of that cost center.   This structure is antiquated – both in how it engages with business owners and how it allows for career growth within the procurement function and the organization as a whole. 

From a stakeholder engagement perspective, it’s very easy to identify why this structure doesn’t work.  Business units and stakeholders don’t see their needs as individual requirements that can be bucketed into “sourcing categories”.  If you are trying to align sourcing strategy with the over-arching business objectives of the departments you support, staffing resources with a procurement mindset isn’t going to work. 

Further, as procurement organizations grow, the category focus becomes narrower and narrower.  For example, I know of a large procurement organization that has a team supporting marketing activities, and they have lead sourcing folks in the following areas:  digital marketing, media buying, creative advertising, marketing operations, primary market research, secondary market research and corporate communications.  However, for marketing departments, each of these “spend categories”, which by the way they would call strategies or tactics, tie into an overall marketing plan.  Getting this granular from a org chart perspective doesn’t allow the procurement team supporting marketing to get a clear picture of that plan, and how these different requirements tie together.  Further, it absolutely kills the leverage you would get by looking at the requirements holistically, and developing agency relationships in a more comprehensive manner. 

This segmented approach also makes staffing incredibly difficult.  As the level of specialty/focus increases, the ability to identify qualified resources to fill positions decreases.  Go to a job board and you will see plenty evidence of this - sourcing professional with 10 years sourcing print in the life sciences marketplace, sourcing analyst with 5 years of IT managed services experience, etc.  As individuals become more and more specialized, their overall business acumen, and ability to support other areas of the business gradually decreases.  This leads to two issues.  First, it makes flexing resources incredibly difficult.  Take your facilities category manager and ask them to support an HR benefits initiative.  That probably wont work out well.  Second, it doesn’t account for the unique nature of sourcing, which requires a substantial amount of widely varying skill sets that aren’t just category focused specialties.  These include being proficient in data analytics and financial reporting, having a solid procurement/sourcing mindset, and being a skilled negotiator and change management agent.

So what’s the alternative?  The ideal procurement org chart should be flexible and scalable, with room for lots of growth.  The team should include a small, key set of  “leads” that do have high level category focus, with a pool of analysts and managers that can handle a diverse set of assignments and the need arises.  The model should ensure resources go through rotations in different areas, allowing team members to find their niche but also get exposed to a very diverse set of business needs. 

One of the best kept secrets in procurement (that we all know) is that solid sourcing principles can be applied to nearly any category.  Rather than being category focused, CPO’s should plan on having the right set of core subject matter expertise based on the industry they are in.  Outside of those core areas, CPO’s should focus on diversifying the knowledge base of the team, while at the same time allowing them to expand on the “specialty” areas best suited for their skill set.  

This will be my last post for 2016.  In 2017, you can expect me to write a lot more on this topic, providing clear guidance on how to move away from a cost savings and category management focused organization, to one that can adapt to any situation, properly align with business to increase customer satisfaction and top line revenue growth.