Should you really aim for “world-class” procurement?

By Peter Smith, Managing Director at Procurement Excellence Ltd. and former Managing Editor at Spend Matters UK/Europe

Discussing possible topics recently with the Proactis team, we wanted to focus this article on something that has an element of looking forward, whilst being tempered with some practical advice which may help any procurement practitioner today. That’s because so many organizations are still struggling with the fundamental foundations of good procurement. It’s no good getting into visionary blockchain ideas if you don’t know how much you spend with key suppliers, or your stakeholders, only to get procurement involved when it’s too late to add value. I’m going to therefore try to achieve that balance between “future” and “right now” thinking in my session.

This has got me considering how organizations should develop and set their vision (and more pragmatic objectives and plans) in terms of what they want from procurement. Because, if you are a small to mid-sized organization – maybe with $10-50m in annual spend – and a procurement team of perhaps 5 to 10 professionals, it is pointless saying, “we want to be leading-edge, world-class category management experts”. You just don’t have enough resource to develop deep category expertise across the board and you will never convince the CFO to give you the 30 or 40 people you would need to achieve that!

For most organizations, attempting to become “world-class” at every aspect of procurement would just be a waste of time, effort and resources. So, think about what really matters, what will bring the greatest return (and, I might add with a touch of cynicism, it helps if it is visible to top management too!). I’m all in favour of ambition, but your plans need to be realistic and appropriate. 

So, here are 4 points to consider when you think about how high you should aim and which particular targets you want to focus on in that procurement journey:
  1. Size does matter I’m afraid! The size of the organization and of third party spend will read across into the investment that the organization will make in procurement. I am unimpressed by guidelines which come from analysts and even government saying “you should have one procurement professional for every $20 million of ‘spend’” or whatever number is used. For instance, there must be economies of scale – so a firm spending $1 billion should not need 10 times as many procurement people as one spending $100 million. So, take that sort of guidance with a pinch of salt. Unless you are of a certain (large) size, you just can’t expect to have the quantity of resources needed to be excellent at every aspect of procurement.
  2. Understand the criticality of procurement in your organization – and that does go beyond simply size of spend. An organization that relies on a network of strategic suppliers and sub-contractors that are mission critical to the core activities of the organization, across many different areas, should be prepared to invest more in procurement than one where employees are relatively more important, and procurement is focused perhaps on more basic raw materials and support services.
  3. Breadth of procurement is another point to consider. Do you buy a vast range of different goods and services? Or do the top 10 items account for 95% of total expenditure?  Now, this criterion is more about what you focus on rather than determining how ambitious you might be. At the extreme, a commodities trading operation needs to be really, really good at buying cocoa, oil or whatever its focus is. It may not need to be “world-class” at using AI for guided buying, low-cost country sourcing, or strategic relationship management. An organization that buys a wide range of goods and services, particular if many are strategically important (see point 2) should probably look at those broader capabilities.
  4. Support from the top – the previous 3 points help to define where you might want to go, but this final point plays into your chances of achieving your goals. Any development or transformation of procurement needs resources and it needs people to do things differently – that’s not just procurement staff, but stakeholders around the organization. So how likely are you to get the support needed from senior management to achieve that change? If you don’t have support, then ambitious change will almost always fail.
So, our message is that it’s not appropriate for every organization to be setting its aim at “world-class”, “leading-edge”, or “best-in-market” procurement performance. Be sensible about what you can do, given your size and just how important procurement is to your organization. Consider how much support you will get for change; if that isn’t there, you need to work on addressing that before you try anything too ambitious. Then focus hard on areas that will really make a difference to procurement performance, and don’t bite off more than you can chew.