A discussion has been running in the Procurement Professionals Group on LinkedIn to explore the reasons why centralised procurement initiatives often promise substantial savings, then fail to deliver to the bottom line. Various contributors have expressed different interpretations of “centralised procurement” which has prompted me to write a short article setting out the five models for procurement organisation.
What do we mean by ‘procurement’
It is perhaps necessary to define what we mean by ‘procurement’ and how this differs from ‘purchasing’.
Some organisations use the words ‘procurement’ and ‘purchasing’ interchangeably; others use procurement deliberately to mean something quite different. And whilst most agree on what constitutes ‘purchasing’ there are varied interpretations of ‘procurement’.
The Qxford English Dictionary provides the following definitions:
- procure: obtain (something), especially with care or effort
- purchase: obtain [something] in exchange for payment
In my experience, the generally accepted use of ‘procurement’ in the private sector reflects the “care and effort” in upstream activities – strategy, sourcing and negotiating – up to execution of a contract. Contract management (post-execution), placement of orders for deliveries, the management of day-to-day supplies, and processing payments, are usually treated as operational responsibilities outside the scope of Procurement (though, with the exception of payments, are often included within the scope of Purchasing). The precise divisions of responsibility vary across organisations, and vary even between categories within individual organisations. For now, let us keep to this general definition. Later, I shall return to variations and other interpretations.
The 3 basic models
There are 3 basic models for procurement, any others being a combination of these three:
Local – All activity, decision making and control is performed locally and is autonomous.
Central – Decision making and procurement activity is centralised. (There may be local activity and controls outside the scope of procurement, for example, calling off supply under a centrally negotiated contract.)
Networked – Activity is co-ordinated across local units. Decision making is not independent but is controlled in some way by a node, or nodes, on the network.
Few large, multi-site businesses operate an entirely centralised or decentralised (local) procurement model, which brings us to the classification of combinations and hybrid models.
2 Further models
In addition to the central, local and networked models, there are, arguably, only two other possible procurement models:
Federal – This is a direct combination of central and local models. Some categories (or specific items or sub-categories) are controlled at local level while others are controlled centrally. The term ‘federal’ implies some form of central governance. The degree of autonomy at local level may be determined either by mutual agreement or by mandate, usually from the centre.
Centrally-led network – Activity is co-ordinated across local units, and control is exercised by nodes on the network, but the Centre operates as the primary node.
In considering the possibility of other models, the existence of a mandate from the Centre may have a bearing. For example, a federal model implies central governance supported by a mandate, but a similar model could operate where use of centrally provided facilities and expertise could be entirely at business units’ discretion. Similarly, a centrally-led network could be mandated or, alternatively, business units could be free to join by choice. The two ‘further models’ could become four.
Finally there is the possibility of a full hybrid, for example, in large conglomerates it may be sensible to run a networked approach in one division, a federal approach in another, entirely local elsewhere, and with varying lead responsibility at the Centre.
The right model
Considering additional models, in my view, adds little to the debate on the choice of an appropriate model. Whilst the existence of a mandate, or not, is a substantive issue, it may be better to consider this within the context of a RASCI across procurement activity. This brings me back to the various interpretations of ‘procurement’. For me, the most important aim is to ensure that the responsibilities for procurement are vested in the right people within an organisation.
For any complex procurement, and particularly for the management of a contract with any continuing supply of goods and/or services it is essential to engage key stakeholders and to leverage their expertise. So the ideal model is dictated by the way business needs to be conducted. This contrasts with the oft-used approach of setting up the model (e.g. centralising procurement) to dictate the way business will be conducted. By use of a default RASCI model for each procurement category and an overriding RASCI model (where required) for each contract it is possible to define explicitly what are the boundaries of Procurement’s responsibilities and the way that Procurement and other stakeholders engage in the overall supply chain.
Few organisations, especially large ones, can operate without a formal organisation structure. So it is necessary , of course, to make a choice. There are a variety of analytical tools to inform that choice, which I shall not go into here.
It is also necessary to decide on the use of mandates. I have a very simple guiding principle: where co-ordination and centralisation are appropriate, imposition is less effective than providing an excellent service that people will use by first choice. This is not a call for democracy. Procurement needs strong leadership. Given the threat to many stakeholders’ interests, perhaps stronger leadership than many other functions.
To suggest there is a right model, is provocative. I have a preference for centrally-led networks but that is influenced to a large extent by the industries and the size of business that I usually operate in, and what I have found to be most appropriate in the prevailing circumstances. The answer is ‘whatever works’… whatever the key stakeholders buy into and are committed to make work.
Irrespective of what may have worked in the past, perhaps we should focus on what will work in the future. With increasing emphasis on corporate social responsibility and sustainability, do we need a different approach?
Do you have another model or a preferred option? If so, leave a comment below or join the discussion, “Is centralised procurement past its sell-by date?” at the Procurement Professionals Group on LinkedIn.
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I have read you articles and they are very interesting and give excellent insight in procurement. I do however have one question. Please could someone tell what are the different types of savings and the commercial models used in the IT space.
Hi Michael. Yours is a big question. Have you read my articles on purchasing for projects? Also try “18 Reasons Why Procurement Initiatives Fail to Deliver to the Bottom Line”*, which highlights causes of on-costs – many relevant to IT as the post was inspired in part by some research I did a few years ago on the reasons why many IT projects fail. Rather than thinking in terms of savings you might consider how you ensure you are getting best value, in which case the articles on value chain analysis may be helpful. Regarding commercial models, I’m not clear what you are looking for; are you thinking in terms of buying/leasing/renting/outsourcing/managed services…?
*Currently having a problem inserting a link that works – hope you can find the article by browsing my blog.