Why procurement needs a new operating model – starting with process

Michael van Keulen, CPO at Coupa Software, unpacks what lies ahead for procurement in our upcoming webinar. Before that though, learn why he thinks procurement’s old operating models no longer work – and why we must now transform to better support the businesses we serve. 

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Organisations learned many lessons in 2020. The most important one was something that we, procurement leaders, already knew in our gut — businesses that could act quickly were better able to adapt quickly and be agile, while those tied to old operating models struggled. 

As 2021 is likely to bring more surprises and unexpected events, procurement must evolve to support whatever lies ahead.

New technologies for the same old models don’t work

Despite ongoing digital transformation efforts across all industries, the reality is that procurement models have barely evolved over the past decade. Many procurement functions are still operating ‘in the basement’, where functional leaders only engage with procurement to support the acquisition of goods/services or purely to comply with internal policies. Rarely is procurement used to drive better business outcomes, let alone as a competitive advantage.

Procurement’s modus operandi has remained focused on commodity-based negotiations, buying, and monitoring as a reactive, passive, and underutilised part of organisations. This makes little sense when supply chains have continued to evolve rapidly, becoming more complex and interlinked while procurement technology has advanced significantly. Our job as procurement leaders today should be to focus on helping our businesses spend smarter, safer, and faster.

To survive and thrive in this rapidly changing business environment, we need to evolve our operating models to be more activity-based and evolve to support speed, nimbleness, and empower teams.

A new model: unlock an agile process to drive value

Procurement models of the past often leave organisations short. A traditional commodity-based approach led by category experts with decades of experience may have worked in the past, but it also created silos without clear responsibility and accountability across the supply chain.

The future of procurement must be far more agile, enabling more value capture and becoming a real competitive differentiator for product innovation, managing spend categories end-to-end, and bringing groups together to encourage cross-functional collaboration.

To fully support this new strategic position and transition from a hurdle to an enabler of value, procurement must transform its operating model. Our guiding principle must be to support businesses in a much more proactive and assertive way, to be ready for whatever lies ahead. Over the past year, I have witnessed how companies with strong Business Spend Management (BSM) processes are much more resilient and assertive, outperforming those stuck to traditional siloed procurement processes and operating models.

Our guiding principle must be to support businesses in a much more proactive and assertive way, to be ready for whatever lies ahead.

To do this, we must first recognise the different options to explore. There are typically four or five organisational structures, including centralised, decentralised, hybrid, coordinated, and delegated models. Each of these structures comes with its own characteristics, advantages, and trade-offs.

For example, while a highly decentralised model allows for greater proximity to the business and can more easily establish strategic relationships with local suppliers, it also comes with larger spend fragmentation and little leverage through spend consolidation. On the other hand, a centralised organisation may have more leverage, control, and efficiency but lacks local knowledge and/or speed-to-market.

It’s essential for procurement to understand these organisational structures to determine how to best position itself and best support the business. As the right operating model is a moving target, the main challenge is striking the right balance between procurement’s expected impact and resource requirements. It is ultimately critical for procurement to be agile and to have the ability to quickly scale when needed to support business needs.

It is ultimately critical for procurement to be agile and to have the ability to quickly scale when needed to support business needs.

Getting the new procurement operating model and process right

To get this new operating model and process right, it’s essential to follow these four steps to ensure the transition to a new operating model goes smoothly:

1. Align procurement with the business
We must ensure procurement closely aligns with the business. This means providing proper support in day-to-day operations, not just when approached to run a competitive process. You want to stay close to the suppliers’ performance by managing the entire lifecycle of that supplier. 

Practitioners regularly ask what ‘the secret’ is to a successful procurement transformation. It comes down to changing behaviors and clear governance, executive buy-in, perseverance, emotional intelligence, and a thick skin. At the very end of the day it’s always about people, people, and people.  Here are some important tips:

• Always start with non-sensitive categories that you know drive value (celebrate early wins!), aka ‘low hanging fruit’
• Emphasise that procurement owns the competitive process but the ‘D’ (decision) always lies with the business
• Define upfront what success looks like and report on it!
• Attain clarity around roles and responsibilities

2. Manage suppliers
It is essential to have regular touchpoints with stakeholders in their 3-5 year journey. This ensures the right suppliers are in place with the scope, scale, capability, and knowledge to continually support strategic objectives. For example, if you want to expand into North Africa and have a supplier that provides proprietary items but is unable to support you on that continent, there is a constraint that has to be resolved.

3. Develop organisational agility
Next, it is essential to develop organisational agility. This requires subject matter expertise in the business combined with a deep procurement-level understanding of how to drive a real competitive process enriched by people with the knowledge and insight to provide transaction-level data. Combining these functional areas enables brainstorming on what you need today, tomorrow, and next year(s).

That is going to be extremely powerful as these three functional areas together drive a much better fact-based business outcome using actual constraints and characteristics needed from the right partners that support your strategic objectives.

4. Identify required resources
It is essential to determine resource requirements, not just from a headcount point-of-view but also the type of resources (talent — more on that in my next blog) and technological capabilities. It is always about People, Process, and Technology and identifying the required skills, resources and investments.

It’s time to rethink our procurement processes

In the years ahead, procurement will act less like a negotiating machine. Instead, procurement is evolving to become a team of all-around athletes with digital fluency and relationship skills to collaboratively drive better business outcomes.

Digitisation, artificial intelligence (AI), and robotic process automation (RPA) are taking over tactical and operational procurement work like running RF(x)s, spend governance, contract management, and spend analytics. Future procurement organisations will have to worry less about these activities and be more proactive in managing categories, risk, supplier performance, and driving innovation.

Let’s be clear: the role of procurement is changing. No longer can we focus only on commodities or for spend to be managed by an IT Procurement Director with decades of experience. We now need adaptive people with a certain mindset and characteristics that can lead organisations to change and maximise value. Our ultimate goal is to drive better-sustained business outcomes by continuously elevating the strategic positioning of procurement!

Want to hear more from Michael van Keulen? He’ll be speaking at our latest webinar with Coupa, Riding the Wave of Recovery: How APAC Procurement Teams are Increasing Trust and Delivering Value | Webcast.

Register here to secure your place on June 16.