Table of Contents
Introduction
Congratulations! You’ve just been asked to stand up a new Procurement function.
To set yourself up for success when creating your Procurement function, my key message is simple: Start small.
Why?
Procurement is by definition a support function. However much we, Procurement professionals, want to convince ourselves otherwise, you do not absolutely need a Procurement function to operate (with a few exceptions… public sector *cough* *cough*).
Sure, if you don’t have one you’re just haphazardly buying goods and services and wasting tremendous resources doing it… but my point remains true.
Therefore, a Procurement function must continuously justify its existence... This becomes easier over time, as you deliver wins and instill a “Procurement culture” in your company, but this never goes away.
Accordingly, if I were starting a Procurement department from scratch, my main focus would be justifying the existence of this new function as soon as possible. It would be about creating momentum. And, it is much easier to create momentum with a small object that grows bigger over time than to start with a big object initially…
In practice, this means delivering recognized, highly visible positive impacts to the company’s bottom-line ASAP. Yes, there are many other value levers Procurement can act on and deliver (I’ll be the first to shout this from the rooftops…). However, when you want to “make a name for yourself”, these are a secondary consideration.
With this basic premise in place, let’s dive into the tactical elements to consider when standing up your new Procurement function.
Step 1 - Understand the Backstory
Before establishing your roadmap for the function, it is imperative that you understand the history and context that led to its creation at your company. You need to understand “why now?”
Procurement functions are typically formed because of:
Reluctant, reactive necessity - The company has grown to a point where purchasing goods and services at scale is riddled with issues. This negatively affects operations (too many follow ups required, lost orders, bad/variable pricing, invoice errors and disputes, etc.). The company reactively decides to act by creating a centralized Procurement function.
External recommendation - New board members or external consulting/audit firms recommend the creation of a Procurement function for governance or operational efficiency reasons.
Organic, proactive management - The executive leadership team sees the strategic value of Procurement and creates the function organically.
In all cases, you’re most likely coming into an environment where Procurement best practices are misunderstood at best, and treated suspiciously at worst…
It is therefore important to understand:
The motivations behind the creation of the function
The key stakeholders involved (or not involved) in the decision and their position/attitude towards the decision
The processes/documentation that led to the function’s creation (e.g. executive committee presentations).
This information will inform everything else you do going forward.
Step 2 - Define Your Main Objectives
Before you start running, clarify the direction you are heading in to avoid having to double back and change directions!
Here are the 3 steps to take to ensure you have solid objectives out of the gate:
2.1 - Define a Clear Mandate
Sit down with your manager / the executives in charge of the function and ask a few key questions:
How do your view the role of Procurement?
How would you define a successful Procurement function?
Where do Procurement’s responsibilities start and stop?
When do expect the function to reach certain milestones?
The answers will paint a picture that demonstrate the executive vision of Procurement’s potential as a function. It will also highlight discrepancies between different visions that you need to resolve now.
Information you’re looking for:
What are the main drivers leading to the creation of the function in their mind? What are the expectations?
Are you here to process transactions (purchase orders) or source and negotiate contracts?
Are you expected to get involved in sustainability, risk, innovation or organizational resilience management?
How Will the Function Be Measured? What are your targets?
How big do they see the team being? What will be your operating budget?
What sort of timelines are you working with?
From there, you can help shape the vision to make it realistic… Formally document your mandate. But don’t do it alone…
2.2 - Identify Key Stakeholders and Allies
Yes, your bosses need to be aligned on the mandate but your new function won’t get far without other allies in the business… Don’t forget, you’re a support function! If there’s nobody to support, you’re going to hit a wall.
There are two types of stakeholders you need to identify early:
Requesters
Requesters are budget holders who have operational or capital expenditure (CAPEX) purchasing requirements. They hold the purse strings.
When the function is new, you’re often perceived as a potential threat to these stakeholders… They used to purchase just fine without you… Now you’re going to get involved and potentially mess up their operations.
Even with a CXO mandate to back your involvement in their purchases, you still need to win these stakeholders over to be seen as an ally and not an impediment to their work.
Identify and meet these big requesters early. You’ll want to associate different stakeholders to different business units and, subsequently, to their spend by category. Based on the feedback you gather in your initial meetings, it might influence where you choose to get involved first.
Hint: You want to privilege working with stakeholders who are allies and view Procurement processes positively to help you accumulate wins early. Remember, it’s all about building momentum. Don’t just attack the biggest piece of the pie without consideration for the ‘People’ dimension.
Validators
Validators are the stakeholders who sign off on Profit and Loss (P/L) reports within the business. These are business unit leaders, Finance leaders, etc.
You need to identify these leaders early to educate them on your objectives and the Procurement process. You’ll want to get them involved in your savings calculation processes/formulas early so they are comfortable signing off on P/L savings you deliver in the next steps.
There’s nothing more frustrating than delivering on a Procurement plan only to be sabotaged by retrospective savings formula changes because you didn’t involve the right P/L leaders upstream in your activities.
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Essentially, for both these groups, the objective is to identify and maintain great relationships with the stakeholders that influence the inputs and outputs of your function. They will have an oversized influence on the fate of your function, whether they realize it or not.
2.3 - Define the Roadmap for the Function
If you can, I recommend starting upstream on the Procurement value chain by developing strategic sourcing and contracting capabilities.
Upstream processes (strategic sourcing) cultivate potential (negotiated) savings.
Downstream processes (purchasing and accounts payable) harvest these savings.
In an “immature” business, it is much easier to have a bottom-line impact by identifying purchasing categories that will benefit from sourcing/contracting efforts rather than trying to optimize operational purchasing processes.
In my experience, to maximize impact, your sequence should be:
Set sourcing and operational purchasing guidelines for the company via your policy
Leave execution decentralized but monitor and report on key compliance measures.
Depending on the size of the business, you may want to focus on a subset of business units and/or geographies to start to keep the scope manageable.
Cultivate negotiated savings by focusing on strategic sourcing activities with your direct team.
Carry out a Spend Analysis and identify the biggest opportunities
Establish category strategies for 2-5 strategically chosen categories with key category stakeholders
Not necessarily the biggest ones but the biggest ones where you will have an impact without much trouble.
Pick categories where the purchasing process is simple and easily measured (e.g. industrial supplies in Vendor Managed Inventory, office supplies, big ticket CAPEX items, etc.). Don’t pick something where purchasing is very laborious and savings are hard to measure like MRO.
Executing Sourcing / Contract Management activities to materialize these category strategies.
Lock in negotiated savings with Finance counterparts. Involve them early. Make it easily trackable to the P/L.
Operationalize new agreements/strategies into decentralized purchasing channels via Change Management practices, supported by your key category stakeholders.
From there, you either expand to more categories and start over at #2 or you get involved more granularly in structuring the purchasing and master data management processes in your categories to limit leakage from your negotiated savings. Eventually, you need to do both.
Accounts Payable should become your best friend when you start playing in purchasing processes… You need to stitch the whole Procure-to-Pay process together if it is to be optimal for the business.
There are certainly other ways to stand up a Procurement function if you have constraints imposed upon you. However, the above will give you the best quick return on investment and will help you fund the function’s growth. Focusing on upstream activities first will give you time to properly setup the function instead of being paralyzed by operational purchasing issues and emergencies.
This roadmap proposal is also aligned with the Hackett Procurement Value Pyramid which details how you can keep increasing the value Procurement delivers as you grow in maturity and influence in your organization.
It sounds self-evident but it bares repeating… Start with the basics (supply assurance and price). You can integrate into other parts of the business as you accumulate wings (total cost of ownership, demand management and value management). Always remember the need to positively impact the bottom line ASAP (In spite of your formal objectives if necessary).
This will give you the legitimacy and runway needed to achieve all your other, more intangible, “value generation” objectives.
Step 3 - Create the Function
Once you’ve got a clear strategy and set of objectives, you need to stand up the organization required to deliver.
Let’s come back to the People, Process and Technology dimensions to help inform the way forward. I’ll also add an additional element: the Procurement policy. This document is used to formalize the 3 other dimensions.
Therefore, the following 4 steps should be done in parallel as they will all inform each other:
The scope and objectives of your function will dictate the processes you need to carry out.
The process scope will dictate which business rules, how many people and which technology you’ll need to execute the processes.
However, a piece of technology may enable the support of a bigger scope with less people.
A business rule may reduce/increase effort required to enforce it.
You now see why I recommend you start small… Getting all these aspect to work together in sync is the biggest challenge of standing up any function.
3.1 - Establish Your Procurement Policy
Once you’ve got a clear vision and set of objectives to work to, you can get to work on a Procurement policy.
Essentially, the Procurement policy is the “tip of the function’s spear”. It is the document that outlines the high level “rules of the game" when it comes to buying goods and services for everyone in the company, regardless of whether or not the Procurement function is involved.
In it, you should find:
A high level definition of the Procurement process in your company (your function’s scope of influence)
The roles and responsibilities of all actors in the end-to-end Procurement process
The business rules applicable to the entire company, regardless of who makes a purchase (e.g. when do you need to get quotes? How many? Why?)
This includes business rules on when a purchase must involve central Procurement vs when it can purchase independently (this should change over time as you grow your scope).
Your Procurement policy should be a living, breathing document that evolves over time (e.g. revision at least once a year). It should also be somewhat aspirational… 100% compliance with the established rules should always be just out reach to keep pushing the organization further on the path to operational excellence in Procurement.
As you prove the value of Procurement in your business, you should be able to grow your scope of involvement in purchases (e.g. spend under management) and reflect that in the rules documented in your policy.
For a complete guide on how to write your Procurement policy and make it evolve over time, you can read the following Deep Dive guide:
3.2 - Organizational Structure
As you define your scope of operation through your policy, you’ll need to define roles within your central Procurement function. Titles may vary. You may also need to subdivide roles or add layers based on your context. However, the responsibilities listed shouldn’t be forgotten…
Chief Procurement Officer / Head of Procurement
Is accountable for the operationalization, measurement and enforcement of the rules in the Procurement policy (although not necessarily responsible for the execution of all processes).
Is responsible for the performance of the Procurement function
Owns the People performance management process for the employees of the function
Owns the function’s strategic plan and roadmap
Sets up and runs governance processes (e.g. sign off on category strategies)
Steps into other roles as necessary to help on strategic initiatives
Category Managers
Based on the categories, spend and business units in your scope, these are assigned to Category Managers who are responsible for Spend Analysis, Category strategy development, Sourcing, Contract Management and contract operationalization for their categories.
E.g. All industrial supplies for North-American business units
The Category Manager is trying to figure out how to meet requirement (volume, specs, SKUs needed) and the best terms and conditions given the market for that category.
Responsible for meeting category savings targets amongst other continuous improvement objectives
In smaller scope companies/categories, they would execute all the tasks themselves. In larger scope companies/categories, their responsibilities may be delegated to other team members (e.g. junior category managers, sourcing agents, contract administrators, data analysts, etc.).
Tactical Buyers / Operational Buyers
Responsible for supporting the business in “spot buy” or “tail spend” go to market activities (e.g. 3 bids and a buy) for simple purchases (e.g. respecting the Procurement policy rules).
Responsible for cutting purchase orders for ordering categories in scope (to ensure a minimum order quality threshold)
Responsible for purchasing process follow-ups (sending purchase orders, getting vendor confirmations, tracking advanced shipment notices, monitoring receipts and dealing with invoice issues)
Responsible for supporting Category Managers as required
Business/Financial Analyst
Responsible for supporting team with spend analysis
Responsible for working with Finance to get sourcing savings approved
Responsible for coordinating and executing on continuous improvement initiatives according to the CPO roadmap (e.g. coordination with other functions as necessary)
Responsible for fulfilling ad hoc reporting requests
System Administrator
Responsible for managing Procurement system user management and system changes (this may sit in IT or be an additional responsibility for someone with another role).
Depending on the scope set for your function, you’ll have a different mix of these roles based on the required capacity to achieve your objectives. A good way to estimate your requirements is to purchase access to benchmarking data.
I’ve consulted lots of benchmark data… It should be used to give you a rough order of magnitude but you’ll have to adjust based on your context. Two organizations that are exactly the same size could have radically different requirements based on the state of the processes, data, systems and the competence of their people…
Here are the 3 benchmarks I find most useful in the context of this exercise:
Strategic Sourcing FTEs per billion $ sourced (USD) : Around 20 (CPO + Category Managers)
Purchase orders processed per year per FTE : 800 to 2000 yearly / Or 3 to 8 per day (Tactical buyers / Operational Buyers)
Percentage of operational budget dedicated to Analysis/Continuous improvement: 5-10% (Business/Financial Analysts)
Again… Take these as general orders of magnitude and adjust to your context.
3.3 - Processes and Procedures
What will all these beautiful people be doing every day? Let’s go one level deeper and start defining specific business processes.
All the activities your function will carry out on a day-to-day basis (spend analysis, setting category strategies, running sourcing events, putting in place contracts, etc.) can be encapsulated in business processes.
By defining and managing these from the very start of your function you’ll have a much better handle over your workload capacity and the practical scope of your operations (vs. your objectives). You’ll be able to adjust those benchmarks to your reality… You can map processes organically and just-in-time based on your initial scope and it’s evolution over time.
Defining and managing formal business processes is the equivalent of setting up a manufacturing plant but applied to knowledge work. Business processes are how you take inputs (e.g. internal client requirements) and transform them into value-add outputs (e.g. a signed contract with optimal terms and pricing for the business).
The following article goes into detail on you can start mapping and managing your Procurement business processes today with tools you already have… Process management is a mindset more than anything else.
3.4 - Tooling (Technology)
People and processes are supported by technology. As you map your processes, assign responsibilities to roles and evaluate this against your spend and transaction volumes, it will become evident that you need some tooling to support your activities.
It’s easy to get lost in the sea of technology. There are over 430 ProcureTech solution offerings on the market at time of writing… That’s a lot…
If I were starting a Procurement function from scratch today, I’d focus on 2 tools up front:
Spend Cube
A spend cube is the tool you’ll use to:
Gather baselines of spend in your different categories to help craft your category strategies
Measure the impacts of your strategies once executed (e.g. did we save what we thoughts we’d save with our sourcing event?)
Answer any and all ad-hoc questions about spend within a category, a supplier, etc.
Without a spend cube, you’ll be reengineering reports manually from source systems every time you’re trying to answer one of the above questions… This will burn up time and resources without contributing to your objectives.
This is why I would focus on a Spend Cube first. It is the source of truth used to justify your function’s existence. You want to have that information at your finger tips, always.
Process Orchestration / Intake Management
Dedicated tools exist for all upstream activities (category management, sourcing, contract management, supplier relationship management, etc.). However, in the context of a fresh slate, I increasingly believe that using a fit-for-purpose Process Orchestration tool is the best way to go for quick time to value.
Process Orchestration tools are a way to operationalize the business processes you defined within the last step. Your processes become “executable” with workflows and you can follow the lifecycle of every request, project, contrat, etc. with dedicated reporting by object.
Since these are “No-code” tools, you can create and change business processes on the fly, giving you great flexibility to adapt to your reality as you setup the Procurement function.
You can also give business users access to a single “front door” for all their Procurement requests. They are routed through a workflow automatically for all their requests, regardless of type. Users can interact with Procurement without being trained and are routed through the correct process and questions according to the nature of their requirement.
This makes running a Procurement organization much easier as you get everyone into execution mode instead of being in their inboxes and wondering what they need to do next to follow your processes/policy.
There will be limitations BUT you can run the whole upstream procurement process within the Process Orchestration tool and augment with fit-for-purpose tools for specific verticals (e.g. sourcing module, contract management module, etc.) later on when you have a good handle on missing functionality you need in your context.
It allows you to walk (with lots of flexibility) before you run.
For more details on how Process Orchestration tools work, check out this Deep Dive article:
Purchasing System
Depending on your industry, you either already have a purchasing system you have to deal with or everything coming in as non-PO invoices…
In the context of setting up a new Procurement function, I would learn to live with the systems already in place as you focus on the strategic sourcing piece of the puzzle.
The only reason to intervene in your purchasing systems early on is if you want to make improvements to get better quality spend data to your spend cube (e.g. including commodity codes on non-PO invoice coding).
There will be plenty to do to optimize your purchasing systems later on… This task is never-ending as your company grows and changes… And this is precisely why you shouldn’t get bogged down in P2P when setting up the function… It will sap all your energy and momentum.
Other Systems
For other systems, rely on what is available to the entire organization (e.g. Microsoft suite). You can use SharePoint sites, spreadsheets, word documents, shared drives, webforms, shared mailboxes, surveys, project plans, Kanban boards, etc. to supplement what you can’t get done with a Process Orchestration tool.
Step 4 - Execute and Govern
Once you’ve successfully translated an executive vision into operations with the elements above, the last thing to do is let people work!
To ensure your team stays on the right track, you should setup and maintain a regular Procurement governance meeting cadence. With a small team, you may be able to get away with a single recurring Procurement plan review meeting every week and periodic 1-on-1 meetings with team members for personal development and issue resolution.
However, as your team grows, you’ll need to put more thought into how you organize governance meetings to ensure optimal feedback loops for the team. Good feedback loops translate to higher productivity and overall job satisfaction for your team members.
Conclusion
As you go through the process of launching your Procurement function, you’ll have to take decisions based on assumptions. Often, those assumptions will turn out to be wrong… Don’t beat yourself up. This is normal.
Keep turning the different nobs and switches listed in this guide to find the configuration that will work best for you and your team. Keep iterating.
If you do that alongside a hand picked team which also values continuous improvement, making sure to provide tangible (and visible!) value to the business, it will be quite a rewarding ride.
Good luck!
Over to you…
What is missing from my article?
What else do you need to setup a Procurement function?
What are the traps to watch out for?