De-fencing Procurement

The procurement organization is evolving. It is transforming to keep up with the change that is happening all around. However, many of the models used to guide the transformation are still based on how procurement was organized and executed over the past decades. To be able to truly transform an organization’s procurement department, the models need to reflect the future state. Therefore, in this blog we will introduce one of Capgemini’s new procurement models: The Procurement Wheel.

Traditional procurement

Traditionally, the procurement process is depicted by two cycles, one representing the sourcing circle and one representing the purchasing circle, connected by contract management (see figure 1). Accounts payable gets very little attention in the procurement cycles, being represented by the ‘Check and process invoice’ step only, while it is a crucial element in the overall process. If you don’t pay, your suppliers will eventually stop supplying, potentially bringing your production to a standstill.

Figure 1: Traditional depiction of procurement process

Given that the model depicts the source-to-pay process as two separate cycles with limited interaction, many organizations actually set up separate departments to cover source-to-pay. As a result, many organizations face sub-optimization of their processes, reflected by a slow, inefficient process with many manual interventions, low (spend) visibility, a significant percentage of maverick buying, and a scattered procurement IT landscape. Often issues are thrown over the virtual fence, because no one feels responsible or has real ownership. These are all challenges that many procurement departments have tried to overcome by adjusting the individual siloes. Unfortunately, the realized results were often temporary, at the cost of the other siloes or at the cost of the business.

For example, introducing catalogue ordering led to an increase in hands-free ordering, but at the same time to a significant increase in the number of invoices received by the AP department as well.

Another example is that implementing a ‘No PO, No Pay’ policy led to increased ‘spend under control’ for purchasing, but also to an increased workload for the business to create purchase requisitions, and for accounts payable to reject the non-compliant invoices and inform the supplier and business.

Within source-to-pay it is nearly impossible to make changes to one element without affecting other elements at the same time. Therefore, elements should not be considered in isolation, but end-to-end.

The Procurement Wheel

The transformation that procurement organizations are going through should bring them to the preferred integrated, data driven, end-to-end state. The Procurement Wheel reflects this state (see figure 2).

Instead of having multiple cycles that can be interpreted by organization as different departments with different systems and different accountable people, it now embraces the end-to-end and integrated approach. The procurement process should be interpreted as starting with sourcing and ending with accounts payable. After all, if you and I want to buy something we select a store or web shop (sourcing), then pick the items we want to buy (purchasing) and pay for it (accounts payable). It does not make any sense to neglect accounts payable from the procurement process, because buying something without paying does not lead to many sustainable relationships.

Integrated procurement also relies on other elements. Firstly, the data driven component is reflected by having master data at the heart of the wheel. It is the grease that keeps the wheel turning. Many organizations underestimate the necessity of having clean and consistent master data. This often leads to challenges and potential delays when moving to new (cloud) procurement solutions, since these rely on sound master data to operate smoothly. Secondly, the overarching procurement strategy and target operation model provide guidance and perspective to the activities in the wheel. This will, in the end, set apart one procurement organization from another.

Together you are one

Some clients, to whom we already presented the new Procurement Wheel, asked us whether we recommend that their currently dispersed sourcing, purchasing and AP departments are merged into one procurement department. While there would be serious benefits to such an approach, it is in many cases unrealistic to physically create one department. Therefore, we recommend that the barriers are taken away. That the areas are not managed by siloed KPIs, but by end-to-end KPIs. For example, hands-free processing (ordering & invoicing) rather than just hands-free ordering.

Employees need to know their counterparts, and proper communication structures need to be in place. And most importantly, there should be one person accountable for all three areas: sourcing, purchasing and accounts payable. So yes, procurement needs to be managed as one department with three separate capabilities. Just like the marketing department can have separate areas for social media, traditional media and events.

Embrace the future

The time of siloed procurement organizations has passed. It is time for procurement to evolve from being a bureaucratic necessity to a value-adding enabler. The next phase in procurement evolution is to become integrated, data-driven and end-to-end. This starts by moving away from the old models that drive the old behavior and embracing the philosophy of the new Procurement Wheel.

About the Author

Xander de Jong is the Digital Procurement Transformation Lead for Capgemini Consulting the Netherlands. He has over 10 years consulting experience and has worked on and led procurement transformation projects around the globe, including the USA, Singapore and various European countries.