Beroe LiVE Poll: Center-led model gaining traction but maturity matters

In collaboration with Ipsita Suman, Principal Analyst

Procurement Organizations have been structured differently across companies. And there has been an age-old struggle between centralized and decentralized procurement structures.

We ran a poll among users of Beroe LiVE, a community of thousands of Procurement decision makers, to find out what is the effective procurement structure. The results showed that Centralized came out on top followed by Center-led structure. Center-led model incorporates features from both Centralized and Decentralized models.

A full-fledged Decentralized structure received only 5 percent of the votes.

Procurement Organizations started out as decentralized entities in the past. However, in order to exchange best practices and introduce standardization, centralization was required.

However, as consulting firm KPMG said in one of its report, the differences between the operating models are often more nuanced than one might expect. KPMG found, for instance, that even decentralized organizations still have many staff working in a central location.

Below table sets out the broad differences between Centralized and Decentralized procurement organization structure.

Key trends in Procurement Organization Structure for Best-In-Class organizations

1. Center-led structure

• While moving towards centralization, organizations realized that it is best to keep scope for local sourcing, which would not be possible due to centralized policies.
• Best in Class companies are currently moving towards Center-led organization structure -- having standardized control over the procurement organization with adequate power given to stakeholders for local procurement.
• However, mature organizations that are doing very well in a decentralized setup are not necessarily moving towards a center-led structure.
   

2. Center of Excellence and Shared Service Center/ Global Business Services

• Establishing Shared Service Center for transactional activities brings about standard operating principles and eliminates back office work in the Procurement teams. Procurement Outsourcing is also common practice for transactional procurement.
• Center of excellence (CoE) team acts as a centralized best practice resource for Innovation in Procurement. CoE teams are established in all areas of the Procurement cycle. Popular areas for CoE are Research and Development, Supplier Relation Management and Innovation Center.
• Organizations also take the help of third-party organizations in order to stay informed about the latest trends in the market. The third party organization may support the Shared service team/ Center of Excellence team/ core Procurement team
   

3. Centralized Procurement Data

• Strong IT interface between the sourcing and transactional procurement teams have to be built for successful shared service center implementation.
• Also, master data has to be standardized and updated on a periodic basis.
• A centralized procurement data makes analytics possible and gives a clear picture of the performance.
• Knowledge management portal helps in best practice sharing among category teams across regions and verticals.

Below table lists out case studies of several Procurement Organizations who went in for organization redesign.

As one can see from above the table, each company adopted a different Procurement structure based on their business need and challenges -- and there is no silver bullet when it comes to cost savings.

Moreover, the level of maturity -- of both Procurement as well as Suppliers -- plays a crucial role in choosing a particular organization structure.
 

Procurement Maturity Characteristics

In general, high maturity Procurement Organizations are prime candidates for Center-led structure. Following are the typical characteristics of a high maturity organization:
 

• Sourcing activities are based on the category approach
• A centralized team is in charge of Risk control and Compliance
• A Center of Excellence (CoE) supporting procurement teams across the globe
• Data compatibility between Supplier and Corporate systems; usage of ERP and Business Intelligence tools
• Creation of a central repository for Knowledge Management
• Established dotted line reporting with well-defined responsibilities and accountabilities

Conclusion

Despite the overhaul in the operating model, the journey from Decentralized to Centralized structure does not always cleanse out the past habits.

As per KPMG’s observation, as companies move from Decentralized to more Centralized structures, they do not lose the benefits of being decentralized (such as stakeholder proximity and responsiveness). Rather, these qualities are retained as firms centralize procurement activities.

At the end of the day, Procurement operating models should be viewed from the prism of efficiency rather than cost savings alone.