Building a structure to fit your organisation

By Remko Van Hoek

By Remko Van Hoek

Having run procurement functions that used just about every kind of operating model, I have learned all structures can – and often do – work well. I have also learned an organisational (org) chart should not be your only focus when it comes to the ultimate effectiveness of a function.

Here are seven lessons I have learned during my career that will help a procurement team organise to succeed.

LESSON ONE: IT’S NOT ABOUT THE BOXES ON AN ORGANISATIONAL CHART

While the relative position of various parts of the procurement function is relevant, where they sit in relation to the business is far more important. The choice between a decentralised, central or centralised operating model should be informed by the business’s org chart rather than procurement’s own organisational considerations.

LESSON TWO: IT IS NOT ABOUT THE BOXES, IT IS ABOUT THE LINES BETWEEN THEM

Looking specifically at a procurement org chart, I have learned that the lines between boxes are more important than the boxes themselves. Buyers can be in one building or scattered around the world and they can have hard, dotted or soft reporting lines; it doesn’t really matter. It does matter if they do not collaborate effectively – ultimately, the business will lose out.

While collaboration may be easier to embed in a centralised model, people will find ways not to embrace it. They will talk collaboration, but you may find they do not participate in coordinated category strategies or give the impression they need to participate. I have seen this in one of my recent roles and it is frustrating. Simply redrawing an org chart will not fix the problem. In fact, in one case, when we redrew the org chart it made things worse because there was lots of work done around the new org chart, which prevented teams from collaborating.

LESSON THREE: IT IS LEADERS WHO GET THE ORG CHART TO WORK

It is essential that procurement chiefs put an org chart to work once it is established. However, the way they lead will vary. In a centre-led structure, for example, CPOs must lead in a way that others will follow, otherwise, staff outside of the central function will focus on their own issues rather than what is important for the business.

Achieving leverage, implementing strategies and developing capabilities may also take longer and involve many more discussions unless the right leadership style is used. CPOs overseeing more centralised functions may find it easier to set a direction but are more dependent on board members.

LESSON FOUR: STRATEGIC SOURCING REQUIRES A CERTAIN DEGREE OF CENTRALISATION

Depending on the maturity of a procurement function, an org chart may drive change. One organisation I work with had to introduce a degree of centralisation to the procurement function to create leverage, strategic sourcing capabilities and coordination, as well as to engage with suppliers earlier.

LESSON FIVE: SRM REQUIRES A DEGREE OF DECENTRALISATION

When a procurement function matures and moves towards more formal supplier relationship management (SRM), a degree of decentralisation is necessary. For SRM to work, procurement needs to engage with suppliers on a daily basis and that needs to be done in ways that go beyond any negotiated contract. As such, individuals need the freedom to engage with suppliers however way necessary. Business leaders, though, also need to be engaged in conversations with suppliers. This way, suppliers feel they have a relationship with the buying organisation, not just its procurement function.

LESSON SIX: AVOID SPENDING TOO MUCH TIME TALKING ABOUT THE ORG CHART

To further enhance its reputation, procurement has to continue creating value for the business. The org chart cannot get in the way of the function doing this. Any conversations about organisational design that drag on indicate something is wrong. You should investigate whether you actually have engaged with and won support from senior business leaders. Aside from that, you should look at whether your team are rolling up their sleeves and getting on with the job. If all this in place, the org chart will quickly follow.

LESSON SEVEN: FUNCTIONAL ALIGNMENT HAS BECOME TRIADIC

Growing C-suite sponsorship for procurement contributions means the function must align itself horizontally with the business and vertically with senior executives. As a result, procurement chiefs need to achieve a triangular alignment between the function, the business and the board.

Procurement and the board

Figure 1, above, illustrates a grid that categorises alignment between procurement and the CEO or board:

The top-right quadrant covers areas or initiatives in which there is clear alignment between the CEO’s priorities and those of procurement. These are the areas in which the function must deliver results; cost savings are the clear example of a priority in this quadrant.

The top-left quadrant includes areas to which procurement would like to contribute, but the CEO does not see a major benefit in doing so. In this quadrant, we might find talent management and SRM, where procurement believes it can make a difference but has so far failed to convince the CEO. These areas require a sell-and-tell approach, as well as pilot projects to demonstrate the value to the organisation.

The bottom-right quadrant includes areas on which the CEO places emphasis, but where procurement fails to see the impact.

The bottom-left quadrant refers to activities that neither the CEO nor procurement consider to be of high importance.

Procurement and its peers

Aligning priorities between procurement and the CEO is only the first step in the alignment process.

To incorporate this into the model, we have divided each quadrant into two halves, representing alignment – or misalignment – between procurement and the business (see Figure two, below).

The top-right quadrant is split into the bull’s-eye and delivery pitfalls. All three parties agree bull’s-eye initiatives are a high priority and should be the main focus. Delivery pitfalls represent areas or initiatives that are supported by the CEO, although some resistance exists within the business. In these cases, procurement professionals can rely on their CEO to try to persuade business colleagues and align performance measures to gain their support, but they must be wary of being too quick to commit to objectives set by the CEO. In such circumstances, procurement professionals may run into resistance elsewhere in the business.

The top-left quadrant is divided into business-led and Ivory tower risk. Business-led areas are those that both procurement and the organisation prioritise, but not seen as central by the CEO. Here, procurement teams can collaborate with the rest of the organisation.

Ivory towers are perceived as highly important to procurement, but neither the CEO nor the business find them important. In these cases, procurement teams have to be careful not embark on pet projects and, if they do pursue these initiatives, they should closely monitor performance and communicate results to persuade other stakeholders of the project’s merits.

The bottom-right quadrant is divided into need-to-do and potential binds. Need-to-do areas or initiatives represent those the CEO and the business consider important, but procurement does not.

Procurement should support these initiatives – ideally, by automating tasks – but should not take a leading role. Potential binds are areas the CEO prioritises, but neither the business nor procurement considers important. In these cases, the function risks being caught between stakeholders.

The bottom-left quadrant is divided into challenges and no-brainers. Challenges are initiatives the business wants to pursue despite lacking support from the CEO and in which procurement does not see any value. In these cases, procurement chiefs should either persuade colleagues of the low return on investment this project would generate or give them the opportunity to pursue the initiative without support from procurement. No brainers are initiatives that receive no support from the business and should be deprioritised by the function.

Much to learn

Organising for success in procurement is important and will continue to evolve as a focus area.

Purchasing is a relatively young field and there is still much for us all to learn. As we do so, the opportunity for procurement to make a difference to the business, as well as to enhance service and value to customers, will continue to grow.

Remko van Hoek is the former CPO of Cofely. He is a visiting professor of supply chain management at Cranfield School of Management in the UK

The article originally appeared in PLQ Volume II, Issue III. To find out more about PLQ click here

This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.

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