Questions that should be answered to build a business case for the optimal procurement structure (centralised vs. decentralised procurement) within your organisation.
There are a number of variables to assess before selecting a centralised or decentralised procurement structure that will work best for your organisation. There are 6 variables listed below with some key areas to review — those are samples only and not extensive. There are also some key questions to address along the journey, so keep those in the back of our mind.
- What are the level of procurement skills available?
- What are the behavioural capabilities of the procurement team across the entire organisation?
- What are the procurement processes the procurement teams are adhering to?
- What are the current guidelines, procedures, and business rules in place that your teams depend on?
- What systems or technologies are enabling people to perform sourcing, procurement and/or purchasing activities?
- Finally, similar to an athlete looking for the edge on its competition, what programme does procurement have in place to ensure of continuous improvement and innovation?
The purpose of this article is to offer areas to review in order to discuss and define the right combination of centralisation and decentralisation of the procurement function that your organisation should select.
Centralised Procurement Definition
“Centralised Procurement is a process where one department represents and acts on behalf of other departments’ needs.”
The key arguments for centralised procurement include:
- The ability to leverage significant reductions in prices;
- Better services at lower costs and increased purchasing power;
- Technical, products and services standardisation;
- Improved contract management and problem resolution;
- Lower training costs;
- Easier performance management of procurement staff; and
- Improved transparency, reporting, management and audit trails.
Another major benefit of centralised procurement is that it increases the organisation’s ability to professionalise procurement, due to being able to recruit/develop its procurement people as specialists, and ensure that good procurement practices are applied appropriately.
Decentralised Procurement Definition
“The rationale of a decentralised approach is that by placing the procurement function closer to the needs of the final user, it is more likely to be an economically efficient business, produce more effective business outcomes and better promote the development of the community.”
The key arguments for decentralised procurement are:
- A closer match to end-user requirements;
- Reduction in scope for large-scale error and unnecessary over-spending;
- Less bureaucracy;
- Shorter time frames;
- More opportunities for SMEs to compete for contracts;
- More opportunities for lower prices from local producers; and
- More scope for personal responsibility and a ‘service mentality.’
Another benefit of decentralised procurement is the ability for managers to build a close business relationship with its suppliers.
Note: A key question remains, that is, what are the variables you can impact to ensure that the organisation “can” move from one model to another, or even adopt a hybrid model?
Variable 1: Procurement Skills Audit
GOAL: Better ability to match procurement process requirements with internal capabilities allow activities to be performed in a more efficient manner (better quality output in shorter time frame).
- Define procurement questionnaire (strategic, operational, tactical, category expertise);
- Develop online questionnaire;
- Analyse results, gaps;
- Develop capabilities matrix and recommend training modules.
Variable 2: Behavioural Analysis Performed at the Team Level
GOAL: Better ability for management to replicate high performer criteria (from within or external hires) and to create high dynamic teams.
- Define behavioural requirements with management;
- Identify high achievers and extract key behaviours to replicate in new staff or existing staff;
- Run behavioural assessments (individual, team dynamics, development);
- Develop report with management tips and recommended training.
Variable 3: Process Alignment
GOAL: Mapping strategic procurement processes in alignment with existing staff capabilities (skills and behavioural) allow for better management of process bottlenecks.
- Review as-is strategic procurement and transactional procurement processes;
- Recommend new processes based on capability levels (skills & behaviour), this task must include a full quantification of financial benefits;
- Identify the level of centralisation and decentralisation required;
- Review / develop new strategic procurement procedures to support the model chosen based on available procurement skills.
Variable 4: Adoption
GOAL: Developing an adoption programme and monitor its acceptance to allow management to transition from centralised to decentralised functions (or vice versa) in accordance with internal capabilities (people / process / technology).
- Agree & develop adoption monitoring mechanisms (live dashboard reports, weekly reviews, exception reports etc.);
- Communicate new procedures;
- Manage adoption levels;
- Implement management system to create visibility and flag exceptions;
- Selectively address maverick activities;
- Provide ongoing support and leadership.
Variable 5: Systems Review
GOAL: With a clear blue print of People and Process requirements, have the ability to correctly define systems’ needs. This approach is recommended to avoid system mismatch, budget overrun, and failed projects.
- Initial high level business case before detailed business case;
- Development of functional requirements down to features requirements;
- Creation of go-to-market strategy and single vs. multi-phased tender (if (2) above is completed);
- Launch of pilot solution with small user sets;
- Overall roll out.
Variable 6: Continuous Procurement Model Review and Performance Management Framework
GOAL: Maintain an optimal procurement model requires constant improvement and adaptation to customer demands. As such, a continuous improvement philosophy must be embedded within a “Project Procurement Office.”
- Regular assessment of process candidates for centralisation vs. decentralisation;
- Alignment of processes with internal capabilities and staff bandwidth;
- Monitoring of adoption levels to transition functions from centralisation to decentralisation and/or from decentralisation to centralisation;
- Launch of mini-projects based on reviews.
Summary: Centralised vs. Decentralised Procurement
Each model has its advantages and disadvantages. By truly understanding your customer demand requirements, the available procurement skills across your entire organisation, the processes in place to support decision making and risk management, and enabling technologies, the business case can be made to adopt a centralised or decentralised procurement structure — or a hybrid version.
Qualitative and quantitative benefits must be monitored, managed and reported, along with risks management, potential cost savings achieved (internal and external), and opportunities (or lack thereof) for closer suppliers relationship and innovation programs — and to continuously improvement on the adopted structure of your procurement function.
Feel free to contact us for further information on reviewing and assessing your current centralised OR decentralised procurement structure for potential improvements.