Perspective

Patrick W. Houston Robert Hutchens

Procurement’s New Operating Model

Contact Information Florham Park, NJ Patrick W. Houston Partner +1-973-410-7602 pat.houston@booz.com New York Robert Hutchens Partner +1-212-551-6499 robert.hutchens@booz.com

Booz & Company

INtrOductION

By now, most companies have ridden one or more strategic sourcing waves that have collectively saved their organizations billions of dollars. Yet even after having benefited from these initiatives, the average company still leaves on the table unrealized savings equaling 5 to 10 percent of its total spending. These savings are not lost because of ill-conceived strategies or organizational incompetence; rather, their loss is inherent in flawed or incomplete procurement operating models.
There are many reasons that the operating models constructed to procure and pay for goods and services prove inadequate. They may not include the processes, tools, or resources needed to fully execute the sourcing strategy. They may not be properly connected to organizational decision making or sufficiently integrated into key corporate planning processes. Decisionmaking authority and accountability may not be clearly defined. Or the IT systems that enable them may be fragmented, impeding efficiency and clouding the visibility necessary to ensure compliance with overall purchasing policies and objectives. In order to mitigate these problems and deliver on purchasing’s cost, quality, and service commitments, companies must evaluate and design their procurement operating models along four fundamental dimensions: organization, processes, technology, and performance management (see Exhibit 1, page 2). Together, these four elements determine an operating model’s effectiveness at executing a company’s sourcing strategies. And because any model is only as strong as its weakest link, each