Do Procurement Departments Deserve to Perish?

By Osama El-Kadi

I am amazed that it is taking such a long a time for procurement departments of indirect goods and services to perish and be replaced by a function called "commercial".

Procurement Departments

It seems that some of the good old procurement and business bureaucrats have managed to keep this function alive and kicking while spending hard-earned company money trying to save it.

In fact some bureaucrats have gone much further and persuaded their boards to develop a sophisticated procurement system solution which they claim will save a huge amount of money.

They have even managed to convince their companies that after they build this great system, they will save even more money, perhaps up to 50 per cent, if they also use an e-procurement tool that will interact automatically with all concerned.

I am not saying that creating an IT system for purchasing is a bad thing or not needed to control stray spending and increase leverage. I am not saying that creating an e-procurement solution is not a good thing or that it doesn't save time and money, especially when buying paper clips and printer toners.

I am simply asking how much that saving is and at what expense is it achieved?

The overall success of any procurement department surely comes from its ability to increase the competitiveness of its organization in the marketplace.

This success largely comes from being a commercially-centered department facing outward rather than a system and process-driven one facing inward.

I think building the system and buying stationery using e-procurement tools should be left to finance to handle. They usually know best how to build and manage a computer system that deals with money.

When I worked at House of Fraser Group earlier in my career, a core function of the finance organisation was running the purchasing and invoice matching systems. The purchasing department or, as they call it in retail, the merchandise department, was more concerned with making deals, researching products and markets and managing a merchandise system to understand the movement of stock. The same department was resourced with highly professional expert buyers, negotiators and merchandisers.

In the indirect purchasing of goods and services, good old bureaucrats are still maintaining a function that has long been transferred to finance in the retail and manufacturing world.

Such bureaucrats seem afraid of facing the real world of negotiations, sophisticated markets, dealing with suppliers, markets and technology, creating relationships and, most importantly, handling change.

Professionals who really drive and contribute to the overall success and competitiveness of their companies in the marketplace are needed.

For once, I will not blame senior management or company boards who have actually done their best to create the right environment for the procurement department to flourish, modernize and increase its leverage.

Many companies have centralized the procurement function and made it part of the overall governance. All they got in return was more demands from their procurement directors to build new systems. Company Boards nowadays seem to hear one mantra from their directors which goes something like this, "if you build it, the saving will come". But does the saving come?

We will never know unless you ask the right question - how much did your function contribute to the company's overall competitive position in its market place?

This is a commercial question to be asked by senior management and not a system and process based one.

What does a 60 per cent discount really mean? It means nothing unless it is compared with other discounts given to other organisation by the same supplier in the same market. And not only that, but also, on what terms is the deal is based and for how long if this supplier happens to be strategic?

Procurement departments must move quickly before they are moved by someone else. They should become a commercially-centered function resourced with highly professional and commercially-oriented people who add value by increasing the competitiveness of their organisation in the marketplace.

At the same time they should relinquish their system administration responsibilities to the finance department (shared Services). After all, the first task of computers when they were invented was to computerize finance.

About the Author

Osama El-Kadi is the former Chief Procurement Officer of Centrica Plc and currently an independent Strategist, Consultant and Motivational Speaker:

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