Procurement department – where does it fit?

One of the recurring questions I get from clients is: “Where does procurement fit organisationally?” … I’m writing this blog with the hope of assisting the numerous executives and HR staff who are confused as to where their Procurement Department should be placed on the organisational chart.

It seems that depending on the politics and business direction of the organisation, procurement departments are often shuffled around from one department director to another until landing back under the CFO for the 6th time! So let’s take the time and look at procurement through a number of different lenses.

The Finance Lens

This is the tried and true traditional “throw procurement into finance because procurement is dealing with financials and cost savings” approach. Whilst this approach is often practical, many procurement professionals would agree that procurement is much more than finance and figures. Traditionally, we will see procurement slotted into finance purely for that reason, finance and figures. However, as a profession we engage with stakeholders, both internally and externally, in a way that is most efficient for all parties to benefit. We reduce organisational risk through sound contracting principles and in some cases, we project manage a number of categories of spend.

So should procurement sit under finance? In some cases, yes. However, there needs to be a common understanding and a link between how finance and procurement will work in with each other for the common goal. My personal opinion is that procurement and finance can work in well together. I have assisted a number of clients to structure procurement and finance together. A powerful relationship can be built by conducting spend analytics together, purchase order reduction programs and other strategic initiatives are also easier to manage in this partnership of procurement with finance.

 The Legal Lens

In some agencies, procurement sits under the legal team or the General Counsel. This structure makes a great deal of sense from a contracting perspective, but there can sometimes be a reduction in business innovation and time efficiencies with this model.

From a contracting perspective, sitting under the legal team is fantastic, as you have direct access to legal assistance. In some cases, procurement teams are chomping at the bit for provision of legal services; so that is one significant benefit. Some efficiencies can be lost as the job of most legal departments is to reduce organisational risk. Whilst a certain level of risk aversion is crucial in procurement, being too risk averse can reduce innovation capacity and slow things right down and ultimately increase lead times to run procurements.

Legal departments certainly have their role to play during procurements, but I don’t feel they are the right fit for “owning” the procurement department in most instances.

The Risk Lens

Some procurement departments rest with Risk Managers. Personally, I love getting risk managers involved in procurement projects, as they come up with some interesting ideas that others may not have considered. As with the Legal lens however, risk aversion can cause some controversy. One example of this was when a particular local government Risk Manager determined that Christmas decorations should not be put up around the local government area as would be the potential to distract drivers and cause traffic collisions. That year was a sad year with plenty of complaints!

In my view, procurement and risk tie in very well in many aspects. Strategic contracting does touch on compliance with certain regulations, laws, schemes, insurances etc and in some cases risk management throughout procurement processes. It comes down to taking a common sense approach. Risk departments are notorious for identifying the problematic issues but are not always so good at identifying the solutions.

So does procurement sit under risk management? Once again it depends on the direction of procurement organisationally.

Has Procurement outgrown other departments?

“Should Procurement be its own department?”. I take this question and I always come back to “it depends…”.

As a procurement practitioner, I could only dream of establishing procurement as its own business unit across the board. I have seen this in a few organisations in the recent past. Did it work? In those instances, no it didn’t. If I analyse the reasons why, it came down to:

–       Spend – the budget wasn’t large enough to enable strategic procurement

–       Buy in – there was only surface level support from senior managers, the day to day managers with procurement still being seen as a stop gap

–       Culture – the culture required a shift, but without the real senior management buy in, there was little opportunity for this culture shift to occur

It is not all doom and gloom when it comes to procurement having its own business unit. Senior managers are starting to see the value in what procurement brings, thus increasing the profile and opportunities for the profession. I have had the pleasure of assisting a number of organisations to restructure so procurement does have its own department. The three key success factors are above; you need to have a large spend, senior management buy in and the business needs to shift and be prepared to change culturally.

A Final thought

Where should procurement fit? That is a decision best made by a number of key stakeholders and based upon solid facts relevant to a particular organisation. Remember that there is not a one size fits all approach and it doesn’t matter what your competitors or other government organisations are doing. What matters is what is best for your business. Many will throw in with: “Yes, but this is best practice.” – remember that best practice is only a benchmark to define what is right practice for your business.

If you are in a procurement role and are in need of assistance to re-brand procurement or to identify how your function can operate as a service delivery, not a road block, please get in touch with us today. Many of our clients have enjoyed the benefits we have delivered to date, including nominations for awards on a global scale.

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  • Saci
    Reply

    Hi Kris,

    Clearly the answer is on top of any organizational chart .
    Procurement should report to CEO level like any other function (HR, Manufacturing…)

    We drive about 70 % of the company sales ‘revenue and we contribute to Ebidtda improvement

    Join me at
    http://www.experthaconsulting.com

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