Intro
As we know, the role of procurement has expanded considerably in recent years. Traditionally focused on balancing cost with quality and delivery, procurement organizations are now responsible for much broader objectives such as risk mitigation, innovation, sustainability and diversity, equity, and inclusion (DEI).
This evolution highlights the need for a strategic approach to organizational design and to structure the team in such a way that these new priorities can be effectively met.
What are the challenges in procurement transformation?
As procurement’s scope grows, leaders face several challenges, including a talent shortage and the need to prioritize long-term development. According to Gartner’s Procurement Competencies Survey, over 75% of sourcing and procurement leaders are implementing access to external courses and interactive internal training to build staff competencies. This focus on talent development is crucial to overcoming skill gaps and aligning teams with organizational goals.
3 Key activities for optimizing organizational design
In order to create a procurement organization that aligns with company priorities, Gartner recommends focusing on three critical areas:
1. Benchmark reporting lines and span of control
Effective organizational design begins with understanding reporting structures. Gartner’s Budget Benchmarking reveals that chief procurement officers (CPOs) most commonly report to:
- Chief Financial Officers (38%)
- Chief Supply Chain Officers (20%)
- Heads of Operations (19%)
The span of control also varies based on organizational performance. High-performing CPOs manage an average of eight staff members, while their counterparts in average-performing companies oversee six, and low-performing organizations report an average of four. These benchmarks provide a framework for optimizing reporting lines and team sizes to enhance efficiency and accountability.
2. Determine the ideal level of centralization
The degree of centralization significantly impacts procurement’s effectiveness. The procurement organization structure survey identifies three primary models:
- **Centralized structures: **Leverage economies of scale and standardize processes but may hinder response time and supplier relationship management.
- **Decentralized structures: **Allow greater flexibility and responsiveness but lack standardization.
- Center-led structures: Combine centralized oversight with localized execution, offering a balanced approach.
Recent trends indicate a resurgence of center-led structures, with 51% of organizations adopting this model compared to 39% favoring centralized structures. This shift is attributed to increased supply chain disruptions, which demand greater adaptability and strategic alignment. Leaders must evaluate their organization’s needs to determine the most suitable structure.
3. Align value drivers with org design decisions
The design of procurement organizations should reflect their strategic priorities. For instance:
- Activity-based structures: Focus on efficiency and speed.
- Category-based structures: Prioritize total value and cost savings.
Beyond the org chart, leaders must address structural deficiencies by refining operating models and governance frameworks. This ensures the organization remains agile and responsive to changing priorities.
What is the importance of competency planning?
Building team capabilities is an essential aspect of procurement transformation. More than 75% of sourcing and procurement managers invest in external courses and internal training to improve team skills, as well as in the efficient use of purchasing software. Competency planning helps organizations address skill gaps, enabling procurement teams to tackle diverse challenges effectively.
Organizations are also making significant changes to their structures, with 82% planning moderate to significant organizational adjustments in the next year. This proactive approach ensures procurement teams are equipped to handle competing priorities and constant change.
4 Strategies for effective organiz ational design
The key areas leaders should optimize in procurement organizations are:
- *Benchmark against industry standards: *Use data-driven insights to assess reporting lines, span of control, and organizational structures.
- Evaluate centralization vs. decentralization: Consider the trade-offs between efficiency and responsiveness to determine the ideal balance.
- Prioritize competency development: Invest in training and development programs to build a skilled and agile workforce.
- **Address structural deficiencies: **Refine governance and operating models to align with organizational goals.
Conclusion
Designing procurement organizations that align with business priorities is a dynamic process that requires continuous evaluation and adaptation.
The recommendation for procurement managers is to focus on reporting lines, centralization and value-based design, so they can create structures that support their expanded responsibilities. Coupled with robust competency planning and structural refinement, these strategies position procurement teams to deliver exceptional value in a complex and rapidly evolving business environment.
