Procurement Insights: Bridging Theory and Operational Reality
With extensive experience across multiple industries and having interviewed over 2,000 candidates, I have gained invaluable insights into the successes and challenges businesses face when developing procurement capabilities. The reality is that the procurement function has seen more failures than successes, with a significant amount of rhetoric, jargon, and a persistent disconnect between theoretical frameworks and operational execution.
One of procurement’s most significant limitations is its ability to gain traction and buy-in from key stakeholders. Often, procurement is perceived as a non-exclusive function, with many stakeholders failing to recognize its strategic value.
This perception is not entirely unfounded. Procurement, at its core, is something we all engage with, even at a young age. The basic principles of sourcing and purchasing are learned early on, often when we head to the store with pocket money. As consumers, we interact with platforms like Amazon, making us aware of what a good purchasing experience can look like, especially in the realm of e-commerce. The concept of procurement, however, transcends basic consumer behaviour and requires a more structured, strategic approach in the business environment.
Looking back, the fundamentals of procurement were evident in everyday family life. Growing up in a working-class family, my parents had to meticulously plan and manage household finances to ensure we didn’t go without. Key life events such as family holidays, birthdays, and other cash-intensive moments had to be balanced with ongoing expenses like groceries, utilities, and other essential needs. If we break down the categories of spending, we can see how procurement principles applied in a practical setting:
- A car purchase could be categorized as capital expenditure (CapEx),
- Grocery shopping as consumables,
- Utility bills for electricity and water as operating expenses (OpEx),
- Home renovations and extensions as project sourcing.
These experiences provided an early foundation in understanding the intricacies of procurement, illustrating how essential this function is in both personal and professional settings.
Procurement: A Strategic Imperative for Success
In the context of household management, procurement decisions were made with careful attention to value and efficiency. For example, when it came to weekly shopping, the list was strategically organized. While cheaper white-label products were available, they were often discarded because they did not deliver the expected value, turning what seemed like a cost-saving measure into an actual loss. Instead, purchasing smaller volumes and opting for preferred brands ensured greater overall value. Similarly, by aggregating services like the phone and TV networks, costs were reduced—effectively applying the principles of supplier aggregation.
This concept of procurement was evident in everyday life. When my mother went to the supermarket, selecting products and passing them through the checkout, she was engaged in a purchasing decision. When new recruits join Jigsaw, I often use such examples to simplify the procurement process and ensure it is clearly understood.
In contrast to other business functions like accounting, marketing, R&D, and engineering, which require specialized expertise, procurement often faces a unique challenge in gaining credibility. To be credible, procurement must be exceptional, and to achieve that level of excellence, it must balance speed of execution with deep knowledge of the portfolio. This is complemented by expertise in market dynamics, finance, and negotiation.
Since these functions must be executed at scale, enablement is critical. This involves the integration of technology, systems, and processes to support procurement initiatives. However, the order of investment is key, as many organizations fail to succeed when they attempt to build on weak foundational elements. With that in mind, let’s explore what often goes wrong in the procurement process.
Does Procurement Perform During a Recession?
One of the most frequently asked questions I encounter is whether procurement can deliver value during a recession. With revenues down, the business may push for a 15% reduction in the supply base. However, when examining the dynamics of a recession, it becomes clear that this approach is not always effective.
In a recession, consumer spending typically contracts, which results in a decrease in revenues. Consequently, the cost of goods sold (COGS) naturally contracts as supply and demand become misaligned initially, while operating expenses (OPEX) also decrease as businesses scale back on discretionary spending such as marketing, recruitment, travel, and other operational costs.
The idea that procurement can drive savings while simultaneously reducing the number of orders and shrinking supplier revenue is highly unlikely. If a supplier agrees to such terms, it’s often a sign of instability, and they may not be able to sustain the relationship in the long term. While some businesses may consider reducing supply risk by consolidating with a sole supplier, this strategy introduces significant risk. In a recession, the potential for supplier insolvency or inability to manage increased capacity is heightened, making this a perilous approach.
Procurement Maturity Curve
For businesses that have invested in procurement over the past 15-20 years and undergone multiple transformations, the opportunities for cost cutting through traditional sourcing (i.e., price reductions) are often exhausted. What is typically lacking are key elements such as robust data analytics, supplier relationship management (SRM), technology adoption, and effective contract management—each of which carries a substantial cost base.
As revenue shrinks, it is unlikely that a business will approve significant investments in procurement enablement—such as technology, systems, and additional headcount—if no further cost reductions can be achieved in terms of supply chain costs. In many cases, businesses respond by reducing headcount and decentralizing procurement, shifting accountability back to business units. Pricing expectations may remain stable due to years of standard contract renewals, allowing departments like marketing to maintain cost levels for a limited period, while procurement resources are cut.
In many organizations, this scenario is unfolding right now, as businesses struggle to balance cost-cutting measures with the need for procurement efficiency.
Small Businesses and Procurement in a Shrinking Market
For smaller businesses that have not invested in procurement infrastructure, there is potential to achieve savings during a recession. These organizations are often at a scale where they may not have the capital to invest in comprehensive, end-to-end procurement frameworks that incorporate technology and personnel. In such cases, a procurement resource might be hired on a reactive basis, tasked with generating savings without the benefit of structured data or clear purchase order records.
This situation often leads to procurement operating in an environment where decisions are made based on instinct and stakeholder input, rather than informed data. The result is reminiscent of procurement practices from the 1980s, where deals were negotiated and contracts signed, but there were insufficient resources to execute on the value promised. In these cases, the procurement process becomes a psychological exercise rather than a value-generating function.
Procurement’s Value in a Growing Business vs. Shrinking Business
Procurement typically adds the most value when a business is experiencing growth. In such environments, procurement has significant leverage in negotiations, as suppliers are eager to expand their revenue. The skill lies in slowing down suppliers’ profit growth on a per-unit basis while increasing the volume of sales. As a business grows its OPEX, CAPEX, and COGS, procurement can play a pivotal role in driving efficiencies between sales and costs.
However, in a shrinking market, the dynamics shift. To maintain profitability, businesses must focus on increasing margins per unit, driven by the fundamental supply and demand principles. While procurement can still add value in this context, it requires a different approach.
Innovation as a Key Lever
For organizations that have made substantial investments in procurement, innovation becomes the key driver during a recession. By leveraging innovation, procurement can help navigate the challenges posed by shrinking revenues and maximize value for the business. However, this is a strategy that remains underutilized and is relatively rare in practice
Does a Dollar Saved Hold More Value Than a Dollar Sold?
The question of whether a dollar saved is more valuable than a dollar earned through sales is a pertinent one. To illustrate this concept, consider the following example: If a company sells a unit for $1, after accounting for costs such as COGS, OPEX, CAPEX, and taxes, the net contribution to the bottom line is only $0.10. This means that 90% of the revenue generated from the sale is consumed by operational expenses.
Conversely, if the same dollar is saved through procurement by negotiating a 10% reduction in the price of goods, the value of the dollar saved is fully realized, contributing $1 directly to the bottom line, with no tax implications. This approach clearly presents a more attractive financial proposition. So, where is the procurement team to make this happen?
The Strategic Business Sense of Procurement
This scenario makes intuitive business sense: by focusing on procurement savings, the company can increase its EBIT and operational cash flow. The savings achieved on the cost base can have a direct impact on profitability, with 100% of the savings realized rather than being eroded by taxes and operational costs. However, achieving these savings requires investment, both in procurement and in complementary services such as professional consulting, technology, and performance-based incentives.
As such, the calculation of savings becomes more nuanced. On one hand, the net savings achieved through procurement may be eroded by the associated costs of securing those savings, such as the investment in procurement resources and external services. On the other hand, these savings are still advantageous, even if the full value is not fully realized in a direct, unencumbered form.
The Impact of Cost Management on Business Performance
While savings and cost management are clearly beneficial, it’s important to recognize that aggressive cost-cutting can have unintended consequences. Often, as businesses focus on reducing costs, customer satisfaction may suffer, resulting in reduced service quality or product offerings. This can further impact top-line revenue, as customers may respond negatively to inferior products or services.
From a revenue perspective, a business’s net margin per unit sold is sustainable over time and can be adjusted for inflation. However, savings on the cost base are finite, and the ability to continue cutting costs diminishes over time, especially if revenues stagnate. This is particularly true when the business reaches a point where cost savings become increasingly difficult to achieve without impacting the quality of the product or service.
Procurement, in mature operations, often delivers value primarily through supporting growth. As a result, businesses may find that procurement’s ability to drive cost savings becomes less effective as growth slows or revenues decline. Eventually, the business may reach a breakeven point in terms of cost-to-sales (CTS), at which point procurement leverage will no longer yield the desired results. If procurement continues to push for savings at this stage, the risk of supplier insolvency or operational instability may increase.
The Diminishing Returns of Procurement in a Recession
In a recession, procurement can become an even less effective lever. Consider the scenario where, as CFO, the contribution margin per unit drops from $0.10 to $0.08 due to increased costs in procurement, recruitment, and professional services. As procurement’s role expands, OPEX increases, which results in further pressure on the profit margin.
At this point, procurement’s role in reducing costs may no longer be enough to sustain profitability. To offset the reduced volume of sales, the business may be forced to increase prices or reduce the complexity of shared services, including procurement, in order to maintain a sufficient return on capital employed (ROCE). In such cases, procurement becomes part of the broader operational restructuring, with the focus shifting back to core business operations and the allocation of capital to areas that drive direct value.
Ultimately, procurement can provide value in both growth and recessionary periods, but its effectiveness depends on the broader context of the business. In times of economic downturn, businesses must focus on improving core operational efficiencies and adjusting their cost structures in a way that maintains sustainable growth and profitability
Why Procurement Transformations Often Fail
In my experience, the number of failed procurement transformations far outweighs the successful ones. As someone who has witnessed numerous attempts at transforming procurement functions, I feel suitably qualified to highlight some of the primary reasons behind this high rate of failure.
As outlined earlier, procurement is a skill set that integrates seamlessly into all aspects of our lives. At a superficial level, it is not a specialized corporate skill set in the same way that HR or sales might be. This naturally raises the question: what distinguishes professional procurement from everyday purchasing practices?
The Key Differences Between Household Budgeting and Professional Procurement
The distinction between a procurement manager and a household budget controller is significant. One of the most notable differences is leverage. In a professional setting, having access to substantial spend or the backing of a major brand allows procurement managers to act as price makers rather than price takers. In contrast, an individual buyer, like a consumer managing a household budget, is limited to sourcing the best available option in the market without the same ability to influence prices.
Scale also plays a critical role. A professional buyer is tasked with managing large, complex categories, often serving multiple internal customers. This requires breaking down spend into segments (not just category management) and employing tailored strategies for each segment. Furthermore, contracts in a professional procurement context are more complex. Unlike an amateur buyer who receives standard invoices without much involvement in contract negotiations, a professional buyer plays a key role in shaping terms, conditions, and the overall contract lifecycle.
Lastly, data and processes are fundamental to professional procurement. Thousands of transactions need to be accurately processed and recorded, ensuring that spending patterns and insights can be captured and analyzed to drive better outcomes.
While we all engage in some form of procurement in our daily lives—whether sourcing products for a renovation or managing a personal budget—most of us lack the specialized expertise required in procurement, such as legal, financial, and negotiation skills. True professional category management demands a combination of all these competencies, and it is the absence of these skills that often contributes to procurement transformation failures.
The Core Reason for Procurement Transformation Failures: Unrealistic Expectations and Misguided Phases
The primary reason procurement transformations fail lies in the approach businesses take to development and the expectations they set. Many organizations assume they can transition from a transactional purchasing environment to advanced category management in just 3–5 years, which is nearly impossible for large businesses.
Instead of following a structured, phased development process, organizations often rush headlong into adopting “best practice” category management frameworks. This term, which is frequently used as a buzzword, is nothing more than a marketing label designed to sell turnkey services at scale. In the worst cases, businesses fail to invest in necessary tools like data management systems and SRM platforms, choosing to hire category managers—often in title only—and appoint policy and governance professionals to enforce rules. This approach is akin to constructing a house by starting with the roof.
The Role of Leadership and Realistic Investment in Procurement
While it is not entirely the procurement lead’s fault, the pressure from CFOs and Boards for immediate ROI is a major contributing factor. If a company is investing millions into procurement to realize an immediate, tangible return on investment, the pressure for results becomes overwhelming. This compressed timeline benefits transformation firms, who are often paid based on projected savings, leading to a focus on short-term results rather than long-term value creation.
To ensure long-term success, businesses must be prepared to delay gratification. Phase 1 of any procurement transformation should focus on enablement, not immediately diving into category management and sourcing. The procurement model must first be tailored to fit the organizational structure, followed by the adoption of the appropriate technology, systems, and processes.
Key considerations at this phase include determining whether the organization operates with a single or multiple P&Ls, whether decision-making is fragmented across the business, and how technology and systems can effectively support all stakeholders. These foundational steps take time, and businesses must first adopt new methods of transaction management before making any changes to procurement behavior.
The Importance of Data, Technology, and System Integration
During this initial phase, the primary goal should be to integrate procurement with finance, ensuring accurate spend tracking through the proper systems and processes. At this stage, procurement is still reactive to the business’s needs, but it can provide valuable data and insights, increasing operational efficiency and driving supplier margin reductions. It is crucial to hire talent that can follow processes and demonstrate solid business acumen, but not expect advanced category management maturity at this point. This helps keep salary costs in check and aligns investment with achievable results.
The bulk of the initial investment should focus on setting up procurement for long-term success. Once the business has fully integrated its systems and data and completed some basic sourcing activities, it can begin to implement more sophisticated procurement strategies, such as outsourcing, offshoring, and category management.
Transitioning to Advanced Procurement Practices
Once the business has matured in its procurement practices, the transition to advanced category management should be gradual. This process involves developing the skills necessary for true category management, which requires legal, financial, sales, and negotiation expertise. At this stage, it may make sense to appoint Portfolio Managers to oversee category managers and facilitate the transition from sourcing to advanced category management.
The most successful procurement operations are those that adopt a methodical, phased approach, avoiding the boom-and-bust cycles that result in recurring transformations every 5 years. By investing in the right foundations, businesses can set up procurement for long-term value and success.
The Misconception of Category Management as Best Practice
Category management has garnered an elevated status as the target for “best practice” procurement—though it remains unclear what exactly constitutes best practice. While it is true that category management can deliver substantial benefits, not every business requires it, and in some cases, implementing a category management approach may even prove detrimental.
For category management to be effective, a company must possess a demand arc, where historical data informs future demand. This allows for constant adjustments to pricing, value, innovation, and risk elements. Industries such as manufacturing, retail, and pharmaceuticals are prime examples of sectors where category management thrives, particularly for spend portfolios that include packaging, ingredients, chemicals, and distribution. These are typically high-value components of COGS or critical OPEX that are directly tied to customer fulfillment or act as barriers to entry. As a result, such businesses can leverage more than just price in their spend portfolios, incorporating strategic positioning and revenue considerations.
When Category Management Is Not the Right Fit
However, for businesses focused on project-based work—such as construction, civil engineering, and mining—the category management model is often not applicable. In these industries, historical demand has little bearing on future projects, and the uniqueness of each project means that what transpired previously is of minimal relevance. Furthermore, many projects use diverse pricing models, which can completely eliminate the leverage of price, rendering category management less effective.
Additionally, spend portfolios that fall under OPEX often operate within price-driven parameters, where the primary objective is cost reduction. While a category management approach may sometimes be appropriate in these cases, it is not always the best fit, particularly if the company’s top-down management or policy does not align with the structure of category management. The process of implementing category management is typically a high-investment, high-cost initiative, which can yield a poor return on investment if it is misapplied.
The Risks of Misapplying Category Management
Calling a function “category management” when it isn’t truly category management only adds unnecessary costs. In such cases, a company may find itself hiring higher-level capabilities that are ultimately underutilized, leading to higher retention volatility as resources become disenchanted with the lack of sophistication in the function.
In many cases, it may be more effective to label the function as what it truly is—a tendering team—and avoid the high costs associated with category management salaries and technology implementations that are poorly leveraged. By doing so, businesses can still achieve some value through basic negotiation tactics without significantly impacting net margins on sales revenue.
Conclusion
In conclusion, while category management can be highly beneficial for certain industries, it is not a one-size-fits-all solution. It is important to assess the needs and structure of the business before implementing such a model. In many cases, simpler procurement strategies, such as tendering and basic negotiations, can provide sufficient value without the need for the high investments associated with category management. The key is to align procurement strategies with business objectives and avoid the trap of adopting “best practice” frameworks that may not be suitable for the company’s operations
