Building An Indirect Procurement Organization From Scratch

You are the Chief Finance Officer (CFO) of a company with revenue exceeding $150M a year and have plans of going IPO (Initial Public Offering) in approximately one year. The board is stressing the importance of focusing on governance with a strong emphasis on ensuring that the right processes and policies for company spend are in place. You have two buyers that process procurement requests (PRs) to support your company on their indirect spending needs today.

Now you are asking yourself - how do I build out my organization to ensure that I have the right governance in place to support a company going public in twelve months? While a daunting task at first glance, fortunately, there are a series of key steps to follow that can aid in your success. 

Establishing a Cost Savings Culture

Depending on the maturity of your company, you may or may not have begun to stop solely chasing revenue and started to implement a cost-savings mindset. This doesn’t happen overnight, as the whole company will need to get on board in order to establish a true cost-saving culture. This concept will need to be implemented top to bottom - or it simply won’t work. 

There is no guarantee that business owners will always go to procurement for sourcing support. If they do not, then the business has the responsibility to ensure that they obtain the best deals possible through a concept such as competitive bids (CB). While there is likely an environment where there is no “procurement dictate”, the business should still go to procurement on any and all MAJOR spend deals. This will be the model you want in place, considering that procurement will likely not have sufficient bandwidth to lead every sourcing event. The bottom line, you want to ensure that all spend (both managed and non-managed) is optimized. Remember, optimizing the spend is not solely a procurement responsibility, but a part of the company culture. 

Hire the Right Procurement Head

Your organization will need to ensure that the most well-suited procurement head is hired. Below are among the top qualities needed to fulfill the position: 

• Experience building procurement organizations

• Strategic thinker while also being able to dive into the weeds 

• Generalist on sourcing expertise with experience managing sourcing events 

• Collaborative and able to work cross-functionally with Finance, Legal, and Infosec

• Thoroughly understands all procurement processes and procurement systems

• Experience in developing procurement policies 

• Analytical, with a deep understanding of numbers 

• Excellent communicator

Without an adequate person in place, optimizing spend will become much more challenging. When conducting the interview process, ensure that the interview team includes buyers, finance, legal, and business stakeholders.

Defining Procurement Processes 

You will need to thoroughly define all procurement processes, ranging from Travel and Expense (T&E) to supplier setup. While your procurement processes vary based on organization, there are key processes that all organizations should implement. These include the following: 

• Sourcing

• Supplier Setup

• Infosec (Information Security) 

• Contract

• Procurement Execution

• Invoice

• Travel Approval

• Travel Booking

• Expense

Right-Sizing Your Procurement Tools

Many companies make the mistake of utilizing the most extensive, robust procurement systems for their operation while not accounting for the actual size of their operation. Decide which procurement systems are required to support your procurement processes, as not all procurement processes early on require systematic solutions. 

There is no urgent need for an EFX tool for RFQ/RFP if your organization can truly get by on manual processes such as spreadsheets for sourcing events. With that being said, it would be important to invest in a procure-to-pay system to manage procurement requests (PR). 

Deciding on the Right Policies

Your procurement policies play a key role in optimizing spend, which is why these policies will need to be clearly defined and implemented. The policies will likely be owned by Finance/Legal, but the drafting will be completed by procurement. Key policies to consider include the following: 

• Procurement Policy - Establishing when a PR is required rather than an expense reimbursement.

• Contract Policy -  Deciding on when contracts are required and when to utilize company or supplier paper. 

• Travel & Expense Policy - Clear expectations and guidelines for both business travel and expensing.

The policies don’t need to be complex and hard to follow, instead, you need to keep the policies as clean and simple as possible. You will also need to ensure that policies are reasonable in order to ensure compliance. If you find that your policies will significantly extend PO cycle times, then you may want to consider trimming it down to better optimize cycle times. 

Gaining Visibility Through Spend Analytics

While not a necessity in the process of establishing your procurement organization, having visibility into the spend through spend analytics will greatly benefit your operation. If you are unsure how to get started with spend analytics, then please see this article here. 

Branching Into BPO/Shared Services

When optimizing the spend, locating  low-cost, quality options are integral. Low-cost resources should always be considered for non-strategic procurement processes such as procurement execution. If you have already established an entity in a low-cost country, then it may be beneficial to consider a shared services model of staffing buyers for procurement execution. 

The other (and commonly implemented) option would include utilizing business process outsourcing (BPO). Business process outsourcing (BPO) pertains to outsourcing non-strategic processes through contract to staff in low-cost countries. Of course, you don’t want to outsource everything, and you will want to keep strategic procurement resources in-house and close to business stakeholders. 

Getting Started With Your Procurement Organization 

Building a strategic procurement organization will greatly aid your operation through spend optimization - but it is no easy task. This is where it would be beneficial to potentially outsource expertise and enable another set of eyes to aid in the establishment of your team, policies, and procurement system.

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Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend.  Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics.  Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.