Designing a Procurement Target Operating Model & Business Case
As experienced procurement consultants, we always advise our customers on having a clear picture of the desired "end state" they want to achieve through implementing an S2P solution. This means defining the future structure of their procurement organisation and its role within the business. Starting your procurement transformation journey with this process can make the difference between success and failure.
The development of a detailed Procurement Target Operating Model will help define what you want to achieve from your procurement function, quantify the benefits and costs for the business case and provide a useful tool for stakeholder engagement.
Building a Procurement Target Operating Model provides the roadmap for the change
A Target Operating Model (TOM) should reflect the culture of the organisation and be driven by a vision of where the company wants to be in the procurement space. There is not a common recipe for building a procurement Target Operating Model but there are some characteristics that might help you become future-fit:
Strategic elements such as governance, stakeholder engagement, people and performance development;
Centralised/specialised, scalable functions, including global processing, e-procurement and spend analytics;
Transactional activities, e.g. invoicing, purchase order processing and contract management.
5-step programme of change
Building a Procurement TOM will help define what you want to achieve from your procurement function, and for this, there are 5 steps that should be followed.
1. Understand your organisation’s current position
It is important to document the ‘As Is’ Operating Model which describes where your business is now. A clear picture of the maturity of your purchasing operation will enable you to identify areas where you are already gaining the most value and opportunities for development. It will help you answer some critical questions, such as; ‘Am I spending the money where I will get the best return?’, ‘Do I have the right organisation in place to maximise efficiencies and savings?’, ‘Have I got the fundamentals, such as invoice processing, supplier data and contract management and benchmarking, in place already?’.
This picture will highlight any gaps in Strategy, Processes, People and Technology that need addressing as part of your S2P journey.
You should also include the challenges that your organisation is facing, whether that is the need for savings, expected growth, industry regulation, or staffing issues. This information will contribute to the development of your business case.
2. Define your Goals
From the information provided by your business snapshot, you can now develop the direction of travel and a high-level vision for procurement in your organisation. What are you trying to achieve? Is it your intention to create a world-class, digitally-enabled procurement function, or are you embarking on a shift from decentralised spending to a more centralised or center-led model? Define your high-level strategy, as this will drive changes in organisation, people, processes, and technology.
3. Design the Target Operating Model
The TOM needs to be aligned with the company’s overall organisation, but many factors can affect the structure of procurement functions. Often the decision needs to be made whether the purchasing function should be centralised, de-centralised or a hybrid centreled model. Typically, organisations cycle between these models, initially building a centralised function, to improve compliance with group policies and industry regulation. As control is established, more flexibility can be introduced, with local buying functions being established, or full delegation to business units.
The TOM needs to be sufficiently detailed to enable you to begin to plan your transformation and to select the most appropriate tools and technology to support the new model.
4. A Phased Approach
By comparing your ‘As-Is’ model to your TOM, you can create a roadmap of the change required and any technology requirements. To deliver the procurement vision and TOM the organisation will need to evolve. Consider a phased approach, each one building on the last until the vision is delivered.
5. Build the Business Case
Each business case for a S2P solution will differ depending on the size and type of the business undertaking the change, and the scope of the work being undertaken in each phase. Source to Pay is usually a long-term investment and building the basics on their own may not bring hard returns but are a pre-requisite for delivering the final benefits.
The development of a detailed TOM will help to quantify the benefits and costs for the business case.
To learn more about developing a procurement target operating model and a compelling business case for your procurement transformation project download our eBook “Developing the Procurement Target Operating Model and Business Case”.
This eBook is the first chapter of our "Ultimate Guide on Source to Pay implementation". The guide is a 12-part series developed by Xoomworks Procurement experts to help companies on their procurement transformation journey. Sign up to receive our 12-part "Ultimate Guide on Source to Pay implementation".