Designing the perfect procurement target operating model for your organisation, one that delivers maximum value at minimum cost, is, unfortunately, not a straightforward task. It is a complex and constantly evolving challenge.
Building on our previous article, what is a procurement target operating model, this blog delves into the key steps and considerations for designing the perfect procurement target operating model tailored to your organisation’s unique needs.
Review the business strategy
Understanding the business strategy and identifying where procurement can best support the organisation in achieving its strategic objectives is the first step in designing the perfect procurement target operating model. This may require breaking down an organisation’s strategic objectives to a more detailed level and assigning weight in terms of importance to ensure full clarity on the most critical needs from procurement.
For example, an organisation’s objective may be to grow revenue. The question then becomes: how are they looking to achieve this? Is it through organic sales of a particular product or service in a specific market, or are they pursuing inorganic growth through acquisitions? If it’s the latter, the procurement target operating model must be capable of supporting the acquisition process, from due diligence to integration, and this will require the appropriate skills and a structure that can easily scale as spend under management increases.
Engagement
Engagement with the executive leadership team at the early design stage is essential, not only to validate assumptions but also to gather input on where they feel procurement can add the most value. Each stakeholder has varying needs and expectations from procurement. This engagement also helps gauge their level of support and buy-in for the procurement target operating model and provides insight into the ease or difficulty of implementing it.
Since procurement interfaces with a wide variety of stakeholders, engaging with key users of different services and processes ahead of the design phase will help identify current challenges and opportunities for improvement within the procurement target operating model.
Define the value required from procurement
Each organisation has very different value needs from its procurement function, and these evolve over time. Therefore, the procurement target operating model must be agile enough to meet the changing demands of the business. Over the past five years, the value demanded from procurement has increased significantly, but it can be broadly categorised as detailed in the diagram below. From the analysis of the organisation’s strategic objectives, it will become clear which value creation opportunities the procurement target operating model must deliver to support the business in achieving its strategy.
Procurement functions, like many support functions, are typically constrained by budget and headcount, and requests for additional resources are always under scrutiny. That’s why it is essential to ensure that any justifications for extra resources are well-articulated and linked to delivering value opportunities that align with the organisation’s strategic objectives. Given these constraints, it is equally important to be clear on what procurement will not support and where it will purposely not add value.
Procurement Value Categories
Document the vision
The procurement vision defines the destination for the procurement function. Consider the value you want it to provide to the organisation and how you intend to deliver it. A vision statement should be concise (no longer than two sentences) and must avoid procurement specific terminology. It should be clear and easily understood by anyone within the organisation.
Establish design principles
Design principles are foundational guidelines that help shape the creation and implementation of a successful procurement target operating model. These principles ensure that the model is effective, aligned with business strategy, and capable of delivering value.
Design principles specify the strategic requirements that the procurement target operating model must support. They also highlight aspects of the current organisation that could hinder the future strategy and, therefore, must change, as well as strengths that should be preserved.
They must be agreed upon with key stakeholders before the design phase begins. While design principles are specific to each organisation, here are some examples to consider when creating a procurement target operating model:
Deliver margin improvements through cost optimisation
Lower the risk of critical suppliers in the supply chain
Scale efficiently to support inorganic growth plans
Ensure compliance with relevant third-party regulations
Be easy to do business with
Set professional procurement standards across the group, regardless of value or risk
Focus on leading only high-risk and complex spend categories
Understand current and future spend
A thorough analysis of current supplier expenditure is a critical input for selecting the right model and informing design decisions. Reviewing spend by category, identifying constraints, and recognising opportunities is crucial for shaping an effective procurement target operating model.
Category reviews should identify the fragmentation of the supply base, the relative size of spend, and its strategic importance to the organisation. Low fragmentation, high spend, and strategic importance suggest that the spend would be better managed centrally.
It is equally important to identify potential areas of growth or reduction that need to be factored into the procurement target operating model. For example, if an organisation plans to exit a particular market or retire a product, this will impact procurement needs. Similarly, large-scale digital transformation initiatives or technology architecture reviews may lead to changes in technology stacks that procurement must accommodate.
Evaluate model options
When choosing the correct procurement target operating model, there are three primary structures to consider:
Decentralised Procurement Operating Model - Procurement activities are managed independently by individual business units, with little or no central oversight. This model is often used by organisations with minimal supplier expenditure or those in the early stages of growth
Centralised Procurement Operating Model- Procurement activities are managed and executed by a central team. This model is common in manufacturing and heavily regulated industries, where compliance and consistent oversight are critical
Center-Led Procurement Operating Model - A hybrid approach that combines the strengths of centralised and decentralised models. Each procurement process is evaluated to determine whether it should be managed centrally, regionally, or locally. Many organisations that adopt this model also establish a center of excellence to define processes and standardise activities across the organisation
Each model should be evaluated against the design principles to determine which best aligns with the organisation’s needs. Our blog on how to choose the right operating model explores these three models in more detail.
3 main procurement operating models
Define service offerings
The value required from procurement will determine the range of services it offers to the business, and these services form a critical component of the procurement target operating model. Different stakeholders will use these services in varying ways, so it is crucial to ensure they are delivered in the most effective and efficient manner for all.
The first step in shaping the procurement target operating model is to clearly define each service needed to deliver the required value from procurement. For example, if supplier risk reduction is a critical value driver for the organisation’s strategy, procurement should offer supplier risk management as a dedicated service.
Some services are focused on enablement, supporting the successful delivery of other, typically market-facing services. For instance, analytics is an enabling service that provides the insights needed for activities such as sourcing and cost optimisation. Without analytics, these services within the procurement target operating model would be far less effective.
Procurement service offerings
Establish procurement “core competencies”
Just like an organisation, a procurement function must establish its core competencies, ensuring these capabilities are consistently maintained or enhanced. Within the procurement target operating model, identifying what is "core" versus "non-core" is crucial to optimising resources and driving value.
For instance, direct material sourcing is often considered a core competency, as it is integral to the end product. Conversely, indirect procurement of services or certain enablement activities may be deemed "non-core." In such cases, outsourcing these functions to third-party providers, who consider them core to their own operations, can deliver higher efficiency and better results.
By clearly defining core competencies within the procurement target operating model, organisations can focus on areas that provide the most strategic value while leveraging external expertise for non-core activities.
Define processes
The effectiveness of a procurement target operating model relies on well-defined processes that underpin its service offerings. Mapping these processes end-to-end and evaluating the value delivered by each activity will help streamline workflows and ensure clarity on responsibilities for each part of the process. This exercise also facilitates the deployment of digital solutions, as the mapped processes can guide system configuration.
To achieve this, it is essential to delve into a granular level of detail. Identify the key activities, determine who is responsible for performing each task, and establish ownership of the overall process.
Processes should also be classified into two categories:
Strategic Processes: These require a high degree of thought, skill, and autonomy, as they involve critical decision-making and influence long-term outcomes.
Operational Processes: These are typically standard, high-volume tasks that are more repetitive and less complex
This classification helps determine which processes can be automated through technology, which can be consolidated and managed through a central team, and which require close alignment with stakeholders for effective execution. By carefully defining and optimising these processes, the procurement target operating model can deliver maximum efficiency and value.
Evaluate outsourcing
Outsourcing can be an effective strategy for addressing non-core activities within the procurement target operating model. By outsourcing, organisations can gain access to specialised expertise, reduce costs, and improve overall efficiency.
There is no one-size-fits-all approach to determining what to outsource in procurement. The process should begin with a thorough review of each non-core competency to identify opportunities for optimisation. Common areas for outsourcing include enablement activities such as spend analytics and market intelligence, as well as operational processes like purchasing and sourcing for selective indirect categories.
Integrating outsourcing into the procurement target operating model allows procurement functions to focus on their core competencies while leveraging external providers to deliver superior performance in non-core areas.
Application of technology
With the rapid growth of AI, procurement technology has advanced significantly over the past few years. A marketplace that was once dominated by only a few providers is now filled with hundreds of suppliers, each offering solutions for different elements of the procurement process. Navigating this expanding ProcureTech ecosystem can be overwhelming, so it is critical to focus on evaluating the business case for technology investments within your procurement target operating model.
Review each process to determine if there is a strong return on investment (ROI) and benefits case. Additionally, keep in mind that the pace of AI development is so rapid that new capabilities, such as Agent AI, could enter the market, potentially rendering some existing software solutions obsolete.
Having a technology roadmap aligned with your procurement target operating model serves as a blueprint for future planning. This roadmap should remain adaptable to accommodate changes in procurement functions or advancements in technology, ensuring that your organisation stays ahead of the curve.
Perform modelling
To design an effective procurement target operating model, it is essential to use appropriate spend and contract data, forecasts, and assumptions about processing time and effort. A digital twin of the procurement target operating model can be created to test various scenarios, estimate benefit generation, and determine optimum resource requirements. Additionally, the model can assess where technology automation will have the greatest impact.
Identify points where the value diminishes—for example, when the cost of performing a specific procurement activity outweighs the benefits. For low-value contracts below a certain threshold, it may be more cost-effective to devolve this responsibility to business units or package it as “tail spend” and outsource it to a provider that can leverage economies of scale to deliver better value.
People
The success of the procurement target operating model relies on having the right number of skilled and experienced individuals to deliver the required service offerings. Conduct a detailed review of each process to establish and document roles, responsibilities, skills, and expertise needed.
Translating these insights into job descriptions with a clear link to the procurement target operating model can significantly improve recruitment and talent alignment.
The modelling phase of the procurement target operating model will also provide insights into the optimal number of people required to execute these processes effectively.
Deciding on delivery locations
Most mid to large organisations utilise a mix of geographic locations to deliver their processes;
Operational processes
Such as vendor onboarding, purchase requisition reviews, supplier information management, and system administration, are best performed in shared service centers. These centers handle high-volume, low-value processes efficiently and cost-effectively.
Strategic processes
Which require a high degree of creativity, autonomy, and stakeholder collaboration, are better delivered closer to stakeholders, customers, or suppliers. These activities typically have lower volume but require a higher level of strategic thinking.
From a procurement target operating model perspective, define the skills and resources required, then overlay these needs with your organisation’s current delivery model. Identify opportunities to leverage existing locations while validating assumptions with local management to address potential constraints, such as language barriers or specific skill shortages.
Structure
A well-defined structure is a cornerstone of any successful procurement target operating model. It ensures clarity in roles, responsibilities, and reporting lines, as well as accountability for delivering key service offerings.
Creating a visual blueprint of the structure allows organisations to challenge existing assumptions and explore opportunities for improvement.
Key considerations include:
Can technology be used to further automate processes and reduce the need for specific roles?
Can more roles be relocated to low-cost locations without compromising effectiveness?
Are there opportunities to outsource additional activities to third-party providers?
By addressing these questions, organisations can fully optimise their procurement target operating model and validate all assumptions before final sign-off.
Flexibility and agility
In today’s unpredictable world the procurement target operating model must be flexible and agile enough to respond to macro changes, such as geopolitical events, pandemics, and technological/economic disruptions. Ensuring the function can scale services up or down based on business needs and adapt quickly to changing conditions is essential for long-term success.
The importance of culture
Even with the best people, processes and technology in place, if you don’t have the right culture then it’s unlikely the procurement function will perform to its best abilities. So what is culture? It’s shared values, beliefs, norms, and practices that shape the behaviour and interactions of individuals within an organisation. It is essentially the personality of the function, defining "how things are done" and influencing everything from decision-making to employee engagement. Providing clarity on “how” to deliver procurement excellence ensures consistency of service and is the foundation for building trust and business partnerships.
Performance metrics
As management guru Peter Drucker famously said, “What gets measured gets managed.” This principle applies directly to the procurement target operating model, where key performance indicators (KPIs) must quantitatively assess procurement’s effectiveness in delivering value aligned with the organisation’s strategic objectives.
Where possible, limit KPIs to a few key metrics that are clear, measurable, and easily understood by anyone within the organisation. Avoid complex or ambiguous metrics that may be open to interpretation or challenge.
Examples of relevant metrics include:
Cost Management: Measuring cost savings and efficiency gains.
Supply Chain Risk Reduction: Assessing how procurement mitigates risks associated with critical suppliers.
Carbon Elimination: Evaluating progress toward sustainability and environmental goals.
The definition of these KPIs and the mechanisms for measuring them should be transparent and subject to regular scrutiny. Ideally, procurement performance metrics should be integrated into the organisation’s overall KPIs, rather than existing as standalone targets. This integration fosters closer collaboration with business functions and ensures shared accountability for achieving strategic goals.
Data & reporting
Data and reporting are critical in procurement as they provide the foundation for informed decision-making, strategic planning, and performance evaluation. Accurate and timely data allows procurement teams to analyse spending patterns, identify cost-saving opportunities, and monitor supplier performance. Reporting ensures transparency and accountability, enabling stakeholders to track progress against key performance indicators (KPIs) and align procurement activities with organisational goals. Furthermore, robust data and reporting capabilities facilitate risk management by providing insights into supply chain vulnerabilities and compliance issues. In an increasingly data-driven world, procurement teams that leverage advanced analytics and real-time reporting gain a competitive edge, driving efficiency, improving supplier relationships, and delivering measurable value to their organisations.
Seek feedback and sign-off
The final step in designing the perfect procurement target operating model is to seek feedback and secure sign-off from key stakeholders. While engaging executive-level stakeholders early in the process is essential for aligning the model with strategic objectives, involving them again at this stage ensures their buy-in and validates that the proposed model meets the organisation’s needs.
Sharing the design with relevant teams and leadership encourages constructive feedback, helping to identify potential blind spots or areas for refinement. Clear communication of the model’s benefits, along with its alignment to the business strategy, is critical for gaining approval.
By fostering collaboration and ensuring alignment across all levels of the organisation, you not only enhance the effectiveness of the procurement target operating model but also lay the groundwork for smooth implementation and long-term success.
How can Swan Procurement help?
We specialise in defining and implementing procurement target operating models while accelerating procurement maturity for our clients. Leveraging deep expertise and data-driven insights, we offer a comprehensive range of services.
As a trusted partner, we collaborate closely with you to tackle procurement challenges and deliver measurable, lasting value. Explore our case studies to learn how we have transformed procurement operating models to drive impactful results.
Get in touch with us to discuss how we can help your organisation achieve its procurement objectives.
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