5 min read
Put yourself in the shoes of a newly hired CPO. You’ve been tasked with taking procurement to the next level. You know in your heart it’s not just about cutting costs; you’re looking to drive real outcomes that matter to the business.
To do that, you know you need an operating model that integrates seamlessly with your organization’s goals, maturity level, and resources. Where do you begin?
In many cases, impactful change comes from transforming procurement operating models. This topic is almost as old as the profession itself, and goes well beyond centralized vs. decentralized procurement organizations. Let’s summarize the key talking points and recent trends you need to know.
What are operating models in a business context?
An operating model represents the framework that integrates people, processes, and technology to achieve desired outcomes. It defines how an organization delivers value by orchestrating its resources, workflows, and tools in alignment with its strategic goals.
Unlike a simple organizational structure, an operating model emphasizes the interconnected roles of human capabilities, process excellence, and technological enablement, ensuring that these elements work cohesively to deliver better results.
Core operating models found in procurement
Procurement operating models have historically fallen into three categories: decentralized, centralized, and center-led. Each approach comes with its own trade-offs, and understanding these is key to navigating the future.
- Decentralized Procurement is a model where procurement activities are distributed across departments, and is often seen in the early stages of a growing organization. It offers flexibility but can lead to inefficiencies if controls, governance, and strategic alignment are lacking.
- Centralized Procurement consolidates procurement activities under a single department or center of excellence, ensuring greater oversight and spend control. However, it can create friction with stakeholders due to perceived constraints on operational freedom.
- Center-Led Procurement is a hybrid model that centralizes strategic functions while decentralizing operational decisions. It focuses on handling strategic activities centrally while empowering business stakeholders to manage less critical purchases independently.
How operating models shift over time
Many businesses change their operating models over time. Procurement organizations typically transition from decentralized to centralized models before ultimately moving to center-led ones. Early in an organization’s growth, procurement operates in a highly decentralized manner. Individual departments or regions make their own purchasing decisions and function independently. This approach provides flexibility but often lacks governance, controls, and standardization. As organizations scale, they can encounter inefficiencies and recognize the absence of a unified strategy.
Various triggers, such as regulatory requirements, audit findings, or the influence of a new executive who understands the value of strategic procurement, often drive the shift toward a more deliberate approach. At this point, organizations adopt a centralized model. They consolidate procurement activities into a single team to establish control, enforce strict processes, and bring a significant portion of spend under management. Leaders use metrics like “spend under management” to measure success. While centralization resolves initial issues with governance and oversight, it often creates friction with stakeholders. Business units may feel constrained, viewing centralized procurement as a barrier to their autonomy and speed.
To overcome these challenges, organizations evolve further and adopt a center-led model. Here, the central procurement team handles strategic activities like category management and supplier relationships while empowering business units to manage less critical purchases. This model shifts the focus from control to influence, enabling procurement to prioritize high-value strategic areas without limiting the operational flexibility of the business units. By balancing centralized expertise with decentralized execution, the center-led model resolves many of the tensions that arise in earlier stages of procurement evolution.
How to find the right operating model for procurement
Crafting the right operating model starts with a clear understanding of your organization’s needs. Begin by assessing your business objectives, stakeholder dynamics, and regulatory requirements. The key is to align the model with your company’s culture, resources and maturity level.
Each organization will find the right operating model for their strategy and resources over time. For organizations that have historically operated in silos, transitioning to a center-led model can help bring structure and strategy to procurement. Conversely, businesses with a strong governance framework may benefit from adopting elements of decentralization to improve responsiveness. Regardless of the approach, taking a phased implementation route is crucial to ensure a smooth transition and long-term success.
Advantages and disadvantages of different operating models
Each procurement operating model comes with its own set of strengths and limitations. Understanding these trade-offs is important for determining which structure aligns best with your organization's needs and maturity.
Decentralized model:
- Advantages of decentralized procurement: This model offers unparalleled flexibility and responsiveness, especially in organizations where local autonomy is prioritized. It allows business units to make quick decisions and tailor their procurement strategies to local needs, fostering strong relationships with local suppliers.
- Disadvantages of decentralized procurement: Decentralized models may lack governance and strategic alignment, making it difficult to achieve economies of scale or enforce consistent standards. KPMG data highlights that decentralized organizations can struggle with inefficiencies and have less visibility into spend, which can lead to increased costs and compliance risks.
Centralized model:
- Advantages of centralized procurement: Centralized procurement provides tight control over processes, ensuring compliance and driving significant cost savings through aggregated spend. By consolidating procurement activities, organizations can leverage supplier negotiations more effectively and maintain consistent standards across all business units.
- Disadvantages of centralized procurement: The rigidity of a centralized model can alienate stakeholders, who may perceive it as overly bureaucratic. Business units can feel disconnected from decision-making processes, which can lead to friction and delays in addressing local needs.
Center-Led model:
- Advantages of center-led procurement: For many procurement leaders this hybrid model combines the best of both worlds. Strategic activities are centralized to drive efficiency and consistency, while operational decisions remain closer to the business. KPMG research indicates that center-led models deliver higher levels of stakeholder satisfaction and operational efficiency, making them ideal for mature organizations.
- Disadvantages of center-led procurement: Implementing a center-led model requires significant change management efforts and clear communication to avoid confusion about roles and responsibilities. Without proper alignment, the model risks creating inefficiencies at the interface between centralized and decentralized functions.
Lessons from Merck’s Transformation
A particularly insightful example of procurement evolution comes from Merck, as shared by their Chief Procurement Officer, Sebastien Bals in Episode 715 of the Art of Procurement podcast. Merck introduced a transformative operating model designed to balance proximity to the business with centralized expertise. This approach aims to create a matrix structure that empowers the business to define priorities while benefiting from centralized strategic capabilities.
Rather than relying solely on rigid centralization, Merck’s model emphasizes a business-centric framework. By doing so, they ensure that procurement is closely aligned with the organization’s goals, driving efficiency without stifling innovation. Sebastien highlighted how this matrix-like structure allows for a high degree of empowerment, enabling stakeholders to define the “what” of their procurement needs while the centralized team focuses on the “how.”
This approach also addresses a common challenge faced during procurement transformations: stakeholder resistance. By maintaining close ties with the business and avoiding a one-size-fits-all strategy, Merck demonstrates how procurement can evolve to become a trusted partner in achieving strategic objectives.
Bottom line on evolving procurement operating models
When reflecting on the challenges and opportunities each procurement operating model presents, it’s important to recognize that transitions between models often define their real-world impact. For example, organizations moving from decentralized to centralized models often find themselves solving one set of problems—like fragmented spend or inconsistent supplier relationships—while creating new ones, such as stakeholder friction or slow decision-making. Centralized procurement might bring order, but it can also stifle the agility local teams need in order to thrive.
In my experience, these challenges can be mitigated by adopting a mindset of collaboration and influence rather than control. For instance, the move to a center-led model isn’t merely about centralizing oversight; it’s about finding opportunities where procurement can add strategic value while enabling the business to remain nimble and make tactical decisions. The key is to listen to stakeholders and focus on enabling them rather than imposing restrictions.
No model is static. Procurement leaders must be prepared for constant evolution. A fully centralized model may initially deliver savings, but as the organization matures, decentralizing operational tasks back to business units—while maintaining a strong strategic core—becomes crucial to staying responsive to changing needs. This dynamic interplay between models aligns directly with the idea of procurement becoming “invisible” for routine purchases, focusing instead on high-value initiatives that drive meaningful outcomes.
By aligning your operating model with your organization’s priorities and stakeholder needs, procurement can transition from being seen as a cost controller to becoming a business enabler. For example, enabling tools like guided buying or generative AI-driven sourcing processes can empower stakeholders to handle low-value purchases independently, while freeing procurement to focus on high-impact areas. This balance is the cornerstone of a successful center-led approach.
