Companies with stronger procurement functions consistently report higher profits. A new survey from global Management Consulting firm McKinsey explains why. But some major challenges remain, including hiring and talent development.

Everyone who’s worked in procurement knows that the field has evolved tremendously over the past number of years. Procurement began as a transactional function whose job was to buy the goods and services that organizations need to operate at the cheapest price. Today, procurement still fulfills that role, but it has become much more strategic.

In many cases it has emerged into the boardroom as companies empower procurement leaders to drive a variety of strategic benefits. And those benefits have broadened as well: strategic procurement builds resiliency against supply disruption by broadening supplier bases. It reduces total cost of ownership for goods and services across the lifecycle of a buy. It builds deeper relationships with suppliers, allowing companies to utilize innovations in manufacturing, packaging and delivery. It has also become a key seat of corporate social responsibility, helping companies buy from more diverse and more ecologically conscious suppliers—efforts that pay dividends with consumers who want to support ethical supply chains. 

So where is procurement headed from here?

The global Management Consulting firm McKinsey has just released their annual report aimed at answering this questions. Titled “Where Procurement is Going Next,” the report surveyed CPOs and procurement leaders across the function and across the globe. 

The goal? To measure the factors that make the best procurement organizations top of the class. Now in its 20th year, the report is a bit of an annual check-in for the procurement profession–and a signpost as to where the field is heading. Today, we wanted to write a brief post about the report, giving our take on some of its big key findings. 

One key finding should come as no surprise to anyone in procurement who’s delivered big results: overall, companies with greater procurement maturity consistently report higher profits. According to the study, companies that rank in the top quarter of procurement maturity have EBITDA margins at least 5% higher than peers who don’t. 

But building a modern, mature procurement organization is easier said than done. As McKinsey puts it, there’s no shortcut. Many companies with established procurement departments struggle to achieve the kind of maturity that allows them to realize these strategic benefits. 

What makes the top Procurement organizations excel? 

The McKinsey authors identified six broad areas of competency where top procurement organizations succeed: data and analytics, category management, skills, digital, organization and procurement strategy. Perhaps unsurprisingly, companies with leading procurement functions in these areas are also ahead in overall profitability. 

How did they get there? It’s a complex picture, with lots of different organizational investment, as well as repositioning due to changing market conditions. Over the past several years, many organizations have pivoted from an approach based on supplier consolidation and globalization to one based on supplier diversification and risk management. The more volatile price landscape of the pandemic and post-pandemic era has forced the top-performing organizations to become more agile in their procurement, using a wider supplier base to take advantage of favourable markets when they arise. 

Where are they going? In terms of immediate priorities, the survey asked Procurement leaders about their biggest priorities going forward, over the next 6 to 12 months: 

• 87% of respondents ranked overall margin management as one of their top 3 priorities;
• 77% said next-generation technology, data and analytics were one of their top 3 priorities;
• 61% ranked talent as one of their top 3 priorities;
• 61% said resiliency was one of their top 3 priorities;
• Interestingly, only 10% said sustainability was one of their top 3 priorities.

Which industries and sectors are ahead?

Traditionally, automotive and consumer goods were seen as leading industries for procurement due to a long-held focus on sourcing as a competitive strategy. But industry is less of a determining factor in procurement success these days. McKinsey found high performance organizations in almost every industry, which represents a bit of a shift.

Company size has also been a traditional source of procurement advantage, with large organizations having more spend to leverage through economies of scale. Large companies have also been historically better positioned to invest in specialized capabilities and advanced digital tools. But this appears to be changing as well, with new cloud and modular deployments of procurement tools opening up more strategic capabilities to smaller organizations. That means that more medium and even small-scale businesses are able to build mature procurement functions, with the right people and processes in place. 

Talent remains a challenge

As mentioned above, 61% of respondents identified talent as one of their top 3 priorities over the next 6-12 months. Which is no surprise. For many years, companies have identified talent as one of their biggest challenges in boosting their procurement performances. 

As the report puts it, “most [CPOs] face significant talent shortages, in both traditional procurement skills and the technical and analytical capabilities needed to deploy and run advanced digital technologies.”

Many organizations are pursuing digital transformations, implementing new tools to streamline their procurement and give new insight into their supplier bases, but many leaders are concerned that transformations aren’t moving fast enough–and talent shortages are part of the gap. Procurement leaders feel that their businesses have finally given them a mandate to be strategic, but they worry that they don’t have the information needed to make smart decisions. Investing in individuals with the right skillsets to capture and interpret that data is part of completing the picture. 

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We encourage you to check out the original report from McKinsey. Not only does it have lots of interesting insights, it also has some great case studies from organizations who were able to achieve this level of procurement maturity. 

As we said above, getting there can be difficult. If you’re looking for the right talent to take your procurement function to the next level, contact Argentus today. Our recruitment network includes several individuals skilled with enacting procurement maturity transformations for some of the top organizations in Canada. Simply send an email to recruit@argentus.com outlining your hiring needs, and we’d love to set up a chat.