Author: CEO & Founder of Trusli, Gloria Qiao
When we talk to our potential customers in the field, especially the relatively new startups who are going through hypergrowth, we notice that there is a lot of misunderstanding and confusion about needing a procurement team at all. We have seen hyper-growth companies with a few thousand employees, some of which may even produce and sell hardware, who don’t have a procurement function at all. This is mind-boggling and very dangerous. Here are the common fallacies about whether and why a company needs procurement and our responses to them.
1. We’ve always run our company without a dedicated procurement team, so we don’t need one now.
False. If a company makes physical merchandise, it typically needs to buy raw material and components/modules to build their product. In this case, having a dedicated direct procurement team overseeing the supply chain is of critical importance. This team can keep the build of material (“BOM”) low, negotiate strategic deals with all the suppliers, oversee their performance and ensure there is no supply chain shortage or delay. This team will have a direct impact on the bottom line for the company. As the company business continues to grow, the spend on the direct materials will increase, which means having a dedicated team with subject matter expertise overseeing the direct material procurement becomes increasingly important.
Even if a company is a software or services company and doesn’t have a supply chain, as the company headcount increases, the spend also multiplies. This includes things such as software that the employees need to do their work, IT purchases, marketing and PR spend, and legal cost, to name a few. At this point, having a dedicated indirect procurement team becomes an imminent need. Otherwise, people will start putting things on their company credit cards, no one knows what the company has purchased, none of the purchases are made with any cost negotiation, and money just goes out of the door.
2. Every group that needs to buy something can just look for what they need and negotiate
False. We have heard of this one a lot. And many people think they are good at “haggling”. However, companies shouldn’t burden functional groups, such as engineering, to buy things. That’s not what they are hired to do. They should work on things that they have expertise in, such as engineering.
Also, commercial negotiation, supplier selection, and management consist of unique expertise and skill set that others don’t possess. One may think that one can haggle, but sophisticated commercial negotiation goes far beyond. It takes a person years of subject-matter expertise, negotiating in the field, and learning the pitfalls and things that could go wrong to be able to manage all aspects of the negotiation properly. More on this in 4.
3. It wastes money to hire a team of dedicated procurement professionals.
False. Dedicated procurement professionals can often save 30-50% on every dollar they oversee. So if your spending reaches to a certain scale, this team will quickly pay for itself and save much more.
For example, let’s say a company spends per year $200M on procurement. With a team of ten procurement professionals, you can bring 40% of this to spend under management. With each dollar under management, let’s assume conservatively that the procurement managers can save 20%. So $80M x 20%=16M. Does this cover the cost of bringing the ten procurement managers? You do the math.
4. We just need some lower-tier buyers to write purchase orders and pay for invoices
False. Many people think of procurement managers as people buying stuff, especially people who cover indirect procurement. I used to get “don’t you just buy chairs?” quite often.
However, a Procurement manager can be highly strategic. They understand the industry landscape, possess skills to conduct reserve auctions, can aggressively negotiate beneficial commercial and legal terms, and can manage everything that could go wrong after we make a purchase (e.g. supplier quality, warranty terms, indemnification, etc.)
For example, we used to manage tens of millions of spending on cloud services. Even many software engineers may not know the tricks to negotiating this kind of contract. Computing differs from storage. For each segment, there is an industry benchmark for the right level of discount one can potentially achieve based on the level of spend and company’s unique position in the marketplace, such as being a first adopter in a certain industry. In addition, we also negotiated heavily on the migration cost, data upload, and download costs. With all this knowledge and deep understanding of this unique space, we were able to achieve multi-million dollars of additional savings, which would have been left on the table but for us.
5. Maybe we just need one dedicated procurement resource.
False. In our last article, we discussed the notion of “ Spend Under Management”, or “SUM”. SUM increases as the company increases the size and scale of procurement professionals. There is only so much one person can manage. The SUM percentage times the percentage a procurement manager can save equals to net savings.
Also, each commodity possesses unique characteristics and buying strategy. For all commodities with significant spending, the procurement team should be staffed accordingly. We just discussed the unique challenges relating to cloud spending above. The same is true for many highly technical commodities, such as computer chip sets, lidar, and vehicle components, to name a few. Even with contract labor, experienced procurement managers develop “rate cards” for each kind of engineering specialization.
For indirect purchases, because the commodities vary so much from one to another, having subject-matter expertise becomes especially important. Negotiating a marketing deal is drastically different from closing on a commercial lease. Having the right procurement professional overseeing their dedicated commodity is extremely important.
Despite many misconceptions and misunderstandings about the necessity and importance of a strategic sourcing team, many executives realize the importance of such teams early on. CFOs, COOs or even CEOs should personally care about and build such teams, starting with hiring an experienced senior leader, who can then build out such a team gradually. See more on our piece about the strategic importance of a Chief Procurement Officer and the organizational design regarding where such a team should sit. Like everything else in life, we can’t solve a problem when we don’t even realize or acknowledge that we have one. Knowing these fallacies is a first step towards a solution.