On the surface, centralized procurement seems preferable to the alternative. As my colleague, Peter Smith observes, “It is perhaps easier to see the potential benefits of centralization than the drawbacks. Centralization means control – being able to control the suppliers and contracts that the organization uses. It means procurement can develop capability, and aggregate spend more easily.”
There are, of course, other benefits of centralization as well, including the ability, when executed well, to more successfully address non-price factors in procurement decisions at the periphery of the business. For example, centralized process, information and control can help drive more successful supplier risk management, supplier diversity and corporate social responsibility initiatives.
Yet centralization also comes with drawbacks, especially in “larger, more complex organizations in particular.” Consider, as Peter observes:
- “Centralized functions (including procurement) can be bureaucratic and perceived as major cost centers by the business, becoming an easy target for cost reduction themselves.”
- “The more complex the organization, the more chance there is of central functions simply getting swamped by data and multiple priorities, and losing direction.”
- “The business focus can be lost with centralization – ‘they just don’t understand my needs,’ becomes the business user catchphrase when describing procurement!”
There are other drawbacks as well, of course. Perhaps the most important of which is that centralization can make it difficult for procurement to truly embed itself in the business. As a core function by itself that builds a “tower” alongside IT, HR, finance, sales and other areas of the business, procurement will, by design, isolate itself as it fortifies its own walls.
This analysis is based on Peter Smith’s paper, Centralize or Devolve Procurement? Why not Both? How Technology is Enabling New Operating Models. Spend Matters readers can download the full analysis via the previous link. Up next in our analysis: Centralization and the “Centre Led Action Network” concept.
Next up: Discussing the origins of centralization theory.