BWP AR Center-Led Procurement

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AberdeenGroup
Center-Led Procurement
Organizing Resources and Technology for Sustained Supply Value
November 2005
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The Center-Led Procurement Business Value Research Series
Executive Summary
Enterprises have long struggled with how to best organize procurement and supply man-
agement groups to optimize and continuously improve supply costs and performance.
Traditionally, enterprises have faced two primary options for organizing procurement
operations – each with its pros and cons:
1. Centralized organizations leverage corporate spending and drive standard sourc-
ing, process, and technology decisions as well as execution from a central com-
mand and control group. While offering greater spending leverage and opera-
tional efficiencies, centralized structures result in higher incidences of unap-
proved spending, process circumvention, and uneven performance.
2. Decentralized organizations empower business units and sites with autonomy
and control over supply, process, and technology decisions, as well as sourcing
and procurement execution. This structure improves satisfaction at the site- and
business-unit level, but fails to leverage corporate spending; is costly to operate;
and leads to inconsistent supply cost and performance across the enterprise.
With market pressures such as globalization, outsourcing, and compliance pushing pro-
curement to the frontlines of corporate strategy, an increasing number of enterprises are
transitioning to a new organizational structure to position for supply management suc-
cess: the center-led procurement organization. This hybrid model blends spend leverage,
process standardization, and knowledge- and resource-sharing attributes of centralization
with the local empowerment and execution characteristics of the decentralized model.
To better understand center-led procurement, Aberdeen examined the organizational,
process, and technology infrastructures of more than 100 procurement groups. We found
that center-led procurement accelerates business support for procurement goals and poli-
cies, enhances compliance, improves spend under management, and delivers supply cost
and performance advantages. Transitioning to this center-led model requires:
• Executive-level support and reporting structure for procurement transformation.
• A multi-year plan that aligns supply and business goals.
• Cross-functional and cross-organizational teams.
• Coordinated cost and performance metrics across functions and businesses.
Aberdeen research clearly indicates that technology is a key enabler (and accelerant) for
the center-led model. Organizations using a closed-loop, source-to-settle automation plat-
form were able to speed process standardization, improve spend leverage and operational
efficiencies, and enhance knowledge sharing and analysis.
This report examines the organization, process, and technology structures required for
successful center-led procurement. It also quantifies the operational and supply cost and
performance advantages of making this transition.
All print and electronic rights are the property of AberdeenGroup © 2005.
AberdeenGroup • i
Table of Contents
Executive Summary .............................................................................................. i
Chapter One: New Pressures Require New Organizational Model .....................1

Centralized Procurement Structures.............................................................. 1
Decentralized Procurement Structures .......................................................... 3
Center-Led Procurement: Model for Strategic Operations............................. 3
Chapter Two: Implications and Analysis ..............................................................4
Chapter Three: Recommendations for Action .....................................................8

Executive Support and Reporting Structure................................................... 9
Multi-Year Supply Plan Aligned with Business Goals..................................... 9
Cross-Functional Teams ................................................................................ 9
Coordinated Supply Metrics and Incentives................................................. 11
Integrated Source-to-Settle Infrastructure.................................................... 11
The Importance of Integration ............................................................... 13
Chapter Four: Conclusions................................................................................. 15
Author Profile ..................................................................................................... 16
Appendix A: Research Methodology .................................................................. 17
Appendix B: Related Aberdeen Research & Tools ............................................. 18
About AberdeenGroup ...................................................................................... 19
AberdeenGroup
Figures
Figure 1: Procurement Organization by Company Size .......................................4
Figure 2: Procurement Performance by Organizational Model.............................5
Figure 3: Reporting Line by Organizational Model ...............................................6
Figure 4: Procurement Automation Investment by Organizational Model.............7
Figure 5: Center-Led Procurement Operating Model ...........................................8
Figure 6: Closed-Loop Procurement Automation Infrastructure ......................... 13
Tables
Table 1: Attributes of Procurement Organizational Models...................................2
AberdeenGroup
Chapter One:
New Pressures Require New Organizational Model
AberdeenGroup research of supply management executives at more than 100 global en-
terprises found that procurement’s role in strategic operations has increased dramatically
over the past five years. Macro-economic factors, such as globalization, regulatory pres-
sures, procurement automation, outsourcing, and supply market instability, are driving
more companies to view procurement as a catalyst not only for supply cost reduction and
assurance but also for market expansion, product innovation, and compliance.1
In response to such elevated expectations, many enterprises are moving to up-skill their
procurement teams and employ new supply management strategies and systems infra-
structures. However, transforming procurement into a center for value creation will re-
quire companies to overhaul both how they organize the procurement function and how
they align supply management operations with overall business activities and goals.
Traditionally, high operation and transaction costs and limited information flows forced
most enterprises to adopt one of two procurement operating models: centralized com-
mand and control or highly decentralized operations. Each of these organizational models
offered benefits and challenges.
Centralized Procurement Structures

Centralized organizations leverage corporate spend and drive standard sourcing, process,
and technology decisions as well as execution from a central command and control
group. Centralized organizational models provide economies of scale that improve
spending power, enhance operational efficiencies and knowledge sharing, and enforce
process and policy standardization (Table 1).
While good in theory, centralized procurement models have not always performed well in
practice. This has particularly been the case in large, geographically dispersed organi-
zations, especially those that have grown through merger and acquisition. In these envi-
ronments, site and plant managers often resist centralization, feeling that centrally man-
dated supply decisions and policies slow operations and do not satisfy local supply and
quality needs.
As a result, centralized procurement groups often report high incidences of unapproved
(“maverick”) spending, process and policy circumvention, and uneven supply measure-
ment and performance.
1
The CPO’s Agenda, March 2005.
AberdeenGroup • 1
Table 1: Attributes of Procurement Organizational Models

Decentralized Centralized Center-Led
Organization •Sourcing decisions and pro- •Sourcing decisions and •Sourcing coordinated
curement activities executed procurement activities across business units
at the business or local level executed at central com- •Spending leveraged
•Spending rarely leveraged mand and control center across businesses and
across sites or business units •Spending leveraged regions where practical
•Procurement reports to plant centrally •Procurement reports to
or business unit manager •Procurement reports to senior supply chain or
senior supply chain exec C-level exec
Process •Limited or no process stan- •Standardized processes •Standardized processes
dardization and policies executed and policies tailored and
•Process efficiency and ef- centrally executed at local level
fectiveness varies greatly by •Process compliance, effi- •Process compliance,
business unit or site ciency, and effectiveness efficiency, and effective-
•Limited sharing of resources vary by business or site ness consistent across
or best practices across sites •Resources and best prac- the enterprise
tices controlled centrally •Resources and best
practices shared across
sites
Knowledge •Skills and category expertise •Skills and category exper- •Skills, category exper-
vary by business unit or site tise controlled centrally tise coordinated across
•Limited visibility into spend- •Visibility into spending, businesses and sites
ing, compliance, and per- compliance, and perform- •Visibility into spending,
formance ance at aggregate level compliance, and per-
•Limited understanding of formance at aggregate
these factors at local level and local levels
Technology •Technology decisions and •Technology decisions and •Technology decisions

usage vary by business unit deployment made at and deployment coordi-
or locale corporate level nated across sites
•Technology deployment •Technology deployment
and usage vary based on and usage coordinated
schedule and budget across sites
Performance •Metrics used vary by busi- •Standard metrics used at •Standard metrics used
ness unit or locale corporate level enterprise-wide, but sup-
•Cost and performance vary •Metric compliance varies port for local variances
greatly across the enterprise across the organization •Metrics and incentives
•Cost, compliance, and shared by procurement,
performance vary across functions and businesses
the enterprise •Cost, compliance, and
performance consistent
across the enterprise
Source: AberdeenGroup, August 2005
2 • AberdeenGroup
Decentralized Procurement Structures

Decentralized organizations empower business units and sites with autonomy and control
over supply, process, and technology decisions. In a decentralized environment, sourcing
decisions and procurement activities are executed by individual business units or plants.
This structure improves satisfaction at the site- and business-unit level and speeds process
and issue resolution by avoiding much of the bureaucracy and “red tape” that comes with
centralized procurement models (Table 1).
However, the decentralized organizational model comes with many negative side effects.
Decentralized models optimize to the individual site level, and neither fully leverage cor-
porate spend nor support the supply or business objectives of the organization. In such
environments, there is little coordination or information sharing between divisions and
sites. Decentralized models do not share systems, expertise, and resources across sites,
resulting in higher operating costs and uneven supply cost and performance across the
enterprise.
Center-Led Procurement: Model for Strategic Operations

The above factors make fully centralized or decentralized organizational models ill-suited
to support and sustain procurement’s new strategic role. Higher expectations and new
(and global) market pressures require enterprises to consider alternative organizational
structures that can provide the spend leverage, process standardization, and knowledge-
and resource-sharing attributes of centralization with the local empowerment and execu-
tion characteristics of the decentralized model.
To better understand procurement organizational design issues and approaches,
Aberdeen interviewed more than 100 chief procurement officers (CPOs) and vice presi-
dents and directors of procurement and supply management. Our research found that
“center-led” procurement is the preferred organizational model among supply manage-
ment executives. In fact, more than 75% of enterprises will have completed or be in the
process of shifting to a center-led procurement organizational structure by 2008.
This emerging center-led structure relies on cross-functional and -divisional teams, flexi-
ble process and policy standards that can be tailored at the local level, coordinated met-
rics and incentives, and an integrated procurement information systems infrastructure that
automates and aligns source-to-settle processes across the enterprise. Preferences, trends,
and approaches to center-led procurement will be examined in greater detail in the next
chapters.
AberdeenGroup • 3
Chapter Two:
Implications and Analysis
Aberdeen research found that “center-led” procurement is the preferred organizational

model among supply management executives. Although less than a third of all companies
currently utilize a center-led procurement operating model, more than 75% of enterprises
will have completed or be in the process of shifting to a center-led procurement organiza-
tional structure by 2008 (Figure 1).
Aberdeen research found that use of the center-led procurement model increased in pro-
portion with company size. In fact, large enterprises (revenues greater than $1 billion in
revenues) were more than twice as likely as mid-size firms (revenues between $50 mil-
lion and $999 million) to use a center-led procurement model.
This dichotomy is partially due to the fact that large enterprises tend to have more mature
sourcing, procurement, and supply management operations and often look for economies
of scale across divisional and geographical boundaries.
Figure 1: Procurement Organization by Company Size
50% 47%
45%
40% 36%
35% 31%
30% 28% 27% Decentralized
25% 22% Centralized
20%
20% 18% 18% Center-led
15%
10%
5%
0%
Overall Mid-Market Large
Regardless of company size, the motivation for a center-led procurement structure is

clear. Aberdeen research found that companies with center-led procurement structures
outperformed companies with other organizational models both in total spend under
management of the procurement group and supply cost reductions achieved (Figure 2).
Aberdeen defines spend under management as the portion of corporate expenditures
sourced and controlled by the procurement organization or by procurement-derived poli-
cies and procedures. Having spend under management ensures maximum spending lever-
age and the application of consistent and best practice market diligence, costing, negotia-
tion, and compliance methods to each spending category. Spend managed outside the
4 • AberdeenGroup
procurement group typically results in decreased negotiation leverage and suboptimal

market vetting, as well as higher prices and management costs.
Companies with center-led procurement structures reported more than twice as much
spend under management than companies with decentralized structures, and nearly 20%
more spend under management than firms with centralized models. This delta is not in-
significant. Enterprises report 5% to 20% cost savings for each new dollar of spend
brought under management of the procurement organization.
Center-led procurement organizations were also more likely to have top procurement of-
ficers reporting to senior and C-level executives (Figure 3).
Figure 2: Procurement Performance by Organizational Model
80%
71%
70%
60%
60%
50% Decentralized
40% 34% Centralized
30% Center-led
20%
9% 8% 11%
10% 6% 6% 8%
0%
% of Spend 2004 Supply 2005 Supply
Under Mgmt. Cost Reductions Cost Reductions
(est.)
AberdeenGroup • 5
Figure 3: Reporting Line by Organizational Model
25
CE 30
10
20
CF 14
10
15
President 6
10 Center-led
Centralized
10
CO 10 Decentralized
0
20
VP, Supply Chain 40
37
10
VP, Operations 0
33
Companies with center-led procurement models also reported broader and more strategic
investments in sourcing and procurement automation and business analytics (Figure 4).
Increased adoption of procurement applications – and the need for improved integration
with enterprise resource planning (ERP) – was a recurring theme among procurement
executives. Technology investments were cited as a key component of every major sup-
ply management improvement strategy outlined by executives for the next three years.
6 • AberdeenGroup
These findings are not surprising. At the tactical level, automation streamlines and re-
moves many of the non-strategic and transactional activities that consume the majority of
buyers’ time, such as order processing, review, and expediting. Automation also allows
enterprises to extend procurement processes and intelligence across the enterprise while
improving coordination and control of spending and execution. At the strategic level,
integrated visibility and control of procurement operations empowers supply manage-
ment and business executives with insight to make strategic business decisions.
Integration and interoperation with financial, ERP, and other business systems are both
critical for the success of procurement automation infrastructure. Such integration fosters
improve spend visibility, speeds invoice and financial reconciliation, and enables proac-
tive compliance monitoring and control.
Figure 4: Procurement Automation Investment by Organizational Model
Contract 25%
15%
management 20%
Full e-sourcing 50%

25%
platform 20%
Center-Led
50%
e- 20% Centralized
20%
Decentralized
Reverse 43%
32%
auctions 40%
100%
e-procurement 100%
40%
AberdeenGroup • 7
Chapter Three:
Recommendations for Action
Despite the obvious benefits of the center-led procurement model, any change in organ-
izational structure will be challenging for most enterprises. In fact, procurement execu-
tives cite aligning and standardizing procurement processes and systems as the leading
challenge to raising the strategic importance and performance of their organizations.2
However, Aberdeen research uncovered the following attributes of successful center-led
procurement organizations:
• Executive-level support and reporting structure for procurement transformation.
• A multi-year supply plan that aligns with business goals.
• Cross-functional and cross-organizational teams.
• Shared cost and performance metrics across functional groups and businesses.
• Shared and integrated source-to-settle automation platform (Figure 5).
Figure 5: Center-Led Procurement Operating Model
2
The CPO’s Agenda, March 2005.
8 • AberdeenGroup
Executive Support and Reporting Structure

As noted above, Aberdeen research found that center-led procurement organizations are
more likely to have top procurement officers reporting to senior executives. This report-
ing line suggests that companies using center-led models view procurement as a more
strategic role than enterprises using other organizational structures. It also suggests that
procurement plans, initiatives, and goals are better aligned with those of the business.
For example, at financial services giant American Express, the CFO crafted a re-
organization to make procurement a strategic asset. The head of global procurement now
reports directly to the CFO, and procurement and finance work in tandem to drive com-
pliance across the businesses.
At Steelcase, Inc., a leading global office furniture manufacturer, procurement reports to
the senior vice president of manufacturing to ensure close alignment of manufacturing
strategies, plans, and systems with strategic sourcing and supplier management activities.
Multi-Year Supply Plan Aligned with Business Goals

Center-led procurement organizations tend to have better alignment and integration into
the strategic planning and operations of the business. Most set multi-year sourcing and
commodity plans that are mapped closely to the financial and performance goals of the
business. These plans include details on the organizational structures, services, commod-
ity strategies, and supply cost and performance goals. These plans also incorporate pro-
jections for their contribution to corporate financial and operational objectives.
For example, Cessna Aircraft Co. has multi-year supply plans with sourcing and com-
modity strategies linked directly to corporate performance and financial goals. A cross-
functional commodity team — including supply chain management, manufacturing, en-
gineering, and finance — maps production schedules against price and supply market
benchmarks to determine and adjust this plan annually. This supply roadmap is linked to
financial and performance targets of Cessna and its parent company, Textron.
Cross-Functional Teams
Center-led procurement organizations tend to make supply management an enterprise
initiative. Most of these firms establish a cross-functional sourcing or governance council
that includes the leadership of all major stakeholders across the organization, including
commodity managers, sourcing process leaders, business unit executives, financial ex-
ecutives, and, depending upon the industry, manufacturing and logistics.
Such coordination enables expertise and best practices to be shared across the business
and provides a structured environment to identify demand and better define requirements
and specifications. It also informs company leaders of savings opportunities and encour-
ages them to take an active role in ensuring compliance with negotiated contracts.
The use of such cross-functional teams increases in conjunction with procurement’s stra-
tegic role within the organization. Teaming activities tend to occur in three areas:
1. Supply planning and strategic sourcing — which aligns commodity managers;
sourcing process leaders; and functional, business unit, and regional leaders to
ensure alignment of supply decisions with business objectives.
AberdeenGroup • 9
2. Compliance management — which typically aligns procurement, finance, and

business unit leaders to maximize cost savings and ensure compliance with con-
tractual commitments.
3. Projects — which includes aligning procurement and engineering for new prod-
uct development; procurement and manufacturing for lean and supply base im-
provement initiatives; or sales, marketing, and procurement for customer-
oriented initiatives. In each case procurement functions as the liaison aimed at in-
tegrating suppliers and internal stakeholders to capture innovation, improve per-
formance, and reduce costs.
For example, Motorola accelerated its reengineering in 2003 when it appointed its first
CPO and established a global, center-led procurement organization. The new organiza-
tion assigned global commodity leaders at the corporate level, two vice presidents within
indirect materials and services procurement, and a vice president over semiconductor
procurement. Each business unit also has its own CPO for direct materials procurement
that reports both to the corporate CPO and the head of operations or supply chain man-
agement within their businesses. The matrixed organization reinforces common procure-
ment strategies and procedures globally, improves spending leverage, and enhances
alignment across business units.
Harley-Davidson has established new product development sourcing groups that co-
locate sourcing and commodity managers (most of whom are degreed engineers) with
their product engineering groups. These commodity experts collaborate with engineers
from design concept through production build. Key goals include:
• Determining the supply mix that provides access to leading innovations
• Ensuring ample capacity to support intended production volumes
• Beating target and should-cost goals.
Steelcase has established a “sourcing service center” to provide sourcing and supply
management tools, information, and templates to the commodity managers across its
global business units. Part of Steelcase’s central services organization, the sourcing ser-
vice center group provides spend and supplier data management, request for pro-
posal/request for quote services and templates, pricing intelligence, and other support
services. This approach not only reinforces standard processes and systems across the
company but also helps identify opportunities to aggregate spending and coordinate pur-
chases across the company.
Faced with this new strategic role, many procurement organizations are learning that
buyers often lack the domain expertise or skills to drive these strategic activities, such as
supplier development. In response, executives are recruiting new talent, particularly those
with graduate degrees in supply chain, logistics, procurement, and finance. For example,
taking the lead from success stories like Harley-Davidson’s, half of manufacturers are
recruiting buyers with engineering degrees to enable procurement to become a more
critical player in new product development and supplier improvement initiatives. (Aber-
deen will examine the skills required for the next-generation of procurement professional
in a future study.)
10 • AberdeenGroup
Coordinated Supply Metrics and Incentives

As noted above, center-led procurement organizations attempt to weave supply manage-
ment into the fabric of the business, ensuring that stakeholders – from the CFO to the
frontline requisitioner – are active participants in efforts to continuously improve supply
costs and performance. Key to attaining such support is ensuring that procurement goals
are aligned and, where possible, shared with the businesses. This entails clearly defining
supply cost and performance goals by function and business unit – as well as providing
shared incentives to achieving these goals. It also requires enlisting the commitment of
business leaders (and, often, the muscle of the finance department).
When overhauling its procurement operations, Owens Corning established a matrixed
procurement model that married commodity management and sourcing strategy and pro-
gram management at the corporate level with business unit leaders and plant-level buyers
and managers. The company’s commodity experts and sourcing managers now collabo-
rate with plants to identify detailed requirements and examine suppliers. Sourcing teams
also work with business unit leaders to drive and measure compliance with negotiated
contracts. Owens Corning fosters such coordination by establishing cost savings targets
for each business unit.
American Express took a similar approach, developing 10 global commodity teams that
collaborate with business unit executives to identify savings opportunities to set budgets,
sourcing strategies, and savings plans for each spend category. These goals are shared
between procurement and businesses.
Integrated Source-to-Settle Infrastructure

Aberdeen research clearly indicates that the recent transition to the center-led procure-
ment model is made possible by advances in web-based procurement automation and ad-
vanced decision support tools. Web-based automation allows an enterprise to extend
source-to-pay activities to the desktops of both functional and frontline employees, while
enforcing corporate procurement procedures and contract compliance. Advanced work-
flow capabilities embedded within these tools can also provide the flexibility to empower
business units or sites to configure processes or controls to support regional or industry-
specific variations or regulatory and reporting requirements.
Such flexibility was critical to Nestle in 2001 when it set out to maximize global spend-
ing and standardize and improve its processes by transitioning to a center-led procure-
ment structure. Like many multi-national corporations, previous efforts to leverage
spending and employ standard procurement procedures were frustrated by reluctant par-
ticipation across regions and a highly fragmented systems infrastructure. Such issues lim-
ited visibility into spending and compliance and stymied efforts to coordinate purchasing
power and decisions across regions and markets.
Nestle is attempting to solve the information management and systems challenge by
standardizing on a common ERP system globally. As part of this initiative, the global
food and beverage giant is rolling out a common e-procurement solution across its major
regions and markets. Adoption of the solution, which is being licensed from Nestle’s core
ERP provider, has been accelerated by a unique three-pronged strategy:
1. Speed e-procurement system deployment by initially implementing in a hosted
model. This tactic ensures that Nestle’s e-procurement rollout does not conflict
AberdeenGroup • 11
with its global ERP and data center consolidation efforts. (Nestle will begin tran-
sitioning e-procurement system management to its own data centers in 2007.)
This approach also allows Nestle to handle implementation and change manage-
ment issues during the initial rollout, enabling simplified system set-up and con-
figuration when e-procurement system management moves in house.
2. Leverage a global service provider that can support system rollout and supplier
enablement at the local level. Nestle partnered with a service provider that of-
fered a standard implementation template for its e-procurement system, including
pre-defined approval workflows, master and regional catalogs, and training. Most
importantly, the service provider offered in-country resources to manage change
management issues, training, and technical assistance at the local level.
3. Provide flexible configuration and supplier management at the local level. Nestle
allowed variability in its e-procurement implementation template to ensure sup-
port of the unique business requirements of individual markets and locales. Simi-
lar flexibility was extended to supplier enablement services, which support the
activation and management of global, regional, and local supplier catalogs.
This flexible approach and local support has enabled Nestle to overcome much of the
push-back that accompanies procurement standardization and system deployment.
“Just because you define a strategy at headquarters doesn’t mean the local markets will
follow,” said one Nestle procurement executive. “Adoption has been accelerated by hav-
ing resources from [our service partner] in the local markets describing the benefits of
e-procurement and building the business case. Once the markets are convinced of the
value to them, they will start supporting the initiative.”
Proof: the company deployed e-procurement across 15 businesses and regions within two
years. Nestle plans to have 35 key businesses in 60 countries using its common e-
procurement system within the next two years. At that time, Nestle expects to be manag-
ing more than 60% of its total indirect (“non-production”) spending through the system.
Such factors and proof-points lead Aberdeen to contend that transitioning to a center-led
organization is difficult, if not impossible, without the use of a common procurement sys-
tem infrastructure that integrates and interoperates with finance, ERP, and other critical
business systems. Supporting evidence for this assertion comes from Aberdeen research
findings that more than 80% of Fortune 1000 companies have adopted web-based sourc-
ing and requisitioning tools. Users report double-digit cost savings, enhanced process
standardization and knowledge sharing, and dramatic improvements in compliance and
process efficiencies. Not surprisingly, nearly half of this market segment prioritized in-
vestment in a standard, integrated source-to-settle platform for within the next two years.
Core components of this closed-loop procurement automation infrastructure include:
• Spend data management for aggregation, cleansing, classification, enrichment,
and analysis of spending data.
• Full e-sourcing platform to automate and manage complete sourcing projects –
from initial requirements development, simple and complex negotiations, bid
analysis, award allocation, and knowledge and project management. Leading en-
terprises are also leveraging optimization-based analytics to enable flexible nego-
tiations and analyze and determine optimal total-cost-based allocation decisions

across myriad business scenarios and constraints.
• Requisition-to-settle capabilities to automate request, approval, receipt, recon-
ciliation, and payment of all categories of spending.
• Contract management to automate contract collaboration and creation, compli-
ance management, and performance analysis.
• Supplier performance measurement for quantitative and qualitative monitoring,
scoring, and analysis of supplier performance. Extended functionality includes
corrective action and improvement planning and execution (Figure 6).
Closed-loop procurement infrastructure will not necessarily be sourced from a single
vendor. However, technology buying trends indicate that enterprises prefer to utilize as
few solution providers as possible. Regardless of selection approaches, effective closed-
loop operations require application modules to be integrated across the source-to-settle
lifecycle to support process efficiencies, controls, and information transfer.
Figure 6: Closed-Loop Procurement Automation Infrastructure
The Importance of Integration

Equally critical is integration between sourcing and procurement applications and back-
office ERP systems, such as purchasing, financials, supply chain, logistics, and inventory
systems. Integration between procurement applications and ERP systems enables “lights
out” source-to-pay operations and delivers improved reporting and intelligence to sourc-
ing and business executives. For example, Nestle expects to gain productivity, cost, and
performance improvements from its center-led procurement initiative once the e-
procurement system is installed in its data centers and integrated with its core ERP sys-
tem. This will avoid data re-keying and enable more proactive alignment and manage-
ment of sourcing and procurement activities in support of overall business objectives.
Such integration can foster improved coordination and collaboration with suppliers by
exposing critical business information, such as demand and purchase plans and pull sig-
nals, to supplier portals or directly to supplier systems. Integration between procurement
and related business systems – such as PLM – supports initiatives, such as compliance,
parts standardization and reuse, and costing.
Chapter Four:
Conclusions
New market pressures are pushing procurement to the frontlines of corporate strategy.
But traditional procurement organizational models fail to provide the control and flexibil-
ity required to meet these new demands. As a result, an increasing number of enterprises
are adopting a hybrid or center-led procurement model that offers the spend leverage,
process standardization, and knowledge- and resource-sharing attributes of centralization
with the local empowerment and execution characteristics of the decentralized model.
This emerging center-led structure relies on:
• Cross-functional and -divisional teams.
• Flexible process and policy standards that can be tailored at the local level.
• Coordinated metrics and incentives.
• An integrated procurement information systems infrastructure that automates and
aligns source-to-settle processes across the enterprise.
Enterprises successfully making the shift to center-led procurement structures consis-
tently outperform companies with other organizational models both in total spend under
management of the procurement group and supply cost reductions achieved.
Center-led firms also report greater and more effective use of procurement automation,
higher level reporting structures, and more efficient and effective operations. As a result,
Aberdeen projects that the center-led organizational structure will emerge as a competi-
tive differentiator within and across industry segments.
Author Profile
Tim Minahan
Senior Vice President, Global Supply Management Research
AberdeenGroup
Tim Minahan is senior vice president of global supply management research for
AberdeenGroup, Inc. Minahan specifically focuses on total cost management (TCM), an
organizational and technological framework for managing the total cost of ownership of
supply relationships. Within TCM, Minahan tracks spending analysis, sourcing, pro-
curement execution, contract management, and supplier performance measurement tech-
nologies.
Minahan also covers product lifecycle management (PLM) technologies and their con-
vergence with TCM. Minahan continually consults with early implementers of these ap-
plications to identify world-class supply management strategies and determine the
strengths and weaknesses of technology solutions and services that are competing in this
market.
Appendix A:
Research Methodology
This research effort draws on the following AberdeenGroup research activities:

• In 2004, Aberdeen assessed CLM implementations of more than 40 enterprises.
Selection approaches and criteria used by these enterprises are reflected in this
report. We have since benchmarked the performance of another dozen CLM im-
plementations.
• In 2005, Aberdeen was also appointed co-chair of the International Association
of Commercial Contract Managers (IACCM) Contract Management Automation
Community of Interest, a group of contracting, procurement, and IT executives
currently evaluating or implementing contract management solutions. The
group’s first meeting focused on the proper criteria to effectively evaluate com-
mercially available contract management solutions. Some insights from this
group are reflected in this report.
• Between January and June 2005, Aberdeen conducted demonstrations and as-
sessments of more than 20 CLM solutions and providers. Some insights from this
research effort are reflected in this report. Detailed findings from this research ef-
fort will be published in the CLM Vendor Assessment Report in
December.
Aberdeen supplemented these research efforts with more detailed telephone interviews
and on-site consultations with additional enterprises. This research initiative aimed to
identify best practices for CLM solution selection.
Appendix B:
Related Aberdeen Research & Tools
Related Aberdeen research that forms a companion or reference to this report includes:
• The CPO’s Agenda, Strategies for Procurement Transformation (March 2005)
• Best Practices in e-Sourcing, Optimizing and Sustaining Supply Savings
(September 2005)
Information on these and other Aberdeen publications can be found at
www.aberdeen.com.
About
AberdeenGroup
Our Mission
To be the trusted advisor and business value research destination of choice for the Global
Business Executive.
Our Approach
Aberdeen delivers unbiased, primary research that helps enterprises derive tangible busi-
ness value from technology-enabled solutions. Through continuous benchmarking and
analysis of value chain practices, Aberdeen offers a unique mix of research, tools, and
services to help Global Business Executives accomplish the following:
• IMPROVE the financial and competitive position of their business now
• PRIORITIZE operational improvement areas to drive immediate, tangible value
to their business
• LEVERAGE information technology for tangible business value.
Aberdeen also offers selected solution providers fact-based tools and services to em-
power and equip them to accomplish the following:
• CREATE DEMAND, by reaching the right level of executives in companies
where their solutions can deliver differentiated results
• ACCELERATE SALES, by accessing executive decision-makers who need a so-
lution and arming the sales team with fact-based differentiation around business
impact
• EXPAND CUSTOMERS, by fortifying their value proposition with independent
fact-based research and demonstrating installed base proof points
Our History of Integrity

Aberdeen was founded in 1988 to conduct fact-based, unbiased research that delivers
tangible value to executives trying to advance their businesses with technology-enabled
solutions.
Aberdeen's integrity has always been and always will be beyond reproach. We provide
independent research and analysis of the dynamics underlying specific technology-
enabled business strategies, market trends, and technology solutions. While some reports
or portions of reports may be underwritten by corporate sponsors, Aberdeen's research
findings are never influenced by any of these sponsors.
AberdeenGroup, Inc. Founded in 1988, AberdeenGroup is the technology-

260 Franklin Street driven research destination of choice for the global
Boston, Massachusetts business executive. AberdeenGroup has over 100,000 re-
02110-3112 search members in over 36 countries around the world
USA that both participate in and direct the most comprehen-
sive technology-driven value chain research in the
Telephone: 617 723 7890 market. Through its continued fact-based research,
Fax: 617 723 7897 benchmarking, and actionable analysis, AberdeenGroup
www.aberdeen.com offers global business and technology executives a
unique mix of actionable research, KPIs, tools,
© 2005 AberdeenGroup, Inc. and services.
All rights reserved
November 2005
The information contained in this publication has been obtained from sources Aberdeen believes to be reliable, but
is not guaranteed by Aberdeen. Aberdeen publications reflect the analyst’s judgment at the time and are subject to
change without notice.
The trademarks and registered trademarks of the corporations mentioned in this publication are the property of
their respective holders.

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Executive Summary .............................................................................................. i

Chapter One: New Pressures Require New Organizational Model .....................1

Chapter Two: Implications and Analysis ..............................................................4

Chapter Three: Recommendations for Action .....................................................8

Chapter Four: Conclusions................................................................................. 15

Author Profile ..................................................................................................... 16

Appendix A: Research Methodology .................................................................. 17

Appendix B: Related Aberdeen Research & Tools ............................................. 18

About AberdeenGroup ...................................................................................... 19

Figure 1: Procurement Organization by Company Size .......................................4

Figure 2: Procurement Performance by Organizational Model.............................5

Figure 3: Reporting Line by Organizational Model ...............................................6

Figure 4: Procurement Automation Investment by Organizational Model.............7

Figure 5: Center-Led Procurement Operating Model ...........................................8

Figure 6: Closed-Loop Procurement Automation Infrastructure ......................... 13

Centralized Procurement Structures

Table 1: Attributes of Procurement Organizational Models

Technology •Technology decisions and •Technology decisions and •Technology decisions

Decentralized Procurement Structures

Center-Led Procurement: Model for Strategic Operations

Aberdeen research found that “center-led” procurement is the preferred organizational

Figure 1: Procurement Organization by Company Size

Source: AberdeenGroup, August 2005

Regardless of company size, the motivation for a center-led procurement structure is

procurement group typically results in decreased negotiation leverage and suboptimal

Figure 2: Procurement Performance by Organizational Model

Source: AberdeenGroup, August 2005

Figure 3: Reporting Line by Organizational Model

Source: AberdeenGroup, August 2005

Figure 4: Procurement Automation Investment by Organizational Model

Full e-sourcing 50%

Source: AberdeenGroup, August 2005

Figure 5: Center-Led Procurement Operating Model

Source: AberdeenGroup, August 2005

Executive Support and Reporting Structure

Multi-Year Supply Plan Aligned with Business Goals

2. Compliance management — which typically aligns procurement, finance, and

Coordinated Supply Metrics and Incentives

Integrated Source-to-Settle Infrastructure

tiations and analyze and determine optimal total-cost-based allocation decisions

Figure 6: Closed-Loop Procurement Automation Infrastructure

Source: AberdeenGroup, August 2005

The Importance of Integration

This research effort draws on the following AberdeenGroup research activities:

Our History of Integrity

AberdeenGroup, Inc. Founded in 1988, AberdeenGroup is the technology-

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