I have been reading a McKinsey article on procurement, titled “A next generation operating model for source-to-pay”, authored by Samir Khushalani and Edward Woodcock
At the centre of the article is a “honeycomb” framework (see exhibit).
So I thought I would try to link this framework with the Operating Model Canvas (see exhibit).
The value capture and value sustainment parts of the McKinsey framework seem to address the Processes or Value Delivery Chain middle arrow of the Canvas:
- Translate business strategy into procurement strategy working with colleagues from outside the function to ensure alignment
- Manage categories both by managing the suppliers and by influencing colleagues
- Contract with suppliers based on the category strategy, McKinsey’s “Source to Contract” step
- Place and expedite purchase orders with suppliers and receive and qualify goods (or enable colleagues to do so). This is McKinsey’s “Procure to Invoice” step
- Process and pay invoices, McKinsey’s “Invoice to Pay” step
- Manage supplier relationships
Because the function is Procurement, the Supplier box in the Canvas becomes incorporated into the value chain: much of the value chain is about choosing suppliers, developing contracts with suppliers and managing relationships.
The McKinsey honeycomb’s outer ring broadly aligns with the other elements of the Operating Model Canvas:
- The Suppliers box in the Canvas has already been covered in the value chain
- The Organisation box is covered by “Organisation” and “Capabilities and Culture”
- The Information box is covered by “Data & Analytics” and, to some degree, “Digital”
- The Management System box is covered by “Governance”
This leaves three issues for discussion. The “Processes” element of the McKinsey framework is one of these. The article explains “In a next-generation operating model, processes are not only harmonized across business units and geographical regions but also employ category-specific solutions that streamline approval processes for the user journeys associated with a particular channel and category.” In other words, McKinsey’s “Processes” element appears to be about “value chain mapping” drawing value chains for each category. This tool helps organization designers decide what parts of the value chain should report to categories, and hence potentially be different for different categories, and what parts should report to central functions within Procurement. For example, the first step – “procurement strategy” – could report centrally and the last step – “manage supplier relationships” – could report to the category managers. “Invoice to Pay” would typically report centrally, but there might be category specific elements in the process. “Manage categories” would report to the category manager, and might be very different for different categories.
The second issue concerns the Locations box in the Canvas. It does not seem to be represented in the McKinsey framework. This is surprising. Location of staff is an important issue in designing the operating model of the procurement function. It is important to decide which staff should be located near suppliers, which staff located near other internal functions and which staff need to be collocated to smooth collaboration within the function.
The third issue concerns “Digital” in the McKinsey framework. As the article states, “Advanced procurement organizations are increasingly making use of automation technologies to eliminate unnecessary manual work from transactional processes. Digital approaches can also enhance user experiences by making access to procurement services easier and more intuitive.” Does the Operating Model Canvas need another box for Digital?
My answer is no, for the same reason that the Operating Model Canvas did not include a box for technology. The middle arrow in the Canvas is about the work steps and the machinery and technology needed to execute these work steps. The Information box is about the information systems needed to support these work steps (and the management system). Digitization is muddying this distinction. Digitization means that a number of work steps will be done by computers. The temptation is then to see these steps as being part of the Information box rather than the middle arrow. The same confusion is happening inside organizations wrestling with whether digitization should be led by the IT function or by a separate team. What is important is that all operating model designers recognize that there are two very different tasks – digitizing the work steps and providing information systems. Because some of the skills sets are similar and the need for collaboration between the two tasks is high, many have chosen to have both tasks led by the IT function.
So where have we got to? First, McKinsey’s honeycomb framework is very similar to the Operating Model Canvas, although it may overlook the locations issue.
Second, while the article claims to describe “A next generation operating model” for Procurement, in fact it just raises some issues that operating model designers should consider when designing future operating models. It provides a value chain and makes some interesting observations about what activities in the value chain will need to change in the future and how priorities might be redistributed. It emphasizes the influence digital will have on these value chains and suggests that “category specific” value chains may also be part of the future.
But the article does not provide an organization structure or suggest what sort of information support is needed or how to resolve the locations issues or how to define those suppliers that need to be managed through collaborative agreements or what type of management calendar or scorecard is suitable for running the next generation procurement function. If McKinsey was using the Operating Model Canvas as its framework for operating model work, all of the above questions would have been top of mind and the authors might have more fully delivered on the article’s promise.
Third, the honeycomb framework attempts to address the issue of value creation, distinguising between “enabling”, “capturing” and “sustaining”. I have been wrestling with how to link value to operating models for my course Designing Operating Models. It is easy when working on an operating model for a business because revenues can be offset against costs, and , as with lean analysis, “waste” or “lack of value” is any cost that does not deliver more than its weight in “value”. However, retaining a focus on “value” when doing an operating model for a function like Procurement is harder. McKinsey’s ideas have got me thinking … which will hopefully lead to a future blog.