How to size a Procurement Organisation for indirect spend

When having to shape a ‘TO-BE-best-in-class’ Procurement organisation, right sizing the organisation is one of the first matter that comes to the table and that needs an answer. Let me share my experience and personal view on this. As usual, I’ll keep the post short for fast reading. I look forward to answering any missing point.

First of all and to make it easier to understand, let’s assume that the company we are considering has following characteristics :

• $1,3  Billion  of indirect / non-core spend in scope
• Presence in 20 countries
• An average of 3 sites per countries
• Sourcing and Procurement technology already in place
• World wide Sourcing and Procurement shared service centers already in place

Now here is my 3 step approach

1. I’m sizing the organisation based on an average spend/FTE and company organisation
2. I run a competitive approach then : I’m sizing the organisation based on Procurement Operating Costs/Addressable Spend
3. I compare the 2, analyse the gap and take a position between the 2, not necessarily the mid-point

So, applying this above to our initial assumptions, here we go:

•  I consider only $1 Billion as addressable i.e. accessible, demand-manageable, sourceable-negotiable
  • Tip 1 : I consider a gap of ~30% between spend in scope and addressable of total spend  is due to common non-influenceable spend categories)
• I assume $20 Million of spend can be managed by 1 Procurement FTE so this leads to 50 FTEs
  • Tip 2: this benchmark varies  from one industry to the other but I $20m has proven to be a good average. You can use CAPS Research public benchmarks to finetune this number
• I adjust this number according to the number of sites in scope, considering a) 80% of the spend is concentrated on 30% of sites and b) that you need at least 1 extra FTE on those sites i.e. 30% *3 sites * 20 Countries *1FTE = 18 FTE, so this lead to 68 FTEs
  • Tip 3: Local presence is key although trend is to get shared services as much as possible. You can play with the 30% or even use real % to be even more realistic.
• I assume $100K Loaded Cost (LC) per FTE. In the current example: 68 FTEs * $100K = $68m / $1B = 0,68%.
  • Tip 4: Use real average data as much as possible for LC.
• Best in class are at ~0,6% and this would lead to 60FTEs based on $100k LC per FTE. I take a median position and estimate the targeted size to be 64 FTE.