Procurement functions today face a perfect storm: an unpredictable macro landscape paired with an avalanche of digital disruption. In this context, procurement functions are under pressure to deliver more value with fewer resources. Our research shows that the procurement function’s spending managed per full-time equivalent (FTE) is 50 percent more today than five years ago.1
Where do we go from here? Companies worldwide have begun to embrace artificial intelligence (AI) agents to automate repetitive tasks and accelerate impact. AI agents will radically affect the procurement organization, making it more efficient, more agile, and increasingly strategic. These procurement agents are advanced AI systems designed to ingest context, make decisions, plan work, suggest options, and act autonomously. They will accelerate the transition to a hybrid workforce where procurement professionals coexist and collaborate with their digital coworkers. This shift could result in the procurement function being 25 to 40 percent more efficient, according to our analysis, while repurposing team activity from routine tasks to strategic decision making.
This article examines how procurement functions are reorganizing and reshaping in response to today’s challenges and opportunities.
Reorganizing procurement functions for the future
At McKinsey’s recent CPO Executive Forum, procurement leaders listed their top priorities as organizational stress and talent, new capabilities and tasks required for the purchasing function, and acceleration of digital enablement. None of those issues appeared in the top three when we asked the same question in previous years.
The attention directed to these issues matters because operating-model maturity is highly correlated with profitability, according to 20 years of data from using McKinsey’s Global Procurement Excellence (GPE 360) survey to benchmark procurement function maturity. Procurement functions that facilitate the best quality, engagement, and cost performance have achieved a tangible EBITDA margin impact of five percentage points or more. Our analysis also reveals that leaders in procurement take a more holistic approach to value creation throughout the source-to-pay continuum and emphasize demand, partnership, and flexibility beyond commercial terms.
At one global advanced-industries company, procurement is transitioning into a strategic, center-led function that is automating processes to free up resources for strategic category management. A global insurance company has increased its strategic head count by 20 percent, creating a center of excellence (COE) with more than ten new skills and doubling the spend under procurement’s influence. Meanwhile, many private equity portfolio companies with smaller departments and more limited resources see high ROI in appointing a central chief procurement officer (CPO). In our client work, these upgrades yield savings of 10 percent or more in subsequent value capture programs.
Lessons from procurement leaders
To dig into examples such as these, we recently surveyed more than 300 procurement leaders across sectors, including advanced industries; consumer; finance and insurance; life sciences; global energy and materials; technology, telecommunications, and media; and travel, logistics, and infrastructure.2 These organizations represent a broad spectrum of third-party spend, ranging from $100 million to $100 billion, with procurement team sizes ranging from 25 to 500 employees.
The survey revealed several insights relating to organizational design trends and best practices.
Procurement is a strategic driver of value generation
Procurement’s role as a strategic driver of value is evident within organizations. Two-thirds of respondents say they report directly to the CEO or CFO (Exhibit 1). At the same time, sectors such as advanced industries and life sciences often place procurement under the chief operating officer (COO) or chief supply chain officer (CSCO) to drive operational efficiencies and support risk management.
Strategic category management is now table stakes
Leading procurement functions segregate strategic and transactional roles with clearly delineated competency requirements for each. Two-thirds of the respondents report that their companies separate strategic and transactional procurement activities, allowing teams to focus on higher-value initiatives (Exhibit 2).
However, the segregation trend is mixed across industries. While only half of companies in travel and leisure have separated strategic and transactional, more than three-quarters of consumer and advanced-industry companies have done so. The value to be unlocked from effective segregation of responsibilities can be significant. One cruise line achieved major improvements in cost when it created a strategic category management function and executed new strategies across all its primary categories. Despite having a procurement department of fewer than 100 people, it made the organizational design and technology changes required to enable the split of activities. The change supported better relationships with key suppliers, which in turn improved supplier performance and on-time delivery.
Elsewhere, a power generation OEM struggled to manage costs until it set up a new strategic sourcing organization to collaborate directly with product development and engineering for new projects. In doing so, the company achieved 11 percent cost reductions over 12 months.
Centers of excellence are scaling capabilities
Over half of respondents say their organizations now have a dedicated COE; the larger organizations are more likely to invest in this capability. A COE can drive value creation by standardizing and optimizing processes, facilitating the sharing of knowledge and best practices, and enabling advanced analytics for insight generation.
Leading procurement organizations look to their COE to offer additional value-adding services, such as cost engineering, integrating these into their working methods (Exhibit 3). A specialty chemicals company that leveraged its COE to develop should-cost modeling capabilities saved 13 percent in raw-materials spending.
That said, COEs’ capabilities most often include process excellence, risk management, and environmental, social, and governance (ESG) management in their organizations, highlighting an opportunity for COEs to build out more advanced capabilities. In leading functions, the COE codifies, maintains rigor, and defines the organization’s approach in topics such as AI, analytics, or e-sourcing.
One industrials OEM provides compelling evidence for this approach. The company made several changes to its operating model—including elevating the COE’s accountability to the CPO level; introducing a new governance model, digital tools, and analytics; and training for category managers. Through these changes, it achieved $370 million in cost savings in year one, with millions more projected over the next three years.
Procure-to-pay systems are underleveraged
Attendees at previous McKinsey CPO Executive Forums told us that a lack of focus on user experience was holding back the use of advanced technologies in their organizations. This has led to relatively low adoption of procure-to-pay (P2P), supplier relationship management (SRM), and e-sourcing software, even though many of these tools and capabilities are widely available. Among attendees at our latest forum, only 60 percent of large and 30 percent of small organizations have a P2P system, which has potential to deliver a 2 to 5 percent cost reduction. Thus, P2P implementation is an opportunity that many procurement teams can still tap.
A case in point is the use of e-sourcing solutions. Only a third of attendees at this year’s forum report that their companies are using these systems, despite their proven value in, for example, managing the long tail to unlock significant savings. One company has seen the use of e-sourcing tools enable a 20 percent cost reduction in the typically complex maintenance, repair, and operations (MRO) category. In contrast, the other two-thirds of companies—organizations of all sizes—are leaving value on the table.
Procurement teams are steadily adopting advanced analytics and gen AI. Forty percent of procurement functions have implemented or piloted gen AI (Exhibit 4). Organizations that embrace these technologies report significant benefits, including a 20 percent savings potential from deploying analytics tools.
One global pharmaceuticals company is doing this through an AI-based invoice-to-contract reconciliation tool. A successful proof of concept developed in just four weeks identified more than $10 million in value leakage, prompting supplier renegotiations to claw back lost value.
Strategic offshoring can drive operational efficiency
While offshoring and outsourcing remain important levers for optimizing procurement operations, they are not used as much as might be assumed. Well-documented, routine processes such as purchase order creation and invoice processing are offshored by two-thirds of organizations. These processes may also be most susceptible to agentic-AI- and gen-AI-powered automation, which has triggered a wave of insourcing for organizations that have traditionally outsourced these activities.
Procurement organizations reimagined
Given the complexities of today’s operating landscape, adjusting the procurement operating model is no longer an option but a business imperative. Our analysis suggests that technology will reshape the procurement function into an organization that is 25 to 40 percent more efficient (Exhibit 5), more agile, and increasingly agentic. This transformation requires procurement to shift from the role of an order taker to that of an embedded, enabling, and empowering function that guides business behavior and drives better outcomes.
The reduction in hours spent on transactional work, now shifted to agentic AI, can enable procurement employees to devote more of their effort to strategy. Rather than micromanaging all purchases, procurement streamlines this work by utilizing established, flexible frameworks, approved vendor lists and catalogs, and dynamic buying channels to steer employees toward the right decisions.
This reimagined approach can ensure that procurement meets the growing expectations placed upon it for efficiency, but its value is far broader. By moving from transactions to strategy, procurement will be recognized for its expertise and knowledge of supply markets and industry trends, and its input will be sought and incorporated within business planning cycles. And in many cases, procurement can become an early champion for enterprise rewiring in the age of AI.
