What is procurement? Definition, benefits, challenges, and how to approach (with examples)

Most types of businesses need to purchase things to function, whether that’s a greengrocer buying vegetables or a manufacturing plant investing in new machinery. Regardless of the scale, industry, or value, these transactions form part of a strategic process called procurement.

Procurement is the act of identifying, sourcing, and negotiating the terms for the goods or services a business needs to operate. When handled well, it can help organisations control costs, reduce risk, and build stronger supplier relationships. When handled poorly, it can lead to weak contracts, unreliable suppliers, and avoidable costs.

What is procurement?

Procurement is the business process organisations use to acquire goods, services, or works from external sources. This can cover anything from office equipment and software to consultancy, raw materials, or long-term supply contracts.

No company can deliver everything it needs to function in-house. So, they need to source suppliers to provide anything and everything from raw materials to logistics. When done correctly, procurement can help organisations:

• Control costs without disrupting quality
• Improve supplier relationship management
• Reduce operational and commercial risks
• Improve service delivery
• Access specialist expertise
• Create long-term value for the business
• Protect cash flow via improved payment terms

Efficient procurement process is important since poor supplier decisions can create lasting commercial and operational problems.

Who is involved in the procurement process?

Procurement works best when it isn’t siloed to a single person. Even when a dedicated procurement manager leads the process, it helps to involve multiple people in the final decision.

Some of the main parties involved across the entire procurement lifecycle include:

• Procurement professionals, such as chief procurement officers, who manage the process, supplier engagement, evaluation, negotiation, and contract award.
• Internal stakeholders who understand the business need in practical terms. They may include department heads, project managers, technical specialists, operations teams, or end users.
• Finance teams responsible for assessing budgets, costs, payment terms, and financial risk management.
• Legal teams that review contracts, liabilities, obligations, data protection issues, and termination clauses.
• Senior decision-makers who may approve major purchases or strategic supplier relationships across the procurement lifecycle.
• Suppliers who propose solutions, clarify what they can deliver, and negotiate contracts and terms of the agreement.

Effective procurement depends on internal alignment among these groups. Before opening discussions with any potential suppliers, it’s worth negotiating internally to understand what really matters for the business.

What can be negotiated during procurement?

Procurement negotiation should consider the full shape of the deal, not just the upfront price. By identifying where value can be created, protected, or traded, organisations can find more useful areas to negotiate.

Some of the main reasons for procurement negotiations highlighted by Chartered Institute of Procurement & Supply include:

• Price: The overall cost, unit rate, discounts, or pricing structure.
• Payment terms: When payments are made, whether staged payments are possible, or whether early payment discounts apply.
• Volume commitments: Whether larger order volumes, minimum commitments, or repeat business can yield better terms.
• Contract length: The duration of the agreement, renewal options, break clauses, or trial periods.
• Delivery schedules: Lead times, phased delivery, urgent orders, or penalties for late delivery.
• Service levels: Response times, availability, performance standards, escalation routes, and support hours.
• Implementation support: Onboarding, training, account management, technical support, or transition planning.
• Quality standards: Product specifications, service expectations, testing requirements, or acceptance criteria.
• Warranties and guarantees: Repair, replacement, refunds, maintenance, or performance guarantees.
• Risk allocation: Liability, insurance, indemnities, data protection, supply disruption, and responsibility if things go wrong.
• Review points: Regular contract reviews, performance meetings, price reviews, or opportunities to adjust the agreement as circumstances change.

What are the different types of procurement?

There are two main types of procurement, with each one focusing on different priorities, risks, and negotiation opportunities. Understanding the differences is important, as many organisations use a combination of procurement types to acquire the goods and services they need. They include:

1. Direct procurement

Direct procurement is the sourcing of goods, materials, or components that are directly used in producing a company’s products or services. It often involves balancing cost, quality, availability, and supplier reliability. Direct procurement covers any components that go into a finished product, including:

• Raw materials
• Mechanical parts
• Ingredients
• Products for resale
• Packaging

2. Indirect procurement

Indirect procurement is a way to secure services not used in manufacturing but that support production and day-to-day operations. This form of services procurement may not directly generate revenue, but it helps the business operate effectively. Some examples include:

• Facilities management (rent or leases on property)
• Utilities
• Maintenance of equipment, such as office supplies
• Furniture
• Advertising
• Human resources

What is the process for procurement?

Every procurement process is different, shaped by what the organisation requires and the overall contract value. That said, procurement generally follows a similar sequence, which is:

1. Identify the need

The procurement process begins with identifying what the organisation needs. This should typically cover why the purchase is necessary, the desired outcome, the budget, and any constraints.

2. Define specifications

Specifications outline what the supplier will provide. This can cover technical requirements, supplier performance expectations, delivery timelines, supply chain management, and other key areas or metrics.

3. Research the supplier market

Before approaching suppliers, the business should understand what the market can offer. This may involve reviewing existing suppliers, identifying new providers, benchmarking costs, and assessing availability for strategic sourcing.

4. Request quotes, proposals, or bids

Depending on the size and complexity of the purchasing process, the buyer may ask potential suppliers to submit a quotation, proposal, or formal tender. This stage allows suppliers to explain what they can deliver, how they would deliver it, and on what terms.

5. Evaluate supplier responses

Supplier responses are then assessed against agreed criteria. These criteria should cover price, quality, experience, operational efficiency, delivery capability, risk, and contractual terms.

6. Prepare for negotiations with a BATNA

As part of negotiation preparations, it’s useful to consider a backup plan in case talks stall. This is known as a Best Alternative to a Negotiated Agreement (BATNA), and is a way to handle an impasse during negotiations. If an organisation can’t reach an agreement with its chosen supplier, then a BATNA is the next best available option. This could mean approaching alternative suppliers from the shortlist, extending an existing contract, or delaying the purchase, to name a few.

7. Negotiate

Once preferred suppliers are identified, it’s time to negotiate. Negotiations can cover pricing, payment terms, service levels, delivery timelines, contract length, risk allocation, and other aspects of the contract.

8. Award the contract

After negotiation, the contract is awarded to the chosen supplier. At this stage, the agreement should be clearly documented so both sides understand what has been agreed.

What are the main challenges in procurement?

Procurement can create major value and cost savings, but there are often challenges along the way. Many of these hurdles appear before the final negotiation even begins, which means preparation and procurement management are key. Common challenges include:

Unclear business needs

Without clear requirement definitions, suppliers may respond with unsuitable proposals. This can waste time, create poor comparisons, and lead to weaker contracts.

To prepare, procurement teams should define the must-haves, nice-to-haves, success criteria, and decision-making process before engaging suppliers. The clearer the brief, the easier it becomes to compare proposals and negotiate from a strong position.

Too much focus on price

As we touched on earlier, negotiating prices is important, but it is certainly not the only measure of value. A low-cost supplier may end up being expensive if they miss deadlines, fail to meet quality standards, or need constant vendor management.

Buyers should look beyond headline cost control and consider total value. This might include service levels, delivery reliability, flexibility, risk, innovation, aftercare, and long-term fit. Setting these criteria early helps avoid decisions based on price alone.

Poor internal alignment

Procurement department often needs to balance competing priorities across teams. Without agreeing on these priorities early, the process can quickly become confusing.

A good way to address this is to involve key stakeholders before going to market. Agree on objectives, non-negotiables, trade-offs, and decision rights. This helps the procurement team stay focused and reduces the risk of late-stage disagreements.

Weak supplier information

Good negotiation depends on good information. If the buyer does not understand the supplier market, typical pricing, delivery constraints, or alternative options, they may enter the negotiation at a disadvantage. 

To avoid this, procurement teams should conduct market research, benchmark pricing where possible, assess supplier strengths and weaknesses, and understand where they have genuine leverage. The same applies to suppliers; if they do not understand the buyer’s priorities, they may pitch the wrong value.

This research also helps buyers understand their BATNA, so they know what realistic alternatives are available if the preferred agreement cannot be reached.

Conceding without trading

One of the most common procurement negotiation mistakes is making concessions without receiving anything in return. In negotiation, movement should be conditional. If one side gives something, they should look for something in return.

To plan for this, buyers should plan their concessions carefully. Know where flexibility lies, where it doesn’t, and what to ask for in exchange. This makes it easier to protect value during the negotiation rather than giving ground too quickly.

Case study: The NHS National Programme for IT

The NHS National Programme for IT was launched in 2002 with an ambitious goal of reforming how the NHS in England used patient information. The programme aimed to create a more connected digital health system, including electronic patient records that could be accessed across different parts of the NHS.

What went wrong?

The programme soon became associated with delays, implementation problems, and difficulties delivering systems that met the needs of NHS organisations. One of the core issues was that the programme was highly centralised, while the NHS itself is made up of many different organisations with different ways of working. This made it difficult to define requirements during procurement that worked across the full system.

Over time, the gap between the original ambition and what could realistically be delivered became clear. The UK Government announced the acceleration of the programme’s dismantling in 2011, following a review by the Cabinet Office’s Major Projects Authority. The Public Accounts Committee later stated that the original vision for the programme would not be realised, and that the NHS was receiving far fewer systems than planned, despite contractors being paid almost the same amount.

The programme is often associated with a cost of around £10 billion, with the Department of Health estimating final costs of £9.8 billion for programmes previously managed under NPfIT. However, it was not a complete write-off: some systems were delivered, while others were delayed, reduced in scope, or failed to meet the original ambition.

What procurement teams can learn from this

Three key lessons:

• Requirements need to reflect practical reality: Large procurement projects need more than a clear ambition. Buyers must understand how the solution will work for the people expected to use it, especially when different teams, sites, or organisations have different needs.
• Stakeholder alignment matters before supplier selection: Procurement cannot compensate for unclear internal agreement. If stakeholders are not aligned on priorities, processes, decision-making, and success criteria, the contract may fail even if the supplier can deliver parts of the specification.
• Complexity must be built into the procurement strategy: Large-scale procurement requires realistic timelines, flexible contracts, robust supplier management, and a clear understanding of alternatives. Without this, organisations can become locked into expensive agreements that no longer match what they need.

Improve procurement outcomes with better negotiation

Every procurement process involves choices. Some are about price, but many are about value, risk, service, timing, and long-term performance.

Strong procurement negotiation helps organisations make those choices with greater control. It allows teams to prepare more effectively, understand supplier priorities, trade rather than concede, and reach agreements that can be delivered in practice.

Scotwork helps procurement teams prepare with clarity, trade with purpose, and protect value under pressure. Speak to us about building the negotiation skills your team needs before the next supplier conversation begins.