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Measuring procurement performance can be as complex and nuanced as the value that the procurement function can deliver. The results from some procurement-led strategies are more complex to understand than others.
Consider demand management, where many Chief Procurement Officers (CPOs) like to highlight that “the best way to save money is not to spend it.” Procurement can influence category usage in several different ways like the sourcing decisions it makes, the training and coaching it provides during implementations/roll-outs, and the general education it can provide. The benefits of a strong demand management program can be substantial, but the correlation to and/or causation by procurement actions can be difficult to assess. Additionally, the results from demand management strategies can be nearly invisible when analyzing the company’s financials. Tools like automated spend analysis, which can provide a detailed view of spend at the category and supplier level, are needed to see the full results of this strategy.
Compounding the issue is the fact that many of the metrics that CPOs use to measure departmental performance never hit the general ledger. One example is the difference in how implemented savings and budget-impact savings are tracked and reported. Through no fault of procurement, implemented savings, which are a real and quantifiable benefit to the enterprise, may not translate fully into budget-impact savings. While most procurement organizations have a defined performance plan, many have difficulty clearly defining a broad set of metrics that link to the value that procurement delivers. The three most common yet difficult to define are savings, procurement return on investment (ROI), and spend under management. Here’s why.
CPOs who believe that they have a successful partnership with their CFO often define that success and their alignment with the CFO almost solely in the context of having an agreement on the definition of performance metrics, specifically savings. But, having alignment on measurements is not the same thing as having alignment on values. Savings presents several challenges to the average CPO in both how it is measured and by whom; procurement departments also face the risk of marginalizing other areas of potential value when savings is the sole focus.
- Procurement ROI
While Procurement ROI can be useful in measuring relative efficiency improvements for a procurement department and justifying the business case for an investment in more procurement resources, it is a poor comparative metric when used to measure procurement departments at enterprises of different industries, regions, or sizes. CPOs should be wary of consultants and analysts that utilize Procurement ROI as a primary benchmarking metric and a driving force behind recommendations. Additionally, while CPOs may make decisions in an attempt to improve this metric, those decisions should not be pursued at the cost of incremental enterprise value.
- Spend Under Management
Spend under management refers to the percentage of total enterprise spend (which is comprised of all direct, indirect (including capital), and services spend) that a procurement organization manages or influences. Ardent Partners is a strong proponent of the importance of this metric in understanding procurement performance. Without undermining the importance of other procurement metrics, like savings; at present time, spend under management is procurement’s “gold standard,” a common metric of performance and impact that can be uniformly applied to procurement organizations of any ilk. For every dollar/euro that is placed under management of the procurement department, the average enterprise sees a benefit of between 6% and 12%.
Measuring business performance of any kind is dependent upon tracking the right performance metrics – metrics that fully, fairly, and accurately account for the sum total of value that practitioners deliver to the enterprise. Measuring the wrong ones, or being held to performance metrics that do not capture the total value that procurement, can “short” the organization of the credit they are do. While savings and procurement ROI may seem like the key performance indicators with which to judge procurement’s value, spend under management is the clearest, simplest, and fairest measure of procurement performance. Paradoxically, the more spend an organization pulls under its influence, the more it can save and the more ROI it can demonstrate for the enterprise.