The Gold Standard – Reprise

The Gold Standard – Reprise

Among other topics, Ardent Partners’ upcoming report The CFO and the CPO: One World, Two Worldviews tackles the big issue of procurement performance measurement. This article looks at a golden oldie of a metric – Spend Under Management.

Over the course of my career in supply management, I have had the great fortune to work with a large number of highly successful CPOs and procurement organizations that have successfully transformed their operations into well-oiled machines that often manage more than 80% and sometimes more than 90% of total enterprise spend.

This percentage of enterprise spend or spend under management refers to the percentage of total enterprise spend (primarily all direct, indirect, and services spend) that a procurement organization manages or influences. I have been and continue to be a strong proponent of the importance of this metric in understanding procurement performance. I believe that procurement organizations, at any maturity level, should focus on this metric and have a strategic plan to increase it each year. The reasoning for this is clear: CPOs that have the visibility and control over such a significant majority of enterprise spend have an extraordinary opportunity to drive value, be it in savings, quality, innovation, supply assurance, and/or any of the tens of other metrics that procurement can impact, across the larger enterprise.

Without undermining the importance of other procurement metrics (read: 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. Applying this metric as a gold or industry standard has great applicability in today’s environment because, by and large, there is a very high correlation between having a high percentage of spend under management and managing it efficiently and effectively. But, as more procurement organizations place more spend under management, that correlation will decrease and the value of this metric will inevitably erode. It will not be a shock when the time comes to move from this standard, it will be a natural progression. Newer, more refined metrics and along with them, newer, more refined maturity models will be needed to help guide procurement organizations as they progress towards operational excellence.

I have been thinking about these new metrics and maturity models for several years and they will become an increasingly important area of focus for me over the next few years. I am looking for interested parties. Please email or comment if you’re interested in collaborating on these topics.

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2 Comments

  1. Hi Andrew,

    IPG is very interested, moreover we invite organizations and think tanks to unite and cooperate to research and lobby this.

    Obviously, I would like to apply these metrics (and not only these) across the board, but…..

    Spend Under Management is very much linked to decision making/sourcing.

    The figures that you mention (80-90% of total enterprise spend) are true for either big corporation or very small businesses. Fortune 100 companies have well-developed procurement teams within the company that can run well-oiled procurement machine.

    Small businesses run 80-90% of their spend either because the main investor manages procurement or he/she is simply the only decision maker.

    In medium enterprises or public organizations the picture is completely different. Those do not yet have “well-oiled” procurement machines or neglect a spend as matter of important. In public organizations CFO and CPOs are not decision makers but only implementors.

    I wonder if you differentiate these types of procurement management in your report or it reflects Fortune 100 only?

    Thanks

  2. Levon –

    Thanks for the note – you make an interesting point!

    In my experience benchmarking thousands of different procurement departments, I’ve seen that the typical SMB procurement department lags its larger counterparts, but I am always surprised by how many large companies have not “figured it out.” There are many trends that favor large advances for mid-sized procurement departments in the next few years. This topic is worthy of a longer response…. in article format, so watch for that.

    Also, while it depends on the topic, I generally try to make my research accessible/usable for enterprises of all sizes, regions, and industries, including the public sector. I think the fact that so many challenges are universal aids in this effort.

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