Before starting today’s article, I’d like to welcome all readers to join the Ardent Partners Supply Management Research Group on LinkedIn by clicking here. Joining this group is one new way to connect with our research team and continue the conversations that get started on this site – thanks!
Ardent Partners’ annual CPO Rising research report is now available. I called this year’s report, CPO Rising 2014: Convergence and it presents a comprehensive, industry-wide view into what is happening in the world of procurement and captures the experience, performance, perspective, and intentions of 273 Chief Procurement Officers and other procurement executives. It is available (after registration) from several sponsor sites including here, here, here, here, here, or here.
How Do You Define Spend Under Management
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: Chief Procurement Officers 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.
I’ve personally overseen more than 100 market research efforts focused on supply management. In these research efforts, we capture operational and performance statistics (or benchmarks). To provide greater context to the 2014 Procurement Benchmarks captured in this year’s “CPO Rising” research effort captured the definitions used for both spend under management and savings by CPOs and procurement organizations around the world. While a variety of definitions for ‘spend under management’ are used, the most common one focuses on procurement’s “influence” (54%) and the role the department plays in guiding or driving decisions. While this definition is potentially ambiguous, the market favors this definition, most likely because it is the most broadly applicable definition on the list since it does not require any procurement systems to be in place. While several of the other definitions are more easily quantified, they are significantly less popular among procurement executives today. As a profession, it is time for procurement to develop an industry-standard definition for its core measure[1].
Not surprisingly, “savings,” an inherently more complex metric than “spend under management,” has greater disparity among the definitions used by procurement teams today. Ardent Partners has long argued that “implemented savings” should be the preferred savings definition because it captures the benefits that accrue to the enterprise and is not reliant upon third-parties to negotiate its acceptance in a budget. Exactly half of all CPOs favor a definition based upon implemented savings, although that group is split on whether cost avoidance should be included: with 26% of respondents not counting cost avoidance and 24% incorporating it into their definition. As if to bolster the argument against using savings as a metric to evaluate procurement’s performance, nearly one-in-four procurement teams lack a clear definition of savings working either with an imprecise definition (6%) or a combination of measures (17%).
How does your procurement department define spend under management? We want to know. To share your definition: email us, post a comment in our LinkedIn group, or write an article to be published on CPO Rising.
[1] Contact me or the site editor if you have a view on a definition or would like to participate in the effort more broadly or write an article sharing your views to be published here.
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