What’s the difference between Procurement Value and Procurement Performance? (Part 1)

The answer to the title of this blog post is: A LOT! Let me rephrase: How well does your Procurement scorecard REALLY reflect the Procurement value that you deliver? Obviously, purchase-price reduction is a narrow metric for value creation. Procurement value in pure economic terms is about more bang for the buck where “bang” is the utility the business gets from supplier products/services, divided by the bucks (i.e., spend), which then decomposes to activity vs. cost and then cost decomposes again down to price and non-price costs. So there's potentially a lot of value not being measured. For example: who usually gets blamed for the failure of supply assurance? Procurement. So, Procurement should be measured explicitly on supply risk on a top-level scorecard, and have associated resources for that. Less than 10% do, and that is obviously a problem.

When we first start working with CPOs in our advisory program, we start with their scorecard, then ask them for their elevator-pitch vision of Procurement -- and examine how well those match up. Usually, there are disconnects. Procurement usually wants to expand its "circle of influence" (a Stephen Covey term applied to spend influence), and get out of the PO-processing and emergency tactical-sourcing game -- even if the business isn't as inclined. So, Procurement needs to reach consensus with the business on the value it wants from the supply base, then work backwards to how Procurement can help improve that performance -- then build the Procurement scorecard around that.

So, start with consensus on IMPORTANCE/VALUE of spend management processes (or Procurement Services if you will) before setting targets on the wrong metrics for delivered PERFORMANCE. In Six Sigma DMAIC terms, DEFINE realistic spend/supply management value, MEASURE current performance along those dimensions of your future scorecard, ANALYZE improvement potential, IMPROVE performance (e.g., via category management teams), then CONTROL the new processes to hold the gains (e.g., spend compliance, supplier compliance, process compliance, etc.). In "magic quadrant" terms (but applied to practitioners rather than providers), get a consensus view of "Completeness of Vision" of the spend/supply management services before measuring Procurement's "Ability to Execute" against them.

Both are important. Too much vision and not enough execution is a sure fire way to have a short tenure as CPO.  Similarly, too much flawless execution against narrow and low impact procurement processes is not a recipe for long term success.  So, the path lies in a the continual elevation and lockstep alignment of procurement value (i.e., strategic services vs. tactical), performance (i.e., execution against service levels), and capabilities (i.e., ability to do previous two) that really help a procurement organization evolve to higher value levels, execute, and repeat.

In part 2 of this post, I'll discuss how to better measure Procurement performance for these increasingly complex value streams within the Procurement service mix, and how to get better alignment with stakeholders -- especially Finance.

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