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

Today I'd like to welcome my old friend and colleague, Pierre Mitchell, to Spend Matters. In a series of posts, Pierre will be sharing his thoughts and soliciting input on key issues pertaining to procurement value and procurement performance. - Jason

I'd like to thank Jason for letting me guest post. I remember about a year before Jason started Spend Matters, we were enjoying a drink at WorldSource, the old FreeMarkets conference, and talking about how we should set up a blog in the procurement area. Flash forward to today, and Jason has the most successful blog in the space. Well done! Jason has been gently prodding me to do the same, but I've been foolishly absent aside from the occasional conference presentation, article, webcast, etc. This will change soon, but until then …

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 sphere of influence and associated capabilities (Capability is the third key dimension besides Value and Performance), 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 Gartner terms (but applied to users rather than vendors), get a consensus view of Completeness of Vision of spend/supply management before measuring Procurement's ability to execute.

When we measure firms at a high level in our program (or in great detail via our fee-based benchmarking projects), we break out ability to execute into proven performance as well as into predictive performance (i.e., measurement of capabilities). Both are important, and we drill these down into the elemental effectiveness/efficiency performance metrics and best practice metrics that roll up (via spend categories, sub-processes, etc.) to the aggregate performance and capabilities, respectively. It's the continual elevation and lockstep alignment of value, performance, and capabilities that really help a procurement organization evolve to higher value levels -- and then execute at world-class performance levels.

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.

- Pierre Mitchell

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