Spend Matters would like to welcome back Pierre Mitchell, in his second post in this series..
In Part 1 of this two-part post, I talked about the importance of separating the notion of procurement VALUE (how strategic is the value delivered to the enterprise by Procurement's services?) from procurement PERFORMANCE (how effective and efficient is the performance for each service?). In this part, I'll talk about how to better measure that performance … and I’ll also ask for your help.
Measuring procurement EFFICIENCY is relatively straightforward in terms of looking at procurement FTEs, process costs, cycle times, etc. (I humbly submit that nobody measures this as well as my firm.) That said, it can be more complex than many think. For example, dividing your procurement budget by your total number of POs is a REALLY stupid way to measure a "Cost per PO" metric! I won't tell you why (hint: think activity-based costing).
Anyway, EFFECTIVENESS is a trickier metric, especially as you move from Price to TCO to Spend Magnitude and finally to the Value of that Spend (e.g., faster time to market, better innovation, better sustainability, etc.). In other words, increase your bang for the buck -- don't just reduce the number of bucks.
When we measure effectiveness in our benchmarking service, we look at cost savings, cost avoidance, supply base leverage, internal customer satisfaction (we actually measure stakeholder perceptions via senior stakeholder interviews as well as though a survey), supplier performance, and other well-known metrics. However, measuring performance-to-market, innovation performance, time-to-market performance, etc. gets very tricky, and there's a very real trade-off between the insights of these metrics and the effort to measure them. Part of the difficulty in measurement is the definition of the metric itself. We aim for the "middle of the bell curve" in terms of how companies measure cost savings and cost avoidance, but for years our clients have been asking us about how to broaden the definitions of delivered value -- while keeping it something that both the CPO and CFO/CEO can live with (many of our benchmark studies are commissioned by the CEO/CFO to get an overall readout on not just Procurement, but Finance, IT, HR, Supply Chain, etc.).
So, the first step is to understand the variation of measurement across the various procurement value streams. By seeing how your peers as well as top performers measure procurement value, you can make a case to your stakeholders that you're measurement system is too narrow relative to the delivered value that you provide the enterprise.
There's a dimension of measurement definition to this, and a dimension of process (e.g., how do realized savings get tracked to the bottom line?). Again, it's harder than many might think. In terms of definitions, think about cost savings: old price versus new price, multiplied by volumes. But … current or future volumes? Savings horizon: one year or duration of contract? If one year, current calendar year or split across the next few years? What if there is no baseline? Do you use initial bid? Average bid? If list price exists, is it allowed? And of course, what about realized savings versus negotiated? If you negotiate a deal, and then take down the budgets, is that “closed-loop spend management”? What about if savings aren't realized because of weak compliance? Then all you've really done is “forced demand management,” which might be fine for the CFO, but not the budget holder who now sees you as a budget reducer rather than value creator.
Anyway, given that we've seen only cursory research on these problems in the market, we've created a practitioner research study on it. The link is below (for firms with over $50M in spend, please). After registering for it, you'll receive an e-mail with log-in information so you can complete it at your leisure. It takes under 30 minutes. It gets into savings (and spend) visibility/tracking and saving booking/”crediting,” and assumptions around savings calculations. Best of all, it features ALMOST TWENTY unique value streams (not all are cost-related) on which we ask to see how you bucket and get credit from Finance. By seeing how others get that value captured, you can use that information to make a case to your own management. We'll be capturing both performance and best practices in order to generate a “top performer” / “top capability” view into the problem as well.
in a few weeks I'll post a few insights here on Spend Matters so that vendors can get some insight into this too -- this is a systemic problem that we ALL need to solve. The link below takes you to the study page, which describes the study in more detail. I look forward to your participation!
Also, we've created a shorter version for Finance, which we're sending to our Finance clients and research community, so if you want to send the following link to them, I'd appreciate it. This way we can really get all views on the problem and the solution:
Note: your survey information and credentials are strictly confidential and are never sent to ANYONE else. Only aggregate results from Hackett performance studies are shared with study participants and members in our Procurement Executive Advisory membership program. If you have any questions, please feel free to reach out to me at pmitchell (at) thehackettgroup (dot) com.
- Pierre Mitchell