Spend Matters welcomes a guest post from Josh Peacher, Senior Consultant within The Hackett Group's procurement practice.
Procurement organizations have historically measured success through purchase cost reductions. However, more and more companies are beginning to understand that procurement's value proposition is evolving beyond just cost reduction and into a much broader array of objectives. Leading procurement groups understand that purely focusing on savings is not only shortsighted but also limiting to the broader organization. Procurement is a service organization and should look for ways to maximize the value it brings. For example, according to a 2012 Hackett Group study (see below), common areas outside of purchase cost reductions that procurement groups are focusing on include:
- Tapping suppliers for innovation early and often
- Reducing supply risk
- Improving regulatory compliance
- Improving working capital and cash flow
- Driving efficiency in the P2P process
- Increasing supplier diversity
While it's one thing to say that your procurement organization is trying to focus on a broader array of initiatives, it's quite another to actually turn those wishes into actions. In order to truly move the needle towards a more well rounded service offering, a clear measureable set of objectives needs to be established and communicated. In my experience, this is where a procurement scorecard becomes an essential transformation tool. A scorecard provides the organization the opportunity to clearly identify its objectives for the coming year, measure its success towards those goals, clearly communicate the results, and begin actions to course correct where needed. While scorecards are becoming more and more prevalent, many organizations still fail to develop a scorecard that truly aids change and drives sustainable results. Below are 10 key considerations to keep in mind when developing your next procurement scorecard that should help ensure a more holistic level of success.
- Align with the Business – It's critical that the metrics chosen support objectives that align with the overall business strategy. For example, I once witnessed a situation where an indirect procurement group supporting a retailer was preoccupied with managing supply risk when it wasn't even an operational concern for the company. Once this procurement group realigned their key objectives, they began adding greater value to the business.
- KISS (Keep it Simple Stupid!) – This was one of my father's common lessons for me as a kid as I often overanalyzed things. All too often, we make the mistake of thinking that more is better. When creating a scorecard, it's critical to consolidate to a manageable set of metrics. Otherwise, the complexity becomes overwhelming and the utility of the tool becomes increasingly diminished.
- Compare Externally – It's not necessary that all metrics be externally benchmarked. However, having an understanding of where your organization is relevant to peer and leading companies on key metrics helps with the calibration process.
- Be Flexible – Markets change and businesses evolve. In turn, scorecarding needs to remain a dynamic activity. A static scorecard can provide robust historical data but that means nothing if the metrics have become irrelevant to the business. In addition, leading companies plan for certain metrics to evolve. For example, with an end goal of measuring revenue impact of supplier innovation, a company may choose to guide supplier behavior by starting with a metric such as the number of ideas submitted by key suppliers.
- Make it Manageable – Once you've selected a key set of metrics, take a step back and ask yourself - "Is the juice worth the squeeze?" In other words, is the effort required to collect the information for each metric worth the value it will create? If the answer is no, then remove the metric and address it again in the future when you have the ability to collect information more efficiently (i.e. new systems).
- Vary the Frequency – Not all metrics should be evaluated on the same cadence. Some metrics should be viewed quarterly while others should be viewed annually. Instituting the appropriate frequency will help to ensure your scorecard is sending the correct signals.
- Customize It – There isn't a one-size-fits-all procurement scorecard. Too often scorecards are dictated by what Company XYZ is doing. Every business is different and the scorecard should reflect that.
- Set Clear, Realistic Targets – This is probably the most important element of any scorecard. Without clear targets, the metrics are simply meaningless numbers. Targets should be reached through a combination of internal and external insights and should be realistic. Setting stretch goals is a good practice but putting a target out there that isn't obtainable or realistic can actually hurt the business.
- Incorporate Customer Satisfaction – Gauging customer satisfaction is an excellent way to improve as a service organization and to understand how the stakeholders of the process view the procurement group. This softer metric is too often omitted from a finalized scorecard.
- Prioritize – Before the results of the scorecard come back, the organization should have already aligned on which metrics are primary, secondary and tertiary. This will help to guide an efficient and effective set of actions once the results have been analyzed.