Procurement ROI: The Right Metric? (Part 1)

Proxima's Guy Strafford recently got me thinking (in a way he probably didn't see coming) about the right ways to measure procurement effectiveness. In a post over on Proxima's blog, Guy makes the observation that executives should be wary of high procurement return on investment (ROI) claims. He frames the argument by noting that he's had conversations with many a procurement executive product of his "10x, 20x or even 30x ROI based on team cost" but that this measure "is far too simplistic ... [and] misleading and are forcing the wrong behavior in our business leaders."

Guy then makes a number of suggestions -- read them if you'd like a template to help drive up ROI numbers -- on why such claims do not provide a reasonable way to measure procurement returns. Of course, as Guy observes, many projects won't generate significant ROIs within a near-term time frame, which is precisely why ROI is not the most appropriate metric to begin with (but we'll get to why later in this series).

As Guy observes, "There will be a long, long list of [programs generating less than stellar on paper ROI numbers]. Some might only generate a ROI of 3x. Some may only break even. Some may even cost money to generate no financial benefit – but other important business benefits are achieved, such as innovation, reduced risk, improved customer service, etc. Either way, a lot of financial and non-financial benefits will be left on the table."

The real crux of Guy's argument comes next: why procurement typically gets de-prioritized in the broader scheme of things despite typical hard dollar returns that outstrip "HR, finance, IT, R&D," and other areas. The problem is not one of absolute savings numbers, but rather procurement's failure "to make its case as successfully as other functions."

We'll tackle some other challenges in this realm in the next post in this series.

- Jason Busch

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