Spend Matters welcomes a new guest post from Aleksey Savkin of BSC Designer.
Business Intelligence (BI) is an umbrella term that companies apply to virtually any area. When a company is looking at improving supplier performance or controlling costs, we start talking about BI for procurement. The classical approach for procurement includes finding strategies for increasing savings, introducing costs controls, and aligning expenditures with investments. The ultimate goal is clear, but what about strategy realization?
Typical cost cutting problems
It can happen with any business. You use your BI system, collect some data, do an analysis, receive data-driven insight, and come up with a great plan to cut your costs. Once the plan is introduced and first results are coming out, you understand that either there was no effect on your business (the best-case scenario), or you actually harmed your business (the worst-case scenario).
I saw this several times with companies that were using Google AdWords to drive paid traffic to their websites. In the case of one company, they were being told by KPIs that they were getting qualified leads. However, when one AdWords campaign was turned off for a month, there was no drop in sales. This company had a three-week sale cycle, and they started wondering whether or not they really needed to pay for AdWords to have leads that don't buy anything in the end.
In both examples, actions (whether cost cutting or running an AdWords campaign) were not aligned with the strategy of the company. They might have seemed aligned in the minds of top executives, but in practice, there is little understanding of why things happen and how factors affect each other. The aforementioned cases show that the problem is not with BI data, but with the focus of BI on what is important.
Solving alignment problem with a Balanced Scorecard
One of the possible solutions that allow you to focus your BI strategy on important aspects of your business is the Balanced Scorecard. This performance management concept was introduced in order to link a company's strategy with managerial actions. Ideally, when a Balanced Scorecard is introduced, you always will be able to answer two questions: Why do we do this? How do we know we are on the right track?
Let's take a closer look at how this concept can be applied to procurement. Sometimes it seems that a procurement strategy is something separated from the main strategy of the company - we are controlling costs while others do the main business. Actually, it is not. If employees don't see the connection in details, then they will face the aforementioned problems. The correct approach would be to "cascade" the company's global strategy to the department that is responsible for procurement. In this case, employees responsible for procurement will understand how a specific cost cutting strategy will affect other aspects of the company; such are the relationships with clients or internal business processes.
Balanced Scorecard best practices for procurement
Instead of describing all the nuances of the Balanced Scorecard method, I'd like to give some best practices based on ideas learned from practical usage of the Balanced Scorecard:
- When you plan cost reduction, ask if this reduction will have a positive or negative affect on four sides of your business: end clients, internal processes, company's growth, and finance.
- Do not focus on financial KPIs only. If you follow the previous advice properly, you will find out that only 30% of your KPIs are financial, and the others should reflect other parts of your business.
- When you deal with a particular process, ask yourself: How do you measure the performance of this process? Is this measure something that meets your final goal (like in the case with AdWords - do you measure leads or sales)?
- Strategy first, then KPIs. Don't start cost cutting with measures or KPIs. KPI is a tool that helps to see if your strategy is on the right track, so start with your company’s strategy, have a strategy for increased savings, and then cascade it to a lower-level problem—and have KPIs to control each process.
Balanced Scorecard is not a magic pill, i.e., it won’t make your business work like a Swiss watch in the matter of a minute. But it certainly helps companies view procurement strategically. Your plans for cost control will be more reasonable if you clearly understand how they are linked to the company's strategy and when you can control them with result-oriented KPIs.