Spend Matters welcomes another guest post by Santosh Nair of GEP.
Ask five CPOs how effective they think their procurement functions are and you’ll probably end up with five different answers. Not just differences across competency levels but also in the types of competencies they measure and how they define them. And there will almost always be a disproportionate focus on annual cost savings, with less importance given to other performance indicators.
A different approach to measuring and managing procurement performance is to use the Balanced Scorecard approach. I’ve seen (and helped) several CPOs deploy this solution and the results were transformational. The Balanced Scorecard is a performance measurement framework that adds strategic non-financial performance measures to traditional financial metrics and provides a more 'balanced' view of organizational performance. On the procurement side, here’s a macro approach to deploying a balanced scorecard:
- Define the organizational objectives very clearly and identify the metrics currently being measured.
- Conduct a brainstorming session (possibly facilitated by a 3rd party) on what metrics truly matter in the context of your organization. This has to be tempered with senior management expectations and priorities.
- Some areas to consider for metrics are Internal Customer Satisfaction, Supplier Relationships, Financial Performance, and Talent Management. Within each area, more specific metrics can be identified.
- Not all metrics are created equal. Decide the top 5 that truly move the needle of organizational performance.
- Define each metric, establish a baseline, and identify targets based on industry benchmarks.
- Filter these down in terms of individual goals and establish processes to measure these on an ongoing basis.
- Set up monthly review meetings to track progress and corrective actions.
Deploying this approach shifts organizational focus (resources, processes, systems) towards activities that truly have an impact. The scorecard helps steer the ship in the right direction. Some metrics to consider as part of your scorecard are shown below:
- Spend. Purchasing Budget as a percentage of total purchasing spend; total purchasing spend per purchasing employee; on-contract spend as a percentage of total spend; percentage of spend under supply chain management; supplier diversity spend
- Savings. Total savings achieved; total savings as a percent of purchasing spend; total savings per purchasing employee; supply chain department ROI on cost
- Suppliers. Total suppliers; active suppliers; active suppliers per 1 million dollars of spend; spend with strategic suppliers as a percentage of total spend; other supplier relationship and risk metrics
- Operational Metrics. Internal cycle time for req to PO; percentage of purchase orders and releases received on time; percentage of critical requests meet within one business day
- Accounts Payable. Total invoices per accounts payable employee; total cost per invoice processed; percentage of invoices processed through EFT and EDI; dollars saved as a result of discounts taken; percentage of invoices processed via Web-based e-invoicing
- Others. Compliance to safety requirements; average training spend per employee; metrics used to measure green purchasing initiatives
For more interesting thinking on procurement, visit the GEP Knowledge Portal.