The Procurement Balanced Scorecard

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.

Voices (6)

  1. Pierre Mitchell:

    Bill, do you not agree with the idea of a coherent performance management system (and scorecard as component of that), or is it the “balanced scorecard” methodology a la Norton/Kaplan (or any over-engineered implementation of the concept) that is the problem? If the former, I’m going to have to disagree with you. Misalignment on the scorecards (e.g., stakeholder’ scorecard vs. procurement scorecard vs. supplier scorecard) is probably one of the biggest barriers to procurement transformations.

    Aleksey, I agree it’s important to understand the connections between the performance metrics, and even more so to understand (and show) the connections between leading capabilities/practices and the lagging KPIs. For example, showing performance of spend under proper management vs. poorly managed spend is a good argument for SUM (which procurement can help enable) that I’ve seen some firms do.

    We dive into various KPIs / benchmarks in our webcast here:

  2. Aleksey Savkin:

    One important idea that is missing is that these objectives should be connected to each other with a cause-and-effect link. They are not by themselves.

  3. Bill Young:

    Show me a balanced score card and I will show you an organisation that does not know why it exists.

    1. Aleksey Savkin:

      Bill, actually companies (and consultants) don’t like to show their scorecard. Only some (like Tesco for example) do this.

  4. Pierre Mitchell:

    KPIs are more than ‘tools’ and I don’t think it’s a bad thing if the KPIs are ‘masters’ IF they are properly designed to gain alignment, get people doing the right things (and the right way), to support transformation efforts, etc. Problem is that the KPIs and resultant targets need to be constantly adjusted and fit for purpose. If not, they inevitably become burdens and we feel like slaves to them as you say. But, it’s worth the effort, otherwise, you end up being reactive, falling back on legacy metrics (e.g., PPV), and having other define your metrics for you rather than you expanding your metrics to align with your expanding capabilities and value you deliver.
    This is an important topic. What you measure is what you get, so if you want excellent supply performance, you need excellent metrics in an equally excellent performance management process.

  5. bitter and twisted:

    Good points, but: how do you ensure that KPIs remain in their proper place – as tools, as means to an end – and don’t usurp and become the masters?

    Eg, I think that a good company should have a low ‘on time delivery’ KPI because they should be ambitiously defining lead times on a ‘should take’ basis.

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