A.T. Kearney’s Procurement Benchmark: Does ROSMA Really Help Elevate Procurement’s Position in the Firm? Pierre Mitchell - February 28, 2014 6:29 AM | Categories: Procurement Commentary, Procurement Research | Tags: Incendiary Tidbits, L1 In Part 1 of this series, we began our analysis of A.T. Kearney’s new partnership with ISM and CIPS to distribute A.T. Kearney’s ROSMA (Return on Supply Management Assets) procurement performance benchmark, which is a complimentary service that basically creates a “procurement ROI metric on steroids.” Our initial assessment is generally favorable in terms of the value created for study participants who need a good high level performance metric from arguably the top procurement management consultancy in the market – and with a stamp of approval from two of the leading professional membership and certification bodies for supply management. In Part 1, we also did say that we'd offer our opinion regarding these key questions: Does ROSMA help elevate procurement’s role – or does it actually work against it? Is the metric itself “ready for prime time”? If not, what needs to be fixed? Should a commercial management consultancy be the one to drive this effort? Let’s get to it… 1. Does ROSMA really help elevate procurement’s position in the firm? Bluntly put: Not so much. Let’s be frank. ROSMA approximates a frequently used composite procurement performance benchmark metric used in the industry: “Procurement ROI.” In fact, ISM’s partner CAPS Research has a fairly close approximation with three metrics that can be found on the more-than-a-decade-old Cross Industry Report of Benchmarks (e.g., see lines 2, 14, and 8 in this 2012 snapshot of it here). These metrics are: Percent of Spend Managed / Controlled by Supply Management (line 2) Cost Reduction Savings as Percent of Managed Spend (line 14) Supply Management Operating Expense as a Percent of Spend (line 8) The CAPS benchmark also includes Cost Avoidance as Percent of Managed Spend (line 15). The first two let you arrive at Cost Reduction as a Percent of Total Spend (“Return”). If cost avoidance is factored in and divided by #3 (the “Investment” in Procurement as a percentage again of total spend), then you get an avoidance-inclusive version of “procurement ROI” number. If you exclude it, then you get an avoidance-exclusive version of “procurement ROI” (which is basically how the ROSMA metric works). Some organizations will only use Cost Reduction in the numerator, but there is nothing wrong with cost avoidance as long as the guidance on its calculation is clear. As a side note, cost avoidance gets a bad reputation. Many of those who pooh-pooh it seem to think that their tribal understanding of it is in line with everyone else. Nothing could be further from the truth. I’ve done some previous research that showed that there is a massive degree of variation in which procurement-led value streams are included (or not) in an “avoidance” measurement bucket or in a “hard savings” bucket (or not counted at all). A few of the value streams are shown in Figure 11 of one of the reports I wrote on the topic here. In fact, even the difference between cost savings vs. cost avoidance is not so clean as I wrote about here and here. The ROSMA tool actually captures cost avoidance. But, as mentioned before, it does not include it in the ROSMA metric calculation (i.e., it is not in the “Additional Benefits” section shown in the ROSMA graphic). Rather, it is captured as a “soft benefit” to measure performance against market costs. This isn’t wrong at all – it’s just one approach. In fact, the terms “hard” or “soft” are themselves meaningless without guidance, and the assumptions about such guidance can vary quite a bit (a topic for a separate blog post). For example, does it include savings created within multiple negotiations rounds when there was previously no baseline? How about when a vendor tries to raise prices and you stave it off? People have different scenarios that they include or exclude. In fact, in the A.T. Kearney Procurement Performance Management (PPM) tool, the cost avoidance data and other soft benefits can be defined and tracked from an internal performance standpoint (not from a benchmarking standpoint). The tool also has workflow to have finance sign off on the hard dollar benefits getting included into the ROSMA scorecard that PPM feeds. We applaud A.T. Kearney’s efforts here – especially in regards to helping ISM and CIPS help their respective memberships. However, we would encourage and applaud A.T. Kearney, CAPS Research, The Hackett Group, CEB, APQC, and even academia (e.g., Dr. Lisa Ellram comes to mind) to create an “open source” definition even just for purchased cost reduction and avoidance – with supporting guidance to the finance profession (e.g., involving a finance association such as IMA). For example, maybe it’s better to align the benefits accrual time period to the contract duration – not just to one year! From a discounted cash flow analysis, benefits would continue in perpetuity. For some reason, the PPV-centric mindset inherited from annual standard cost re-calculations needed to close manufacturers’ financial books has somehow been the "anchor" for such benefits calculation assumptions. Even worse, only giving credit on a project from the date of its completion to the end of the fiscal year only gives on average a six-month benefits period. And so it goes. In the next installment, we will dig into the details of the ROSMA metric and explore whether we believe it’s ready for prime time. Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of follow-up comments by email. Notify me of new posts by email.