Spend Matters welcomes a guest post from Diptarup Chakraborti, assistant vice president of marketing at Zycus Inc.
Back in the late 1980s, a big debate broke out among procurement leaders as to how to best measure procurement’s functional performance. Procurement had been seen traditionally as a service function – processing transactions, managing bid processes and negotiating prices and commercial terms with suppliers - but not making significant contributions to business performance or market competitiveness. As a consequence, key measures of procurement performance were things such as:
- Cost to issue a PO
- Purchase price variance (PPV) (that is, did you pay less this time per unit compared to last time?)
A small, yet vocal group of business leaders, who were looking to elevate the procurement function to a more strategic status, began vilifying these old metrics, suggesting they were actually dangerous for the function. They saw them as institutionalizing and perpetuating the notion of “procurement as pure overhead” – a necessary evil or cost of doing business that could only be burdened across business-unit P&Ls.
But, the huge challenge at the time was not only defining better, more strategically focused metrics for procurement performance, but also in assembling and synthesizing the data needed to produce accurate, consistent and credible metrics. Required capabilities simply did not exist at the time. Few felt comfortable with the idea of deploying unreliable metrics - via team or personal objective-setting, job-performance reviews, salary, bonus and other incentive processes – as a means obtaining different, more competitively focused behaviors from procurement personnel.
Enter the Age of Big Data
Fast-forward three decades to the new age of big data. The evolution and proliferation of information and automation technology for sourcing, procurement and supply management, and more important, the ability of the technology to integrate with operational, financial, human resources, and other corporate information systems, has enabled a huge leap forward in the possibilities for designing and deploying strategic procurement performance metrics.
A new white paper Analyze This. Top 10 Metrics to Strengthen Organizational Procurement Practices, by Richard Waugh, vice president, business development for Zycus, demonstrates just how far the discipline of procurement functional performance measurement has come over the past three decades. For example, the oversimplified and noncompetitively focused concept of purchase price variance (PPV) has transformed and expanded into the more sophisticated practices of:
- Segmenting cost savings (negotiated, actual, and realized)
- Collaborating with finance to validate and flow procurement cost savings through to financial reporting and budgeting processes
- Isolating procurement process-driven savings from market and other cyclical/secular trends
- Measuring procurement return on investment (ROI)
Instead of measuring “cost to issue a PO,” Waugh observes CPOs now focusing on such strategic measures as: compliance to strategic procurement contracts, incremental revenue from supplier innovation and net promoter scores - a concept borrowed from marketing to measure and track satisfaction levels among procurement’s internal customers.
While procurement performance metrics have continued to gain in sophistication and strategic focus, Waugh’s paper also demonstrates how independent organizations - such as CAPS, The Hackett Group and Aberdeen Group – have built a substantial canon of external benchmarks that CPOs can use to gauge the competitive positioning of their organizations as opposed to tracking procurement performance in a year-over-year, internally focused vacuum.
With Great Power Comes Great Responsibility
The procurement visionaries of the 1980s had a popular saying: “What gets measured gets done.” That much remains the same. But, contemporary procurement leaders face almost the opposite challenge of their forbears. While the age of big data makes it very easy to measure many aspects of procurement organizational performance and to see how performance is trending over time, Waugh suggests it is also much easier to:
- Measure too many things (leading to “analysis paralysis”)
- Lose site of the most important metrics that drive desired competitive behaviors among procurement personnel
- Confuse an organization, inadvertently placing individuals and corporate functions at cross-purposes
CPOs must start with clear business- and market-driven objectives for their organizations, winnow down to a dashboard of critical metrics designed carefully to engender specific behaviors to advance those objectives, and continually reevaluate, recreate, and innovate new metrics along with changes in external business conditions and challenges.