We previously discussed A.T. Kearney’s recently released report titled “Building the Brand of Procurement and Supply,” which summarizes and analyzes its 2014 ROSMA (Return on Supply Management Assets) benchmark metric. In Part 1 of our analysis of the report, we described the methodology and approach of the study. Then, in Part 2, we tweaked the model to fix a bad assumption and to drill it down in a spreadsheet format that shows how the model works with example data (and the assumptions regarding each of the steps).
As I’ve mentioned before, we’ve covered ROSMA here at Spend Matters in all its gore, such as this post and others listed below. To recap though, ROSMA is an A.T. Kearney-branded term and associated “composite” KPI that is basically a version of the popular “Procurement ROI” metric that divides the hard-cost savings earned in a year by the cost of the procurement function driving those savings during the same year. ROSMA adds some additional drill-downs on the “R” portion of the ROI to also analyze spend influence, the percent of influenced spend that is touched, and the “yield” of hard cost savings from those “touches” (e.g., sourcing projects).
So, the bottom line is that it’s a fairly rigorous benchmark metric on “procurement ROI” from a large consulting firm that any procurement organization should definitely check itself against. But, the problem is that A.T. Kearney really jumps the rails when in its report it makes comments like:
- A “revolutionary performance management standard” that “tries to help procurement ‘speak the language’ of the scorekeeper for supply management: the CFO.”
- “Enable a profession-wide standard to accelerate broad recognition of the value of procurement.”
- “Advance a ROSMA-driven CPO agenda.”
I was hoping A.T. Kearney would tone down these types of marketing comments for which I critiqued them previously here, here, and here. But, these questions are not just self-serving, they are actually symptomatic with a bigger problem for which their cure is actually part-and-parcel of the disease.
The self-serving aspect is obvious, and my recommendation is that procurement organizations should NOT “advance a ROSMA-driven CPO agenda,” but rather advance a procurement-enabled business agenda that can be measured on business terms through the language of the business itself via P&L, cash flow statement, capital efficiency and broader enterprise valuation metrics. A proprietary “procurement ROI” procurement metric owned by a consulting firm by definition is the opposite of a “profession-wide standard.”
My biggest issue though with this whole thing is that A.T. Kearney is recommending using a dressed up “procurement ROI” metric to try to help solve the wrong problem. The real problem is that the “procurement performance management” capability is broken at most firms. The report actually cites this accurately:
“Most organizations do not have the reporting and tracking capabilities to provide ongoing, accurate visibility of procurement’s value-creating activities. They simply don’t have a grasp of – and therefore can’t manage – their resources to optimize them with the same level of precision as is typically done in other functions."
But, then A.T. Kearney tries to use ROSMA as a “revolutionary performance management standard” that “tries to help procurement ‘speak the language’ of the scorekeeper for supply management: the CFO.” Obviously, it’s not revolutionary, nor a true open standard, but the bigger issue is that A.T. Kearney seems to imply that procurement should just throw its arms up and use the finance its advocated performance measurement system of book values, sunk costs, standard costing, PPV, use-it-or-lose-it budgets and lack of credit for cost avoidance. This measurement system is simply perverse.
Kearney correctly states that, “Many CPOs have participated in ‘tagalong’ KPIs across their stakeholders’ value-driven targets, but few organizations have delivered on a robust supply management balanced scorecard or articulated procurement-specific EVA targets.”
BUT, just because this powerful “root solution” (that solves the root cause of a clearly dysfunctional accounting-centric measurement system) is difficult to implement, it shouldn’t mean that you throw it out and just accept your lot in life and get back to the “sourcing factory” and further calcify the legacy procurement model, albeit with a new KPI faceplate on the same old value proposition. THIS is the real danger.
It is only by the act of translation and alignment between procurement and the business through this “balanced scorecard of supply” and how it ties to the real drivers of performance that affect future discounted cash flows that drive enterprise valuation – not just metrics and processes that efficiently post variances and close the books.
We’ll touch on this PPM topic in future posts, but for now, you should definitely check out our PRO member webcast on procurement performance management where we dive into this topic in great detail.
What do you think? Do you think procurement can help the firm unwind the binds of this highly dysfunctional measurement system? What’s clear to me is that you better at least be able to speak this language if you’re going to try to change the dialect for the better.