Procurement Metrics: Understanding the Economic Language of Value (Part 1) — Spend [Plus+]

buzzwords ktasimar/Adobe Stock

One of the challenges that procurement faces is “speaking the same language” as finance, as well as the language of its stakeholders. A marketing department, for example, may use the term “investment” for its spending. Similarly, many procurement organizations categorize some of their added value in a category called “cost avoidance,” even though the term is not taught or recognized formally by the finance function.

Even within procurement, many terms are used inconsistently. Consider the term “addressable spend.” Is all spend addressable, as represented by cash disbursements going to external parties? Or is it supplier spending that is reasonably under the influence of procurement? If you say the latter, what defines “reasonable”?

The friction and misalignment common between various functions often results from stakeholders not having a basic understanding of terms that seem similar but yet can be very different. This problem is exacerbated when the stakes are high and you start getting measured and benchmarked on these metrics. To prevent this, procurement needs to be “business multilingual” and understand the variations of terminology so that it can best speak these languages and help the organization make the best decisions to create value.

This is what we’ll address in this analysis, with a focus on procurement and finance within the enterprise. Clearly defined terminology is the foundation from which higher-level concepts, performance metrics and benchmarks can be consistently understood — and improved.

For full access to this Spend Matters Plus content: