A New Spend Metric: “Touched Spend” — Do We Need It?

AnyData Solutions

One of our Spend Matters Plus clients, a procurement manager in the energy sector, sent me a note asking about a new benchmarking metric that he recently saw being collected by CAPS research called “touched spend.” He sent me the following definitions below and asked me to weigh in on them, given my tenure at The Hackett Group running procurement research related to benchmarking:

  • Sourceable Spend: All company-wide external purchases that could be sourced by supply management (whether they currently are or are not). Does not include such items as taxes, fees, legal judgments or charitable contributions
  • Managed Spend: Purchases made following policies, procedures or commercial framework developed by the supply management group
  • Touched Spend: Total of all spend that has been bid, negotiated, indexed or influenced in any way by the supply management group during the reporting period

Before I "touch" the topic of this new “touched spend” definition, let's review the first two metrics. I have previously examined sourceable spend and managed spend in gory detail, but here’s the bottom line:

  • “Sourceable Spend” is the same as “Addressable Spend” and should just be referred to colloquially as external “spend.” The high level definition above is OK, but “fees” is a little vague and there are more expenditures that could be added to the list such as transfer pricing and regulatory filing expenses. But, you don’t want to go overboard and conveniently cut out difficult spending areas or areas traditionally difficult for procurement to influence. For example, the State of Maryland has nearly 30 areas that it carves out, and many are indeed influenceable. So, if you do procurement benchmarking, make sure you’re benchmarking provider is providing clear guidance on this key normalizing metric denominator. See our guide to the benchmarking industry for more on how to use procurement benchmarking firms.
  • “Managed Spend” is the same as “spend under management” and “influenced spend.” Many might argue that “managed” is a more effective form of “influenced,” but if you have mandated via policy that procurement perform sourcing above a certain threshold, but procurement is only brought in last minute with low leverage, is that level of “management” really better than early pervasive influence in a sourcing process executed by procurement resources that report into a business unit or partner function rather than the formal corporate purchasing organization?

This leads to the last metric.

In my humble opinion, and with all due respect to CAPS Research, the “touched spend” metric could use a little touch-up. First of all, it needs to be changed by having the word “influenced” removed. Influence can take the form of policies/processes/systems put in place by procurement but executed by any resource. This is already captured in the “managed” bucket defined above. What I think the “touched” metric is trying to get at is more of a hard ROI of purchasing employees reporting up to the formal procurement organization who are doing the work directly.

Why the need for this metric? Many CFOs (and even CPOs) think that procurement ROI only counts when the resources being invested in that directly perform the work report formally up through procurement — and it’s not fair to compare to other firms where the work has been delegated to budget owners while procurement is sitting around supposedly twiddling its thumbs.

I understand the knee-jerk desire to see this metric. It’s like comparing a POs per FTE metric for one firm with 95% automation versus one that’s mainly manual. Is the comparison manual to manual (i.e., 5% manual versus 100% manual) or is it in totality? The default answer should be the latter, and the same is true with the “touched” metric.

It will be interesting to see the data on what percent of managed spend is “touched” by procurement compared with how much is delegated or democratized to the business. In a center-led model, the strategic procurement staff can be hard line into procurement, but they can also be dotted line “embeds” reporting into their stakeholder organizations (and colocated with them). This shouldn’t be discouraged, of course, given the benefits of tighter alignment.

The more important accompanying metrics should really be about the quality of influence/management of the spend rather than where in the organizational hierarchy they report. If procurement can ensure that delegated, best-practices-driven, technology-enabled process are executed, then procurement can be freed up on even more strategic areas around supplier innovation, digital business strategies, risk management, M&A support or other areas truly strategic to the business.

Procurement needs to more fully transition to a transformative enablement function, similar to what quality groups went through decades ago. In doing so, procurement must take care not to overuse metrics that emphasize functional silos rather than cross-functional excellence.

Voices (10)

  1. Pierre Mitchell:

    Serge, couldn’t agree more, except please add the works total cost reduction and broader economic value addition to the last sentence. The goals is not ongoing unit price reductions via sourcing (which I think is B&T’s point), but broader measurable value creation for the business. Too many firms give up on this because they don’t have the enterprise level capabilities and leadership to drive leading metrics like innovation and supply chain resiliency rather than just focus on lagging metrics easily measured through standard costing approaches vis a vis the G/L.

    1. Serge Milman | Alldyn:

      I agree. Though, I believe in crawl – walk – run approach. I see too many organizations attempting to run without first learning to crawl.

      Specifically, we have seen very few organizations who are at truly at best-in-class in Strategic Sourcing. Numerous surveys show sub 5%-8% annual savings, and most P&Ls show results that even worse. Yet, we have consistently generated 15%-20% category level savings across most indirect and direct categories.

      The crawl-walk stage is getting the basics right. For Sourcing, this requires excellence in execution and demonstrating tangible results to CFO and P&L owners. If we were to survey CPOs about achievement relative to this metric, my guess is that most would rank below 5 on a scale of 0-10.

      Once the basics are covered, then by all means let’s focus on innovation. However, some of the solutions that pass for innovation would be obsolete if the crawl-walk stage was done well.

      1. Pierre Mitchell:

        Agreed. You should be careful about the metrics you cite though and not compare apples to oranges. There’s a difference between an overall 5% average savings as % of total spend versus the savings that you are addressing in category ‘steady state’ and also what you’re driving for a particular deal. For example, 15% savings on a 2 year deal with only one year allowed by finance is 7.5% steady state. And if you only have 66% influence, you’re down to 5% steady state on all spend. For those tuning in to our discussion, the ATK ROSMA stuff is pretty good at breaking this all out. See figure C on https://www.atkearney.com/documents/10192/10099781/What-Good-Looks-Like-ROSMA-2016.pdf/4e531147-d91a-4434-bf3a-1aa9ffe8cbc1

        1. Serge Milman | Alldyn:

          Agreed. Using this logic, ATK’s ROSMA data shows that best-in-class deliver savings of just 4.5% on $1 billion in spend, and average performers just 1.8% on $1 billion in spend.

          The numbers I site are annual savings (obviously only applicable to the 1st year after the sourcing effort which, after which incremental savings are typically 5%-10% annually based on contractual agreements).

  2. bitter and twisted:

    If you want fact based measurement, why spoil the facts with the opinion known as ‘savings’

    1. Pierre Mitchell:

      B&T. What don’t you get. You paid $10 last year for widget X and you negotiated it down to $9. Favorable PPV of $1. Booked to the G/L. Auditors and CFO are happy. Keep turning the crank, try to save your way to zero, make your supply chain brittle, and run your suppliers out of business.
      If that doesn’t work, then just change your part number to set a new high baseline that’s not captured as unfavorable PPV, and then bake into your 5 year contract a year-on-year savings clause that works out whatever you negotiated in total.
      Yes, there are a lot of games played on both sides, but that’s the whole point of a ‘balanced scorecard of supply’ (I call it supply performance management) from which procurement performance management (and the procurement scorecard should be derived). I’ve written a lot of stuff on PRO/Plus on these concepts and how to implement them.
      You can’t throw your hands up on value measurement, but rather, need to work with Finance and others to make it real and use it to change behaviors, get alignment (not destroy it), resolve tradeoffs, and transform supply and the business.
      If you would like to be part of the solution here, then please share your recommended scorecard and approach for value measurement that’s working for you. I’m sure the community would be receptive to your insights.

      1. bitter and twisted:

        The 9$ widget price is a fact. 1$ saving is an opinion.

        What good does “hurrah ive saved 1$” do?

        1. Serge Milman | Alldyn:

          An organization and/or its Procurement team are in serious trouble if they are incapable of determining product cost and total spend. Assuming this not to be the case, the ‘baseline’ spend identification should, at a minimum, be a very close approximation of the real spend.

          Why does $1 save matter? Seems like a crazy question but I’ll bite … it matters because organizations can redeploy these savings to purchasing other products / services, and/or push the savings into increased profitability.

          For the vast majority, my experience is that there is an opportunity to save $150 – $200 million on every $1 billion in vendor spend. Your comments seem to validate that some have altogether stopped caring about the core mission of Sourcing / Procurement – instituting efficiency and creating savings.

        2. Pierre Mitchell:

          You pass on the savings to customers to grow revenue and/or pass it on to shareholders by booking it directly to the bottom line to improve EBITDA and EVA. And justify your existence/job. That’s all.

  3. Serge Milman | Alldyn:

    if you don’t measure it, you cannot improve it. This time tested saying applies in spades to Strategic Sourcing. More transparency is beneficial to all. Insightful metrics are essential to assess impact of Sourcing organization to the enterprise.

    Evading transparency or delegating category sourcing (aka democratizing, real-time bidding, etc.) is akin, in my opinion, to Sourcing leadership, simply giving up. Such actions necessarily result in ‘value leaks’, that is, loss of potential savings. (for example, we intuitively understand that one is likely to get a better deal on sourcing 1 million pencils (centralized procurement led sourcing model) vs buying 100 pencils periodically (democratized, real time bidding, etc)).

    Procurement organizations continue to struggle with generating positive impact on the P&L. Numerous studies show average in-house teams generate just 2%-3% annual savings while best-in-class squeezing out a mere 5%-6%. However, even these lack-luster “paper” savings fail to materialize in the financial data, with P&L data often showing increasing vendor spend (true even for mature Global 1000 firms).

    Sourcing organizations should track, among other things:
    – Spend: all vendor spend without exception
    – Spend Under Management (SUM): spend that has been sourced
    – Savings: contractual savings
    – P&L impact: Spend * SUM * Savings
    – P&L Impact Compliance: expected P&L impact vs actual P&L results on a monthly, quarterly and annual basis

    Establishing a fact-based measurement for performance of Procurement / Sourcing function will enable CPOs to quantify successes, as well as to zero in on opportunities for improvement.

    In our experience, the delta between actual and potential Strategic Sourcing value creation is large — actual Sourcing savings <5% (and often negative – eg. net spend increase) vs potential of 15%-20% Sourcing savings and ongoing unit price reductions.

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