“Mirror, Mirror on the Wall, How Is Procurement Performing?”

We are pleased to publish this post from Sigi Osagie, a leading expert on effectiveness in Procurement & Supply Chain Management. He is author of the highly-acclaimed book Procurement Mojo – Strengthening the Function and Raising Its Profile and can be contacted via www.sigiosagie.com.

Contemplating what true Procurement success means is a valuable exercise. It may force some of us to recalibrate our conventional notions of what ‘performance’ accomplishment entails. The ‘key performance indicators’ (KPIs) we commonly adopt are exactly what the phrase infers: they signify what we view as the key dimensions of performance and the measures we use to establish how well we are doing.

As shocking as it sounds, some Procurement functions don’t even measure their performance. And for those that do, the principal KPIs typically concern financial benefits and regulation or governance – for example, cost savings or PPV; Procurement ROI; spend-under-management; and supplier performance. But where are the measures that indicate how well we are doing with building the competences of our people who do the work?

What about the measures that tell us whether or not we are succeeding in serving our internal customers robustly, thus feeding a positive perception of Procurement and its value-add?

And which measures tell us whether or not Procurement is appropriately aligned to the corporate agenda?

Take a look at the KPIs of your own Procurement department; if you had to establish your ‘dream Procurement function’ would these be your choice of performance measures to tell you how flawless it is?

Performance measures should indicate actual performance relative to the vision or goals pursued. So Procurement KPIs should incorporate the function’s performance responsibilities and its obligations to enterprise priorities, and balance operational and strategic perspectives. Crucially, these requirements must be met beforehand when setting functional goals.

The link between objectives and performance measurement is fundamental. It’s pointless setting goals against which you can’t measure progress. And it’s senseless setting goals against which you can track performance but failing to do so effectively; perhaps because your KPIs are inappropriate.

The term ‘KPI’ is grossly overused. Everything that can be measured is now a “KPI”, whether or not the measurement is indeed a key one. And we seem to have forgotten the wisdom in the statement often attributed to Einstein: “Not everything that matters can be measured and not everything that can be measured matters.”

Do you measure what truly matters, or what is conventional or easy-to-measure?

Good KPIs are like a mirror that tells no lies – they should give you an accurate reflection of how you’re performing. But they can only be effective if they are appropriate.

Your KPIs should reveal the ‘organisational health’ of your Procurement function and how well you are doing in the most important dimensions of performance. Focus on the few vital measures that illustrate functional contribution, capability and growth. These may vary from organisation to organisation, as the key focus of each Procurement function will depend on its goals, which must relate to enterprise priorities.

Taking a balanced approach ensures the Procurement function doesn’t miss vital feedback in all the key dimensions of its organisational existence. Your KPIs should provide a view of Procurement’s status and progress from several perspectives, helping to ascertain the answers to crucial questions like:

  • How well are we doing with regard to contribution to enterprise success?
  • How do our internal customers see us, and how well are we meeting their needs?
  • How robust and efficient are our internal and external infrastructure, including our people capability and our supply base?
  • In which aspects of our organisational existence must we improve?
  • How can we continue to grow our capabilities and improve our value-add to the enterprise, its customers and our employees?

I reiterate the need for balance because many Procurement people still think ‘performance’ is solely about delivering “cost savings.” An overriding focus on purely financial or short-term performance will definitely not lead you to your Procurement mojo.

There can be no definitive one-size-fits-all set of measures. However, effective Procurement performance measurement must imbibe considerations in non-financial areas such as talent and bench strength, internal customer satisfaction and risk mitigation. Whatever KPIs you choose, remember that good performance measures don’t automatically give you performance success.

People often mistake ‘performance measurement’ for ‘performance management’ – two separate things. There is a hidden fallacy in the common interpretation of the notion that “what gets measured gets done.” Measuring performance, per se, will not give you performance success. Managing performance will. But you can’t manage performance without measuring it. Success comes from the appropriateness of the objectives and performance measures, what we do about what the KPIs tell us, and how effective we are in our ensuing actions.

As you digest these points in your mind, remember that people are the heartbeat behind your performance outcomes – it is people who create performance, good or bad, including those who define Procurement objectives and KPIs that may or may not be appropriate.

Voices (6)

  1. RJ:

    Excellent article, Sigi, and something I have been harping on about for years. Procurement consistently struggles to gain (and even if does, maintain) a position “at the top table” largely because the main measure we use, cost saving, is in itself a diminishing return, especially if only measured “in year” or against repeating operational costs.

    The list of questions you provide is an excellent starting point for any organisation and a great challenge to find what should be measured rather than what can be measured.

    Do you have concrete examples, though, of the kinds of measures that can be used to monitor “how well we are contributing to organisational success” or “how robust is our external infrastructure”? In many instances we are likely to find that the former is “claimed” by our internal stakeholders and hence the need, in my opinion, for Procurement teams to have explicitly shared objectives with their key stakeholders rather than being measured in glorious isolation and/or conflict.

    1. Sigi Osagie:

      Thanks a lot for your feedback, RJ. You reiterate many of the relevant issues.

      The whole topic of ‘performance management’, whether in Procurement or another function, is very often misunderstood. We regurgitate the words and acronyms – KPIs, balance scorecards, dashboards, etc. – but many people (even senior execs.) don’t really grasp how these things come together or should be deployed for organisational success. Sad, but true.

      As much as I’d love to, giving detailed examples here isn’t really practical. Check out the section titled “Procurement Functional Performance” in “Procurement Mojo” (www.procurementmojo.com), where you’ll find several real-life examples with illustrations and detailed explanations.

      Thanks once again for your valuable comment.

  2. Sigi Osagie:

    Thanks for your comments, Nicholas and Christiaan.

    To Nicholas’s point, looking to data available is a common approach, but, quite honestly, not effective as a starting point. We should never measure performance or select KPIs based on what we can measure. Rather performance measurement should be a reflection of attainment against our goals or objectives.

    So defining the right goals comes first (if the goals are inappropriate or lack SMARTness, then the performance measurement will be completely meaningless); then selecting the most appropriate KPIs that will accurately reflect how we’re doing against the goals.

    You may want to check out “Procurement Mojo” where I explain this in detail, and use examples to illustrate an effective approach, which Christiaan touches on in his comment.

    And, yes, I have seen a few situations of the mirror shattering in my time! (LOL, I love that, Christiaan!)

    Thanks again for your contributions.

  3. Christiaan Murphy:

    There has been a lot of suggestion on the interwebs recently that procurement should look to other measurements than merely savings, but I have not seen any articles suggesting what to measure. I like Sigi’s list here.

    And if you need a way to collect this data, just send out a survey after the close of each sourcing project, negotiation, pricing request etc. Everytime a member of procurement closes off a request from the business, ask the business person the questions Sigi lists above. After only a couple of months, you will have a clear picture of what procurement looks like in your mirror. Just hope the mirror does not shatter from what it sees the first time you hold it.

  4. Nicholas Martin:

    I found this really interesting, particularly the different perspectives to consider when setting KPIs.

    As someone with a ‘systems’ background it’s easy to start by thinking about what data is available.

    This article makes it clear that that we should first decide what questions we want to answer.

    1. Christiaan Murphy:

      Or perhaps ask the business what questions we should be asking ourselves.

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