Procurement Measurement – 10 suggested metrics from Zycus (part 1)

There’s a worthwhile paper available for download at the moment from spend management company Zycus.  It’s written by Richard Waugh, VP of Corporate Development, and is called "Analyze This – top 10 metrics to strengthen organizational procurement practices". 

He draws heavily on benchmarks from the Hackett Group, Aberdeen Research and CAPS (the Centre of Advanced Purchasing Studies in Arizona). All good sources, although as we will see, we have some inherent notes of caution around using these or any benchmarks.

It’s a good topic for a paper though, given the importance of measurement and the problems that the procurement industry has had over the years in coming up with robust and meaningful measures that actually convince our senior  colleagues (CFO, CEO, etc) of our worth.  It’s also a good topic because it stimulates debate.  We won’t give you all of Waugh’s ten metrics (to encourage you to go and read the paper) but today we’ll have three we think are good, and tomorrow three we’re not so sure about!

Spend Under Management

“The most compelling measure of the Procurement Organization's influence and control over company spending, Spend Under Management (SUM) is most often equated with spend that is actively managed or controlled by the Procurement function where there is clear responsibility for Sourcing the category and corporate agreements are in place with preferred or at least, approved suppliers”.

Yes, whilst we might want to debate the precise definition of “under management”, it is clear that a strong procurement function is going to have influence over a high percentage of an organisation’s total third-party spend.

Incremental Revenue from Supplier Innovation

“A benefit of the increased focus on Strategic Supplier Management, and an increasingly important metric for quantifying Procurement's value contribution in light of the diminishing returns available in many cases from cost reduction activities, it is the top line revenue impact from collaboration with strategic suppliers for innovations in new products and processes, that has allowed top quartile performers to generate 7.4% in incremental revenue as a % of total revenue according to the Hackett Group's report on Leading Procurement Organizations, and an average of 3.5% of total revenue for companies overall”.

I’m suspicious of firms’ ability to really measure this – very difficult to identify just what revenue contribution comes from “supplier innovation”. But conceptually, this is a more and more important part of the role for successful procurement functions, so we should be trying to measure it somehow.

Net Promoter Score

“While the other Top 10 Metrics lend themselves to external benchmarking comparisons to peers, including a measure of satisfaction with internal customers acknowledges that despite how well a procurement organization may rank according to external benchmarks, if internal customers are not happy with existing service levels, any other gains will go for naught”.

I like this a lot - how internal colleagues perceive the function must be important. And not as difficult to actually measure as some of these. (“Net Promoter” score is generally assessed by a question such as  “would you recommended us / this product / whatever to your colleagues / friends”)? It is surprising how many functions don’t ask their internal stakeholders what they think of them – the cynic in me suspects it is because CPOs don’t want to know the answer!

More tomorrow, with some somewhat more arguable metrics from Waugh’s paper.

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