Procurement Measurement – 10 suggested metrics from Zycus (part 2)

We featured yesterday the paper available for download from spend management company Zycus, written by Richard Waugh, VP of Corporate Development, 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). We gave three of his metrics yesterday that we like, but today let’s start a few arguments about three more, that are perhaps a little more questionable.

Suppliers Accounting for 80 Percent of Total Spend

“Following on the theme of focusing the right resources on the right suppliers, this metric provides a quick read as to whether or not purchasing power and resources are being appropriately leveraged and allocated, or conversely, diluted due to a fragmented and unwieldy supply base.  Although the 80/20 rule is commonly applied here, as in the top 20% of suppliers account for 80% of spend, the actual targets should be for an even greater concentration of spend with fewer suppliers – somewhere in the range of 6-7% of suppliers”.

So we should aim to have a few suppliers accounting for a very large proportion of our total spend. Why?  Economies of scale are overrated in the days of flexible manufacturing anyway, and this is the thinking that has led too many buyers to push themselves into the hands of supplier oligopolies in sectors ranging from government IT services to automotive parts. In any case, the “right” answer here is highly variable by industry and firm within the industry even, but we’d argue that in many cases, organisations have too many large suppliers, and in some categories, too few suppliers.  This is a metric therefore that we don’t think should be applied universally.

Cost of Procurement as Percent of Spend

Most procurement organizations face the challenge of having to do more with less – overall procurement budgets are flat to declining – so this operational metric gets at the core of organizational efficiency….  As a rule of thumb, the cost of procurement is about 1% of spend overall, according to CAPS research cross-industry benchmarks for 2013, with significantly higher costs for engineering intensive industries such as Aerospace and Defense and Engineering and Construction at 2% and 2.74% respectively, with the low water mark in Financial Services at just .28%. Across industries, Hackett Group data pegs World-Class performers at .6% of spend.

There is something in this one of course – clearly, procurement functions should run efficiently and effectively, and should not be outliers in their own industry in terms of this metric, assuming proper measurement (see later comment).  But many of us believe that organisations would get a decent return if they spent a bit more on procurement, so one danger with this is it could become a “race to the bottom”.  Would it be a good thing if my organisation only spent 0.1% of our spend on procurement?  And again, the “right” answer depends so much on the specific organisation’s situation, and indeed on how you measure it. A firm that has procurement devolved into the business lines could have a low-cost central procurement function, but an overall (yet concealed) high “real” cost. So a virtually meaningless measure, I would argue.

Realised 0r Implemented Savings

Waugh identifies the problems here himself.

“The most consistently used metric to measure (and often bonus) procurement teams – if not the most consistently applied - is Savings, so it has to at least crack the top 5, with however, a few notable caveats. …  Cost avoidance on the other hand, defined in the CAPS Benchmarks as, “The difference between prices for goods and services and the probable increase in pricing during the reporting year if actions had not been taken to obtain reduced costs for the same goods and services,” is a grey area. Finance is often  hard pressed to grasp the concept of cost avoidance when they cannot account for the impact on the financial statements – in other words, if it does not hit the budget, it didn't happen”.

Actually, I do agree that this has to be in the list. But I am deeply, deeply cynical about the accuracy and credibility of savings measures in 90% of organisations.  Even savings on direct items are often dodgy, and by the time you get onto cost avoidance savings on complex services – well, you might as well throw a dice to get the numbers in most cases. But yes, we probably have to include some sort of savings metric within the overall portfiolio!

So a good read, well done to Richard Waugh and Zycus, and you can download the paper free on registration here.

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