ROSMA – a Flawed Measure of Procurement Performance

AT Kearney, a top consulting firm, ISM (the US-based Institute of Supply Management) and CIPS are promoting an AT Kearney metric called ROSMA - return on supply management assets. It attempts to promote a measure of procurement performance that is “speaking the language of the CFO” according to the promotional material.

I was re-reading my US colleague Pierre Mitchell’s excellent posts on the topic recently, which sparked my thinking. Pierre ran Hackett’s procurement benchmarking programme before joining Spend Matters and knows more about procurement measures, benchmarks and the like than anyone I’ve ever met.

My analysis of ROSMA is fairly simplistic. Frankly, I don’t much like the primary focus on “savings” that we still have in procurement, although I recognise it isn’t going away any time soon. So my initial feeling was somewhat negative about ROSMA on that front, as it very much has that focus, although it does allow some sort of capture of other benefits.

As Pierre says, ROSMA;”divides the hard cost savings earned in a year by the cost of the procurement function driving those savings during the same year. ROSMA adds some additional drill-downs on the “R” portion of the ROI to also analyze spend influence, the % of influenced spend that is touched, and the “yield” of hard cost savings from those “touches” (e.g., sourcing projects).”

I’m also deeply cynical about organisations’ ability to measure their savings accurately anyway, unless they use Sievo’s software. But that’s another issue for another day too.

Overlooking those points for now, it seems to me that there is one fundamental and fatal flaw with ROSMA. You end up with an ROI type figure, and the suggestion is that the bigger the better in terms of that number. However, that figure is the result of both the “savings” number and the “costs of the function” number (the numerator and the denominator in the equation).  So let’s look at two cases.

Organisation one has a third-party spend of one billion dollars (£, Euros, whatever). It has a very small procurement function of 10 people, total running cost just $1 million. They only cover a small part of the spend, maybe 10%, and declare annual savings of $4 million from their work.

Organisation two also spends $1 billion with suppliers. Their procurement team is much bigger, influences much more spend, has 50 people, and costs $5 million to run. Their savings are $15 million.

Now any sensible person, asked to choose which procurement function is more successful, will go for number two. Net benefit is $10 million versus $3 billion, and presumably with the greater spend influence, the non-savings benefits will be much greater too. Clearly there would be a shareholder benefit if organisation one grew its procurement team and replicated organisation two.

But the ROSMA for one is 400% (or 4), whilst for two it is 300% (3). So present that without explanation to a CFO, and she will go for the first – it’s a better return, isn’t it?

Which in shareholder value terms, is plain wrong.

That’s all we wanted to say for now really. If a measure can lead you so fundamentally into a faulty interpretation and potentially a wrong decision, I can’t see why I would use it. So don’t tell me what your ROSMA is - it means nothing to me. (Vienna)*.

We will however be back with more on this issue, I'm sure; it is a topic that is close to Pierre's heart, and to mine.

 

* dodgy musical reference

Voices (11)

  1. Pierre Mitchell:

    good discussion all. Value contribution measurement by any function/resource is complex. Unfortunately, the Finance overlords who tend to manage the ‘balanced’ scorecards have been training in the PPV value destruction school of thought. It’s a massive topic obviously. Kim, you are dead on.
    b+t, agreed on most fronts, but be careful with “A big saving is surely an indication of previous incompetence rather than current brilliance.” The fear of exposing historical underperformance is a HUGE barrier to improvement that is a learned trait from a sniping, fearful, dysfunctional corporate culture. Sunk costs are sunk. Lost savings are lost. Economic costs are forward looking. Opportunity is forward looking. yes, let’s learn from the past, but not overlay cast stones at each other – lest we be stoned. hmm, I might want to re-phrase that.

    Ian, yes, it should be all costs relative to all costs/investments (e.g,. technology tools) in the resources that perform the supply management processes – independent of the org structure of where the resources report up to. This is how we did it at Hackett. Harder to capture, but if you don’t, it is fundamentally siloed and not truly comparable because everyone organizes differently.

    b+t, I love your comment on value. Very recursive and very zen. I look at procurement value as derived from spend/supply value (two sides of same thing. you get supply from spend) in eyes of stakeholder measurement system. Now, value itself is utility/cost, but it’s hard to calculate “Utils”, so you have to build that ‘balanced scorecard of value’ to represent stakeholder goals that hopefully tie back to EVA or whatever uber valuation metric is de rigeur, but also be able to extract the cost savings bit for the green eye shade overlords.

  2. Ian:

    Since good procurement is a cross-functional team activity why not measure return on total company people costs? Or as the McKinsey Quarterly suggested back in 1989, ROSK – Return on Skills.

    Profit divided by Staff Costs.

    Profit mind, not cost savings, and all staff not just one function.

    If procurement is truly strategic, then the idea of measuring “just our bit” makes no sense

  3. Bitter and twisted:

    You can’t calculate value !

    If you could it wouldn’t be “value”, it would be “[insert calculation]”.

  4. Dan:

    Part of the problem is that a lot of value-adding work that procurement does, such as risk management or supplier relationship management, is difficult to measure, as it is ensuring the supply chain operates as smoothly as possible. If a supplier gets 100% success rate with deliveries, is that a good thing that procurement has accomplished, or is it just business as usual?

    Another hypothetical situation: A global company’s procurement team identifies that the supply chain is at risk from a volcanic eruption disrupting air travel. After a lot of work and expense, it puts contingency arrangements in place that ensure that no disruption will occur and potentially giving it an advantage over its competitors in such a situation. However, no volcanic eruption takes place. Have the procurement team actually accomplished anything?

    1. Richard Hedmark:

      Dan
      I have to say that this hypothetical metaphor is a bit too metaphorical to me. Why would a purchasing team handle a vulcan’s outbreak or not?
      Then I think you make your assumption a bit too tight! As a manager, I always have a number of K.P.Is which have underlying points to measure. That is, if there was an imminent threat of an outbreak, you get this in the measurements that have to be made on pressure. Then all the inserts or improvements in the organization’s actions would clearly be apparent in this particular measurement, or how? Then your tease falls.

      1. Dan:

        Its hardly metaphorical, given that it actually happened.

        Eyjafjallajökull erupted in 2010, causing aircraft to be grounded and airports closed all over western Europe, and had a massive impact on air freight.

        Its hardly beyond the realms of fantasy that supply chain managers would put in place contingency measures for a recurrence of this, such as identifying alternative suppliers or planning the re-routing of key supplies via other transit methods.

        My point is, if a recurrence of that eruption never happens, is all this contingency planning a waste of time? And would it get you any recognition from the C-Suite?

  5. RJ:

    Bitter & twisted, you’ve suddenly become a voice of reason!! What other part of the business measures itself almost exclusively on the basis of how bad things used to be! Cost savings in themselves only apply in any case to repeat purchases of the same specification so any strategic initiatives fall by the wayside in organisations that don’t recognise a broader measure of “real cost reduction” as Kim Godwin calls it but even a direct comparison can be a falsehood when comparing individuals, departments or whole organisations. What price now for a 2Mb broadband link that would have cost several thousand a month 10 years ago? Does that make the telecoms buyer better than the MRO buyer whose prices have increased by 5% in a year? Or the fuel buyer whose costs have halved in a year? Procurement really needs to find a better measure of value contribution than “savings” or even “cost avoidance” (does anyone want to engage a cheap lawyer, for example?). Wehn we can define value contribution more accurately then we can have a ROSMA.

  6. Bitter and twisted:

    Problem is that the R in the ROI is “cost saving” rather than “profit increased” .

  7. Kim Godwin:

    Taking any single measure in isolation is fraught with problems and the unhelpful behaviour that it can drive. But if you look at the underlying principle to ROSMA – that of Return on Investment – there’s an argument that this is the right approach to take. Most procurement organisations have more work than they can handle with the resources they have, so the question then is how do you deploy what resources they do have to maximum effect? This whole issue of prioritisation is a huge one in its own right, but RoI that looks at potential value compared to the resource needed to deliver it has surely got to be the right way. Value of course relates to the receiver or stakeholder, so for some where hard savings are what it’s all about, ROSMA will be the right measure. For others that may not be the case, but let’s not kid ourselves that real cost reduction is going to be any less important for most procurement teams in the foreseeable future

  8. bitter and twisted:

    A big saving is surely an indication of previous incompetence rather than current brilliance.

  9. Trevor Black:

    Peter, I am in total agreement. The focus on cost savings is a distraction on what the procurement function is all about. In particular I do not believe any savings figures that are reported by any part of the public sector as they are politically driven and merely a marketing tool for politicians. Those you make year on year savings appear to have lost the plot whereas the real savings are in achieving value and cost avoidance. The reason why reverse auctions are so popular in that sector is that the savings can be measured whereas potential greater savings that can be achieved in partnership working are not because they are more difficult to measure and therefore of no interest to accountants and politicians.

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