It’s a while since we featured a couple of our favourite candidates for the worst procurement KPIs. The first we covered was the “number of suppliers per £ million third-party spend” (or similar). That has always seemed to us a pretty meaningless measure, and impossible to use as a benchmark because every organisation would be different even if you could derive the “right” answer.
We then had a go at “£, $ or € million spent per procurement professional” and its close relation “cost of the procurement function as a percentage of third-party spend”. We don’t much like those either.
Today, a KPI which we had not seen until quite recently, but has now popped up as part of one well-known benchmarking programme. It is phrased something like this: “the percentage of third-party spend competed per year”.
So, this seems to be suggesting that the more spend you take to market and compete every year, the better. The implication of this as a benchmark is that a large number is better than a small, so the ultimate would be 100% of third-party spend competed every year.
Let’s think about this logically - where shall we start with our critique?
The first glaring problem is that the ideal percentage varies so much by the type of business. If you are some sort of wholesaler or commodities trading business, competing even 100% of your spend once a year is probably not nearly often enough. You may be running some sort of competitive process in some spend areas monthly or even more often.
In other cases, a business that by nature has a relatively small number of critical, strategic suppliers may find the best approach is to have relatively long-term contracts – three years or five years may be entirely appropriate. Indeed, the key point here is that not just different organisations but different spend categories require different approaches and probably therefore different lengths of contract.
This metric is such a “blunt instrument” and of course would also not identify an organisation that has got all their contract strategies wrong – regularly competing those they should not and vice versa gives you the same metric as someone who gets it the right way around!
There is no way of telling without doing a very detailed strategic analysis whether the “right” answer for any organisation is therefore 20%, 60% or 120%. That is therefore a pretty useless measure if you are going to use it to benchmark against anyone else. It would also be worrying if the justification given to an internal stakeholder for recommending taking their spend to market was “our benchmark tells us we should do this”!
Perhaps the only point of interest would be if the percentage was very small for any “normal” business. If it were down at 10% or 20%, it might justifiably sound some alarms, but even then, there may be good reasons. So, if you must use it, do so with care, and remember it is all about appropriate category strategies, not running tenders for the sake of running tenders.