We continue our series on the top 25 procurement myths. Some you may know, others maybe not. You also may agree with us on certain ones and not others. But, the important thing is that we have this discussion. We will post 1 a day here on Chief Procurement Officer, so make sure to check back on the site to catch them all.
12. There's a trade-off between procurement efficiency and procurement effectiveness
Many people understandably feel that there is a natural trade-off between efficiency and effectiveness. The feeling is that you can either do it well or you can do it fast. Take the example of sourcing. If you lower your monetary threshold at which a procurement organization must be involved, procurement will get overwhelmed and will have to take shortcuts in order to keep up. In other words, you'll have to decrease the quality of spend influence in order to increase the quantity of spend influence. Seems like a trade-off, right? How could this trade-off possibly be a myth, you ask? Read on…
Well, the first issue here is that we are comparing apples and oranges. Efficiency is defined as output divided by input. But, what is the output? Number of deals? Percentage of contracts spend touched by procurement? Savings? If you try to push too many deals into the “sourcing factory,” your "quality" (i.e., savings) will go down. So it does indeed seem like a trade-off. But, if we have learned anything from quality management in manufacturing, it’s that when you improve quality (i.e., effectiveness… satisfying the customer requirement), you reduce defects and rework and you will end up improving efficiency.
The same principle applies in procurement. Trust me, I’ve analyzed hundreds of companies’ procurement benchmark data, and there is a strong statistical correlation between efficiency and effectiveness. In other words, you only have so much investment (budget), so, if you can apply better methods and tools, you can get higher effectiveness directly in terms of spend savings, but you’ll also be more efficient. This, in turn, frees up your resources to be reinvested in driving more savings. It’s a virtuous cycle. As I like to say, the highest cost in procurement is the opportunity cost of wasting the precious time of top procurement talent that are driving value out of their spend. This goes back to myth No. 10. Improve efficiency of high-impact staff and re-invest their time back into driving more 10X ROI. Your spend per FTE and/or managed spend pert FTE will increase, and so will your savings. So you need to “use efficiency to fund effectiveness." Or put another way, effectiveness is about doing the right things and efficiency is about doing more of those right things in the right way (i.e., eliminating waste in the process, automating the processes, etc.) with limited inputs.