The Most Useless Commonly Used Procurement KPIs – Another Candidate

We had a number of excellent comments on our “worst measures used for procurement” article both here and on Twitter. My next one that I was planning to feature was also suggested by the excellent Bertrand Maltaverne on Twitter – as he said “amount of spend managed by FTE … also meaningless without context”.  

Spot on, and this metric bears some resemblance to our last example, the supplier reduction metric (and variants thereof), as it uses third-party spend as the numerator to calculate the metric, but it focuses on procurement people instead of supplier numbers as the denominator in the equation.

So “£, $ or € million spent per procurement professional” is perhaps the way it is most commonly presented. If we spend £1 billion and have 100 procurement people, that is £10 million per person.  Or it might be the “cost of the procurement function as a percentage of third-party spend”, which as we will see is a tiny bit better in one aspect (but still generally useless). These measures really have so many flaws, it is hard to know where to start.

Again, we have the issue of what are we comparing it against? Is £10 million per person good, bad or average? Every organisation is different, and one that has an intrinsically complex supply base, with many smaller but important suppliers, is a million miles away from a commodity trading-type organisation, where one person might spend a billion or more a year!

Then we have to ask, what is a “good” number here? Generally, a higher figure in terms of spend per person is taken as positive in some of the well known benchmarking studies, but that leads to the logical conclusion that a procurement function with nobody in it is infinitely good. That’s maths for you.

We spent a couple of £ billion at NatWest with about 80 professionals; that felt about right, I don’t think (even with better systems) we would have added more value in total or given a better return with 50 or 25.  Arguably, a procurement function that has worked out how to really extract value from its supply market will have a smaller (apparently “worse”) metric, because each procurement person can justify their existence even if they only manage maybe a couple of million spend.

We also have definitional issues. What about all the people engaged with procurement activities (let alone contract management) who sit outside procurement? Experts in other functions or line managers to whom we delegate low value procurement perhaps? So this is a metric where you get a better answer by devolving more and more to users, which may not be a bad thing to do but should not be a decision made in order to hit an arbitrary target.

Similarly, outsourcing chunks of procurement also helps if it is measured on people (but not if the cost variant is used, which is why that is marginally better than the headcount figure).  Again, a “better” metric should not be achievable by taking an action that might have no real justification.

Now we’re not arguing that procurement should not always strive for efficiency as well as effectiveness. We need to justify continuously our costs and indeed work hard to arrive at the optimum level of procurement resource in terms of balancing cost and return. But these metrics tell us nothing about where we are on that constant journey, we’d argue, and again can take us into counter-productive behaviours and actions.

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