The CPO’s Top Performance Metrics
“I think an underlying issue for the performance measurement of any function that must be addressed is understanding how that function captures its ‘value-add’ to the enterprise versus the ease of tracking and accounting for it. My view is that the determining factor of what to measure should be related to where or what you are expending resources and time; this should be true for all functions.” – CPO, Hi-Tech Industry
Measuring procurement performance can be as complex and nuanced as the value that the function can deliver. The results from some procurement-led strategies are more complex to understand than others. Consider demand management (where many CPOs like to highlight that “the best way to save money is not to spend it”): procurement can influence category usage in several different ways like the sourcing decisions it makes, the training and coaching it provides during implementations/roll-outs, and the general education it can provide. The benefits of a strong demand management program can be substantial but the correlation to and/or causation by procurement actions can be difficult to assess. Additionally, the results from demand management strategies can be nearly invisible when analyzing the company’s financials. Tools like automated spend analysis which can provide a detailed view of spend at the category and supplier level are needed to see the full results of this strategy.
Compounding the issue is the fact that many of the metrics that CPOs use to measure departmental performance never hit the general ledger. One example is the difference in how implemented savings and budget-impact savings are tracked and reported. Through no fault of procurement, implemented savings, which are a real and quantifiable benefit to the enterprise, may not translate fully into budget-impact savings. While most procurement organizations have a defined performance plan, many have difficulty clearly defining a broad set of metrics that link to the value that procurement delivers.
CPOs who believe that they have a successful partnership with their CFO often define that success and their alignment with the CFO almost solely in the context of having an agreement on the definition of performance metrics, specifically savings. But, having alignment on measurements is not the same thing as having alignment on values. Savings presents several challenges to the average CPO in both how it is measured and by whom; procurement departments also face the risk of marginalizing other areas of potential value when savings is the sole focus.
While Procurement ROI can be useful in measuring relative efficiency improvements for a procurement department and justifying the business case for an investment in more procurement resources, it is a poor comparative metric when used to measure procurement departments at enterprises of different industries, regions, or sizes. CPOs should be wary of consultants and analysts that utilize Procurement ROI as a primary benchmarking metric and a driving force behind recommendations. Additionally, while CPOs may make decisions in an attempt to improve this metric, those decisions should not be pursued at the cost of incremental enterprise value.
The Gold Standard: Spend Under Management
Spend under management refers to the percentage of total enterprise spend (which is comprised of all direct, indirect (including capital), and services spend) that a procurement organization manages or influences. Ardent Partners is a strong proponent of the importance of this metric in understanding procurement performance. Without undermining the importance of other procurement metrics, like savings; at present time, spend under management is procurement’s “gold standard,” a common metric of performance and impact that can be uniformly applied to procurement organizations of any ilk. For every dollar/euro that is placed under management of the procurement department, the average enterprise sees a benefit of between 6% and 12%.
An increasing number of business executives have made the realization that an operating environment that values cash, profit margins, and risk mitigation is one that that plays to the primary skills and capabilities of a procurement operation. As the leader of procurement team, it is incumbent upon the CPO to ensure that the department is engaged and aligned with the business and operating at full capacity. CPOs must set a framework that enables their team to manage more spend and influence more behaviors while becoming serial collaborators with internal and external partners alike.
Interested in topics like this that matter to the CPO? Consider attending our CPO Rising 2016 event in Boston on March 29 & 30, 2016. Registration is now open.