Top 5 Metrics to Measure Procurement PerformanceJune 26, 2012 AP/FinanceProcurement
How do you know how successful your procurement practices are?
According to Ardent Partners, 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. 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.
Compounding the issue is the fact that many of the metrics that CPOs use to measure departmental performance never hit the general ledger. 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.
The top metrics Ardent Partners analysed in response to that problem are as follows:
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 not 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. While CPOs 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 that a procurement organization manages or influences, which is comprised of all direct spend, indirect spend (including capital), and service spend. 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 type. For every dollar/euro that is placed under management of the procurement department, the average enterprise sees a benefit of between 6% and 12%.
Obviously, it’s important for an organization to keep track of its procurement department’s performance. Once you’ve understood how much or how little value your procurement practices are providing, you can take steps towards increasing that value by making it better. These metrics can be a helpful tool to help an organization measure their procurement performance, and help set them on the right path towards procurement excellence.