Every organization wants to be successful, but the methods for measuring success differ drastically based on the industry, company, or individual department. In order to quantify or identify “success,” key performance indicators or KPIs are used to help rate employee performance and to pinpoint which employees are actively contributing toward the overall progress of the company.
When it comes to procurement—including tail spend management efforts—having KPIs in place is essential. Yet, it can handicap procurement teams severely if they are caught chasing the wrong criteria for calculating achievement. As a quick example, per-employee spend, while a common KPI, may not be a useful measurement of employee productivity because employees who manage many suppliers within the tail may not spend a lot of money in the process, while other employees may spend vast amounts of money on only a few suppliers.
Imagine spending an entire year hitting quotas and exceeding standards, only to realize at the end of the year that the key performance indicators established within the organization were incorrect, and what was thought to be productive activity has simply accelerated the rate at which the organization spiraled into deficiency?
On account of this potential outcome, it is paramount that procurement leaders establish the proper KPIs for their teams in order to guarantee that the successes they measure in real-time are genuinely culminating in legitimate business success for the organizations they serve. In order to aid you in your quest to drive towards company goals this year through KPIs that accurately reflect success, here are five procurement measurements that your company should be using.
1. Total cost to perform
As a metric for success measurement, the total cost to perform gets straight to the heart of the issue because it normalizes all procurement data and makes it easy to compare different organizations to one another, regardless of size. For example, if the total cost is calculated on a per-thousand-dollars-of-revenue basis, it results in a single number for comparing overall organizational efficiency.
Overreliance on such an all-encompassing calculation that comprises so many variables—like personnel costs and general overhead—can be problematic, because it doesn’t reveal the source of inter-organizational disparities in efficiency without further inspection. However, it is a very effective starting point for diagnosing what potential deficiencies might be present and can spark investigations into processes capable of revealing where an organization’s procurement team might be lagging behind its competitors.
2. Cost savings
Cost savings are at the heart of what procurement is all about. After all, why else would the procurement process need to be so heavily scrutinized unless the goal of acquiring necessary goods and services for the lowest possible cost was worth investigating and achieving? Well, what separates world-class procurement organizations from their peers is the cost savings they generate, and they spend 21 percent less money and employ 29 percent fewer staff members than their peers, on average. Obviously, this attention devoted to conserving financial resources is a hallmark of the very best procurement teams.
There are a number of effective ways to increase cost savings, among them being the automation of low-skill, time-consuming procurement processes, and employing other digital tools to reduce the man-hours devoted to less-consequential tasks for the sake of strategic efforts requiring human intuition. Regardless of how cost savings are achieved, its usefulness as a success measurement is undeniable.
3. Procurement cycle time
One of the goals in procurement will always be to reduce the time that passes between the placement of an order for goods and services, and the final delivery of those same goods and services. Up-front savings are fantastic, but there are other ways to lose money due to inefficiencies, and one of these is the loss of productivity due to purchased goods not being where they need to be at the required time.
This is one of those clear-cut cases where automation provides the most efficient solution for reducing the time of the procurement cycle because the correct software can reduce procurement cycle times by several days, while also slashing supplier lead time. Therefore, no matter what the internal cost savings figures might reveal, if the procurement cycle time is unnecessarily high, it is revealing an obvious area in which inefficiencies lurk, and where organizational attention needs to be devoted to refine the overall procurement process.
4. Vendor performance
Vendor performance is based upon an aggregation of measurements for determining vendor quality. These measurement techniques can include a wide range of assessment methods, including the average number of bids solicited, the average number of quotes received per bid, the percentage of tail spend through preferred suppliers, and pricing competitiveness along with compliance with negotiated terms.
Frankly, you truly can’t have too many techniques at your fingertips for tracking vendor performance, because so much of organizational success is reliant upon whether or not suppliers deliver as contractually promised, or whether or not swapping out one supplier for another is likely to remediate any problems that emerge. So, make sure you are holding your suppliers accountable for delivering what they’ve pledged, and have contingencies in place if partnership agreements aren’t panning out as expected.
5. Percentage of spend under management
As a performance metric, spend under management is frequently confused with two other metrics: spend under procurement and spend under contract.
Spend under procurement can be used to identify all of the spend that is handled by the procurement team. This includes purchases that are simply funneled through procure-to-pay software and never thought about strategically. If this is the case, this spend isn’t truly “under management” within the true spirit of the term. Likewise, spend under contract is not the same as spend under management because many contracts are renewed automatically with little thought given to alternative arrangements or renegotiations of terms.
In all honesty, spend under management should only refer to spend that is strategically managed. This means that, at a minimum, the spend is all subjected to regular analysis, contracts are all reviewed well before expiration to fine-tune negotiation strategies and identify alternatives, and end-user teams are engaged in the process to determine where they can add value to purchasing decisions.
Certainly, there are several other success measurements your organization will be monitoring in its quest to optimize procurement performance, and rightfully so. Just make sure you are paying at least some heed to the five key performance indicators suggested by this list, and also make sure you are implementing them properly so that the data you receive is relevant, actionable, and useful.