As the procurement function continues to demonstrate value and maintain its trusted business advisor status, few things are more important than keeping track of the value delivered and measuring progress. With increasing pressure on the procurement function to demonstrate value beyond cost savings and the advent of zero-based budgeting, it is critical for procurement professionals to select the right metrics to measure the efficiency and effectiveness delivered. Yet too often, we have discovered organizations selecting the wrong metrics, measuring without a purpose, and using vanity metrics for measurement.
A clear understanding of what really matters to the success of the function and the organization, and what does not, can make all the difference. Our experience from collaborating with customers has revealed three common mistakes that procurement professionals frequently make when measuring performance.
Measuring vanity metrics
Vanity metrics are typically surface-level metrics that are measured in absolute values. They are used to impress others and have a place in measurement, but not in measuring the value the function has delivered. Examples of vanity metrics in procurement include comparing total spend, total POs, count of suppliers, number of electronically enabled catalogs, number of projects involving collaboration with product development, and so on. The challenge with measuring and using some of these vanity metrics is that increasing/decreasing spend, count of POs, or count of catalogs does not necessarily indicate that the procurement function is delivering value or making progress.
Rather than measuring absolute values, procurement professionals should measure key normalized “metrics that matter.” One of the key reasons a metric should be normalized is to ensure that the metrics are comparable to industry benchmarks and targets.
Examples of better normalized operational metrics include:
- Addressable spend as percentage of total spend: Used to understand the extent of procurement’s influence and control through its practices across the entire organization.
- Electronic POs as percentage of total POs: Used to determine the proportion of all PO transactions that are electronic. This is also a proxy for PO efficiency with the idea that a higher proportion of POs that are electronic means a more efficient buying organization.
- Suppliers per $billion in addressable spend: Used to measure the spread of suppliers across the organization. A lower supplier count typically indicates that the supply base is concentrated, while a high supplier count may indicate a long tail of suppliers or opportunities to consolidate suppliers.
- Percentage of POs that are catalog-based: Used as a proxy to measure compliance with negotiated contracts and pricing.
No clear purpose or objective
Each metric that is tracked to measure value or progress should have a clear objective. More often than not, this is unclear in the scorecards we have seen. If your organization has a metric for the number of sourcing events conducted electronically, why is this metric important? Does an increase in this number indicate that your organization is more efficient at sourcing? How do you compare your sourcing efficiency against industry benchmarks? How do you set a target for sourcing efficiency?
Without a clear objective for the metric, the metric will not add value and will lead to wasted energy and resources.
Lack of ownership
As metrics are put in place to measure progress and success, the sheer volume of metrics that are measured can quickly get out of hand. Savings by direct vs. indirect at the category level, number of suppliers by spend category, percentage of suppliers enabled by region, percentage of categories implemented: these are good examples. Who is responsible for the success of these metrics? Who is accountable for reporting and ensuring that these metrics will drive the success of the organization?
Successful organizations have a clear owner for each metric who is responsible for:
- Defining the metric
- Setting the targets for the metric and corrective action plans
- Establishing data sources
To measure value and progress, procurement professionals need to select the metrics that matter. Those who excel are the ones who can clearly demonstrate “how and why” through their metrics and avoid common pitfalls along the way while pushing the envelope of the metric benchmarks and targets. To see some meaningful metrics in action and how your organization compares, check out our recent benchmarking insights on procurement, sourcing, and working capital: Insights from the SAP Ariba Benchmark Program: How To Be a Top Performer.