In Part 1 of this series on procurement ‘s key performance indicators (KPIs), we discussed how legacy KPIs need to be augmented to help procurement expand its value proposition. In this second installment of the series, we ‘ll focus on how to build a balanced 360-degree procurement scorecard and highlight some truly KEY performance indicators that help foster the right behaviors and alignment across the source-to-pay (S2P) process and the broader value chain.
This four-part brief is available to readers as part of SIG and Spend Matters ongoing partnership.
KPIs: Become What You Measure
Everyone knows the old adage, What you measure is what you get. Known as the Hawthorne Effect, it has been shown that performance will improve when those performing the process know they ‘re getting measured on it. So, designing stakeholder-specific KPIs is critical to ensuring business alignment. The SMART (specific, measurable, achievable, relevant and timely) metrics model is an excellent framework to apply here. Still, the first step is ensuring a 360-degree measurement system that aligns procurement with:
- Customers/stakeholders and suppliers across the S2P process and the value chain
- The strategic/business objectives of senior management and the operational realities and constraints faced by line staff. To get down to it, let ‘s talk about the specific KPIs that are worthy of consideration:
Spend Management and Total Cost Management
- Validated cost savings (beyond price savings), including freight, tariffs, quality, capital, insurance, energy, administrative, etc. along with market price benchmarking, where available. Budget reductions stemming from these savings should be determined by finance and business units not procurement.
- Normalized supplier spend (e.g., spend per employee). This is a good C-level metric that brings in demand and financial planning beyond just unit costs.
- Annual value leakage This combines multiple areas of value loss: missed contractual discounts, contract penalties, missed early payment discount opportunities, duplicate payments, inventory write-offs, T&E fraud/non-compliance, etc.
Stakeholder-specific Metrics Of Supplier Performance And Procurement Performance
- Spend Under [procurement-led] Management as a business influence metric that should, in turn, help improve the other KPIs. This metric is more than just procurement involvement in sourcing deals and can be tuned in various ways.
- Stakeholder satisfaction score with procurement and internal SLA performance where applicable (e.g., in shared services). Some firms also measure supplier satisfaction to assess whether they ‘re a customer of choice.
- Stakeholder relevant metrics impacted by suppliers (and procurement!) for business outcomes such as innovation (e.g., % of new revenues stemming from supplier innovation programs), M&A support (e.g., post-merger cost synergies ), organic revenue uplift (e.g., improved promotions uplift $ per marketing supplier investment), working capital efficiency (e.g., DPO, early payment discounts), sustainability (e.g., supplier sustainability ratings), supply chain risk, and many others.
- Process-specific S2P workflow metrics for cycle times, error rates, response times (e.g., to a stakeholder inquiry), and other metrics that are tactical KPIs in terms of workflow, but can be strategic when translated to the impact on spend and supply performance.
KPIs that are tied to contracts, summable to category/supply-base level, and tailored by supplier/spend type), including:
- Supplier Perfect Order rate that combines on-time in full (OTIF), quality, and invoice accuracy for item based spend. This is also a highly lagging supply base KPI for continuity of supply, but we ‘ll address this later.
- Service level performance against SLAs for services spend, and stakeholder specific supplier/supply outcomes mentioned earlier (e.g., innovation)
- Other balanced scorecard elements: supplier risk (by risk type), flexibility, responsiveness, tier 2 supplier performance, CSR score, etc.
Procurement Staff Engagement and Satisfaction
- Voluntary turnover rate for the key job roles/staff that are delivering procurement value
- Employee engagement/satisfaction rate to ensure that procurement employees are getting what they need to be successful in hitting their KPIs: training, tools, knowledge, funding, etc.
Ensure that investments in procurement are yielding high economic returns. The word investment is critical to denote a profit center mindset and operating model rather than just a cost center-centric back-office expense.
- Cost of procurement as a % of spend (sometimes called procurement Operating Expense or Procurement OpEx). There are two methodologies and benchmarks to choose from (an activity-based costing view versus a procurement departmental budget view) here.
- Procurement ROI that takes annual quantified spend/cost improvements from #1 above and divides by the Cost-of-Procurement
Most procurement organizations have a few of the above metrics and usually focus on Procurement ROI elements, but this can create misalignment with the business that cares about supply outcomes relative to their business goals rather than just year-on-year cost savings. So, adopting the balanced scorecard elements above will help shift a mindset from just cost-focused tactical spend management to more outcomes-focused strategic supply management.
Unfortunately, a scorecard should be more than a static list of lagging performance metrics. It should also be a tailored dynamic dashboard tuned to various stakeholders that also includes leading/capability metrics for people/organization, process and technology (automation, information and analytics-powered insights). This topic is way beyond what we can cover here, but the single most important thing that a CPO can do is to have a Procurement Center of Excellence (CoE) that establishes and refines these scorecards for KPIs and capabilities to help set transformation goals, provide needed resources/support, and track improvements.
Before we wrap up this installment in this series, it ‘s essential to recognize that KPIs are part of a process for procurement performance measurement and improvement (or transformation at a larger scale) that must fit into a broader performance management process for the value chain and budget owners. As such, this process needs to be more efficient so that it can be improved and made more effective (i.e., to provide deeper predictive insights for less effort/cost).
Anyone who has done this knows it ‘s not easy! Here is where technology can help extract and clean performance data from disparate systems, engage with stakeholders for self-service interaction (which is increasingly guided ), integrate to external data like benchmarks, identify trends, predict future performance and then automatically notify key stakeholders only when they need to take actions rather than requiring them to meander around pretty/ dumb dashboards. This requires an orchestration of various tools such as S2P applications, analytics (with increasing machine learning), RPA tools like bots, market intelligence feeds, master data management tools, community benchmarking and so on. Luckily, there ‘s a healthy supply market for these tools, but some assembly is required!
In the next installment of this series, we ‘ll dive into how to implement a few critical and problematic KPIs that require a little extra attention to execute well. So, stay tuned!