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Procurement Performance: Moving Beyond Savings
For more than a decade, analysts at Ardent Partners have challenged the use of savings as the sole or primary measure of a procurement department’s or the Chief Procurement Officers‘s (“CPO”) performance because doing so can diminish or constrain the total value of what procurement contributes to an enterprise. In periods of deflation, savings can appear to be a convenient procurement metric, but there are simply too many factors beyond the control of a procurement team that ultimately determine final savings numbers for it to dominate the performance discussion. The good news is that, as of 2016, only 7% of procurement departments used savings as the sole measure of their performance. The list of other metrics used by the other 93% of enterprises is quite lengthy, and the level of usage of each indicates that no real consensus yet exists as to what the other top metrics should be. But, that is fine because this industry works on a continuum. It has taken years for the industry to move to a more balanced approach to procurement performance; so, it may take a few more before the methodology is standardized.
“Aligning procurement strategy to overall business strategy makes you a much more attractive candidate to the rest of the company. Understanding what the business does and what the business units are trying to do and then coming up with a roadmap to determine what procurement needs to do to support those needs is not easy. In fact, it can be even harder to articulate the connection of procurement performance to company results but it is a worthwhile pursuit and something I feel was critical to my advancement.” – EVP & COO at High-Tech Company
Today, a majority of executives understand, at some level anyway, the complexity and nuance in measuring procurement performance; but that was not always the case. For the last decade, a majority of CPOs (and their lieutenants) have actively worked to change the procurement performance narrative and press key stakeholders across the enterprise to realize that there is more to procurement’s “value add” than savings alone. At long last, it appears that the efforts of these few are now poised to help so many working in the profession. To ensure that this new savings tale becomes gospel, it falls to all professionals working in procurement to evangelize a more balanced approach to procurement performance measurement. As more executives are converted and begin to change the way that the procurement department’s performance is measured, CPOs will need to reflect that change and modify, as necessary, the way their departments are managed and organized.
In recent years, improving and enforcing compliance levels and increasing the number and impact of procurement-led innovation initiatives have established themselves as top CPO priorities. Technology and increasing/improving process automation levels within their department has really increased. Over the last few years we have seen the scope of technology projects and the number of business processes considered as targets for process automation continue to grow.
“I am pushing heavily for technology changes in 2016 and beyond. The need to take paper out of our environment as well as the need for automated, auditable workflow remains my #1 priority. I have contracts and POs and am now pushing for ePayables, vendor on-boarding, and supplier management forms,” – Director of Procurement at a Major Insurance Company
For most CPOs, this will mean a reprioritization of goals along with a reallocation of resources and changes to both performance reporting and staff focus. For others, this will take the form of a deep review of organizational competencies and the implementation of new hiring and training strategies. Others still may find that a wholesale change in management style is warranted.
If the de-emphasis of savings as a measure of procurement performance becomes permanent, and, at this writing, it is not clear that it will, then CPOs’ responses to this shift have the potential to become the catalysts that are sorely needed to drive procurement departments to become more agile and achieve the next level of performance.