What's the difference between Procurement Value and Procurement Performance? (Part 1)
I'd like to thank Jason for letting me guest post. I remember about a year before Jason started Spend Matters, we were enjoying a drink at WorldSource, the old FreeMarkets conference, and talking about how we should set up a blog in the procurement area. Flash forward to today, and Jason has the most successful blog in the space. Well done! Jason has been gently prodding me to do the same, but I've been foolishly absent aside from the occasional conference presentation, article, webcast, etc. This will change soon, but until then …
The answer to the title of this blog post is: A LOT! Let me rephrase: How well does your Procurement scorecard REALLY reflect the Procurement value that you deliver? Obviously, purchase-price reduction is a narrow metric for value creation. Procurement value in pure economic terms is about more bang for the buck where “bang” is the utility the business gets from supplier products/services, divided by the bucks (i.e., spend), which then decomposes to activity vs. cost and then cost decomposes again down to price and non-price costs. So there's potentially a lot of value not being measured. For example: who usually gets blamed for the failure of supply assurance? Procurement. So, Procurement should be measured explicitly on supply risk on a top-level scorecard, and have associated resources for that. Less than 10% do, and that is obviously a problem.
When we first start working with CPOs in our advisory program, we start with their scorecard, then ask them for their elevator-pitch vision of Procurement -- and examine how well those match up. Usually, there are disconnects. Procurement usually wants to expand its sphere of influence and associated capabilities (Capability is the third key dimension besides Value and Performance), and get out of the PO-processing and emergency tactical-sourcing game -- even if the business isn't as inclined. So, Procurement needs to reach consensus with the business on the value it wants from the supply base, then work backwards to how Procurement can help improve that performance -- then build the Procurement scorecard around that.
So, start with consensus on IMPORTANCE/VALUE of spend management processes (or Procurement Services if you will) before setting targets on the wrong metrics for delivered PERFORMANCE. In Six Sigma DMAIC terms, DEFINE realistic spend/supply management value, MEASURE current performance along those dimensions of your future scorecard, ANALYZE improvement potential, IMPROVE performance (e.g., via category management teams), then CONTROL the new processes to hold the gains (e.g., spend compliance, supplier compliance, process compliance, etc.). In Gartner terms (but applied to users rather than vendors), get a consensus view of Completeness of Vision of spend/supply management before measuring Procurement's ability to execute.
When we measure firms at a high level in our program (or in great detail via our fee-based benchmarking projects), we break out ability to execute into proven performance as well as into predictive performance (i.e., measurement of capabilities). Both are important, and we drill these down into the elemental effectiveness/efficiency performance metrics and best practice metrics that roll up (via spend categories, sub-processes, etc.) to the aggregate performance and capabilities, respectively. It's the continual elevation and lockstep alignment of value, performance, and capabilities that really help a procurement organization evolve to higher value levels -- and then execute at world-class performance levels.
In part 2 of this post, I'll discuss how to better measure Procurement performance for these increasingly complex value streams within the Procurement service mix, and how to get better alignment with stakeholders -- especially Finance.
- Pierre Mitchell
TweetBacks
What's more interesting, is what behaviours are driven by the measurement. For instance, if I'm measured by the number of PO's a generated per unit time, you're going to see one heck of a lot of one line item PO's.
A few extra points:
They're correlated. They have to be. We always say 'Efficiency funds effectiveness'. i.e., you only get so much budget, so you can squander it on launching POs or re-invest efficiencies into higher impact processes like sourcing. The biggest Procurement cost is the OPPORTUNITY COST of not investing your money in the right place. Transaction costs are costs - Strategic Procurement costs are investments. So, if anyone gives us a hard time on focusing on P2P efficiencies, we say 'great - if sourcing is so important and P2P insignificant - then why are you spending 40% of your Procurement budget on the latter?'
Efficiency is not just P2P and effectiveness not just sourcing. In fact, P2P effectiveness is critical and so is sourcing efficiency to the point of opportunity cost. 20% efficiency improvements in sourcing should equate to 20% more savings - and if you want investment in e-sourcing, you better be prepared to up the savings targets in return. Luckily, it won't be hard if you do it right.
Also, value is indeed often subjective, but also important. To a stakeholder - 'perception is reality'. That's why 'brand management' and communications is key for Procurement - and a key skill that is lacking for many.
Also, again, value is orthogonal to performance. You can ask stakeholders: 'how am I doing'? and they 'great! you're processing POs really well! you are excellent at expediting! and you really accommodate my 11th hour requests to negotiate a deal when I have an invoice in my hand already!'. That is low value but high performance.
And totally agree on 'you get what you measure' - that's why we're doing a study on it. Stay tuned for blog post # 2 on that.