In the first two parts of this KPI series, we highlighted some of the foundational measurements for procurement pros and the problems of traditional procurement key performance indicators in terms of how they can be incomplete, misleading and even damaging to a value chain transformation.
So how do you get from tactical procurement metrics to more powerful spend/supply measures that help build new capabilities and favorably impact critical business outcomes?
We have mentioned some of the more expansive sets of metrics that organizations use to measure several areas:
● Spend/cost management and savings
● Supplier/supply performance
● S2P process metrics for process performance
● Underlying capabilities in talent management, digital, etc.
● Stakeholder-specific metrics related to the above
In this third installment, we’ll dive a little deeper into some example metrics, but the first order of business is to provide a framework giving the backdrop on the KPIs and use it to hone in on metric types before listing individual KPIs.
The enterprise value framework below shows where spend/investment is made to business units (and supporting functions like procurement, finance, IT, HR, etc.) that delivers business performance/returns — and enterprise value (e.g., as measured by EVA, ROIC or equivalent). Organizations that use such enterprise value metrics also tend to have more robust strategic planning and FP&A (financial planning and analysis) processes that in turn help procurement organizations align to.
You can then extend this value framework out to suppliers where “spend is what you pay, but supply is what you get.” Better supply outcomes for less spend means more enterprise value.
“Spend performance” can be benchmarked via a normalized spend KPI, such as “Spend as a % of revenue,” but supply performance (which includes underlying supplier performance and contract performance) is the key to maximize supply value, which is ultimately what business stakeholders want.
You’ll notice that procurement hasn’t yet been brought into the conversation, and this is what completes the picture below. Procurement adds its value through having the enterprise execute a robust S2P process (and integrated to a broader supply/value chain picture) that connects this chain of value from external customers to business unit/function partners and then ultimately out to suppliers as shown below:
Integrated Business/Spend/Supply Management Framework
The S2P process shown illustrates how “spend management” and “supply management” work together. Supply management is generally about sourcing to set up supply capabilities, and spend management focuses on the spending process (budget consumption, ordering and payments) and the spend data that feeds back to sourcing.
So, now we’ll have a context to discuss the individual processes and concepts that make this all work together:
- Value Management (and Performance Management). This is the ability to repeatedly generate and improve enterprise value not only through competitively differentiated/defensible competencies and smart executable strategies, but also through a performance management capability that keeps all enterprise process participants focused, aligned and supported.
- Financial / Budget Management. This is “big spend management” for all firm expenditures — whereas “small spend management” is about managing supplier spending. This is the FP&A process (and cash planning) in Finance and the Integrated Business Planning process that links to supply chain planning.
- Demand Management. This is managing the demand that drives supply and spend! Top-performing procurement/SCM organizations see and shape demand much earlier and more deeply than their peers so that they can apply all value improvement levers and create a higher quality of early spend influence rather than just a higher quantity of late-stage spend influence. See figure 4 of the 2019 Deloitte Global CPO Survey for more insights on this.
- Cost Management. This is the ability to measure and improve costs that flow to the P&L directly or indirectly. It dovetails into financial/budget management but can be a disconnect between procurement and finance. For example, based on our research, procurement’s top request from finance isn’t just funding; it’s leadership in strategic cost management (hint: purchase price variance is not a strategic cost measure).
- Savings Management. This is the ability to identify cost/spend savings opportunities, coordinate resources to seize those opportunities, validate the results, pass on the savings (to shareholders or budget owners), and then hold the gains to reduce savings leakage.
- Service Management. This is about managing internal business services from business functions and/or shared services groups; and also extending and managing third-party services in an “XaaS world.”
- Stakeholder Management. The management of key stakeholders by the process owner (e.g., a CPO actively managing critical budget-owning business leaders and also strategic suppliers).
- Spend Management. The ability to see your supplier spending (and the procure-to-pay processes that spent it) so that you can “spend better” tactically within P2P, but also spend more effectively through better sourcing, supplier management, risk management, etc. “Spend” is of course comprised of both cost drivers and demand drivers (volume/consumption).
- Supply Management. Not a name change for the Purchasing department, but a process to provision resources internally and externally to fulfill demand.
- Process Management (e.g., S2P management). The ability to define, measure, analyze, improve and control an end-to-end business process such as S2P, order-to-cash, etc.
- Procurement Management. Defined either as managing all procurement department activities/resources that only formally roll up into the procurement department, or, preferably, managing all procurement activities (with resource coordination via other resource owners) regardless of where the resources report into.
- Category Management. This is about defining and managing spend/supply segments so that strategies, processes, and resources are optimized to varying degrees of granularity of the nature of that supply market (and the internal/external demands driving it).
- Sourcing Management. Gathering requirements, spend, cost structures and market intelligence to formulate sourcing strategies to optimally negotiate and contract with suppliers that deliver lowest TCO and highest value within mutually beneficial relationships.
- Supplier Management (or “Third-Party Management” more broadly). This is the management of suppliers that guides supplier interactions in terms of relationship management, performance management, quality management, risk management and information management.
- Contract Management and “Commercial Value Management.” Contract management isn’t shown explicitly in the graphical framework, but it is central to the whole value flow. Contracts aren’t just legal risk transfer documents — they’re the ultimate B2B system of record that captures all aspects of commercial value flow across a supply/value chain. We call this area “Commercial Value Management” and believe that it represents the next generation of contract management.
- Performance Management. KPIs measure performance that itself is a step in the performance management cycle. As businesses and strategies evolve, so must the KPIs. The leading performance indicators must change to actually lead the transformation.
- Capability Management. Leading performance metrics (vs. lagging KPIs) are almost always “capability metrics” that relate to people (talent/organization), processes (and supporting best practices), and digital (automation, visibility, master data, intelligence, etc.).
As promised, let’s get down to brass tacks and the individual KPIs. These 18 KPIs could certainly be exploded much further (No. 4 on cost savings could be an entire article by itself!), but you should start here:
- Stakeholder-specific business KPIs (i.e., business outcomes: sales; profits; innovation; budget levels, budget attainment, etc.)
- Normalized spend performance (e.g., spend as % of revenue).
- Stakeholder-specific spend/supply/supplier metrics — linked to No. 1
- Total Cost Savings (e.g., year-on-year; benchmarked to market) — not just supplier-related
- Supply/value chain performance (supply continuity, cost, service/fulfillment, cash, CSR ratings) — linked to No. 1 and No. 3
- Supplier performance (e.g., fulfillment/SLA; capability score; contract performance) — linked to No. 5
- Supplier capability level (e.g., process capability, resilience, flexibility, innovativeness) linked to No. 6 since capabilities (leading metrics) enable lagged KPIs
- Category performance (linked between previous two and applied to multiple suppliers in the category)
- Spend Under [procurement-led] Management percentage. A “quality of SUM” can also be measured here or in No. 15.
- Procurement-led value improvements $ (per KPIs from above), including year-on-year cost savings: broken out into “hard cost savings,” cost avoidance/soft cost benefits, balance sheet improvements, etc. This also is an entire report in its own right!
- Procurement OpEx or Cost-of-Procurement (procurement “investment”)
- Procurement “ROI” calculated from previous two
- Stakeholder satisfaction with procurement (e.g., net promoter score, internal SLA performance, etc.)
- Supply/spend management (e.g., S2P) process metrics: cycle time, defect/rework rates, process-level productivity, etc.
- Internal S2P capability level (e.g., alignment, automation, best practice utilization, spend/contract visibility, market intelligence, risk management, etc.)
- Value leakage (maverick spend, duplicate payments, supplier penalties, etc.)
- Procurement staff performance and capabilities (skills/competencies) tied to above. Metrics can include reviews, training, skill/competency scores, etc.
- Procurement staff engagement and satisfaction
- If you want some “homework” to apply these KPIs to your organization, simply map these KPIs on top of the graphical value framework shared earlier and think about how that relates to your organization and your current scorecard.
We will however leave you with a key strategy: Tailor your KPIs and the dashboards to the internal stakeholders (and don’t forget your suppliers). It’s their spend! Doing so allows them to see and manage their own performance (spend, savings, suppliers, targets, actuals, projects and procurement’s support of their S2P performance/process).
Procurement then, in turn, with support from third parties, can then help stakeholders refine that spend/supply management operating model to be informed by best practices.
In support of this, the final installment of this series will drill into an example metric — spend under management (SUM) — and discuss how to understand it, expand it and implement it. Stay tuned!
Pierre leads procurement research and IP development at Spend Matters and is the chief architect of the firm's industry-leading SolutionMapSM framework. He has 30 years of industry, advisory, and research experience and is a recognized digital procurement transformation expert specializing in advanced supply processes, practices, metrics, and enabling digital tools and services. Previously, Pierre led procurement research at The Hackett Group, and also coined the term "guided buying" in his role as the industry's first procurement technology market analyst at AMR Research (now part of Gartner Group).