Measuring Procurement Performance, Rocket Science?

Mikael Hellström

VP, Customer Relations, Customers

I remember around 15 years ago, when Procurement started to become an important part of the CEO’s agenda. Before this, in many companies, if you did not perform well enough in Sales, you were put into Procurement “to do something useful”. Suddenly Procurement was recognized to have a direct impact on the company’s P&L and the “revolution” of e-Sourcing, e-Procurement and electronic invoices took place. Everybody wanted to be “best in class” in the field of Procurement.

When something becomes more important, you tend to want to keep it under the loop and measure it. This was also the case with Procurement. Unfortunately measuring Procurement is not as straightforward as measuring e.g. Sales with topline and profitability development. Hence, different KPI’s were invented like never before. Different kind of savings were reported upwards in the company to justify the existence of Procurement, all its fancy tools and all the new category manager recruitments. I remember being in a meeting myself where it was stated that “we needed to claim a 10% savings target to the top management!”. When I asked how we should actually measure this, the reply was “it does not matter as long as we can show a 10% savings”. I was not convinced.

Credibility problems

This kind of thinking led to a credibility problem for Procurement. Many of the KPI’s were so complicated that nobody really understood the underlying logic behind the figures. Procurement was blamed for reporting “Funny money” which was not visible under the bottom line in P&L. Sometimes, since the logic behind the KPI’s were so complex, even Procurement itself had difficulties in remembering/understanding them.

Does this sound familiar to you? For me it does.

This complexity leads to the fact that when people are changing positions, the procurement newcomers might have difficulties in understanding the existing KPI’s. As a result, they might want to invent new KPI’s to satisfy the reporting needs and to own the KPI’s themselves. I’m not saying that KPI’s should be carved in stone forever. Of course they should reflect the strategy and goals of the business, which Procurement is supporting and serving. But still it seems that the KPI’s are way too much dependent on the people working in Procurement. You can maybe little harshly say; “new people, new KPI’s”. If KPI’s are changed too much and too often it leads to more confusion among internal stakeholders.

Don’t kill the process!

Another problem with numerous and complex KPI’s is, that when they measure processes like source-to-contract, the process becomes very stiff and impossible to drive, because so many attributes are required in each step to be able to measure the required KPI’s. People get exhausted of filling information into the project management tools which leads to not following the process properly or at all. The process dies latest at the stage when the “KPI-inventer” has left the position or company.

Keep it simple, and involve

Hey, let’s not make this too difficult, ok? Since measuring Procurement is not always straight forward and might involve some discussion when talking about e.g. Procurement savings, it is extremely important to involve internal stakeholders both when developing the processes and KPI’s, and when actually executed them. It is much more powerful if a CFO approves the reported savings than if a CPO does it. It gives Procurement the credibility it is aiming for when other functions are involved. And regarding the complexity of the KPI’s, remember that even if it is not perfect in all perspectives from your point of view, think about the people who actually execute the process, your audience for the reports and also your future successors. Many times roughly right is better than precisely wrong. Here is summarized your three steps to better Procurement credibility;

  1. Involve internal stakeholders (both inside Procurement and other functions) to design the processes and KPI’s connected to those processes
  2. Make the KPI’s simple enough, so that also others than you understand them
  3. Involve other functions (preferably CFO or Business Head) to approve projects to get the credibility behind the reported savings

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