Metrics guide a function, perhaps more than they ought to at times, but almost certainly in a direction that can be towards the business or at odds with it.
"What gets measured gets managed" is a 60-year-old mantra attributed to the great management writer Peter Drucker. Getting the attention of stakeholders - and even shareholders - means delivering in ways that are meaningful to them, and, crucially, in measurements that are vital to them. Knowing what these are and how to deliver against them may sound simple, but it often requires a complete recalibration of how procurement operates.
Indeed, as finance writer Andrew Sawers has pointed out, indicators can span the whole spectrum of corporate performance:
- Purely operational measures such as cost savings, department running costs and percentage of spend within scope.
- Risk-oriented measures such as concentration of spend with key suppliers, purchase orders issued after the invoice date.
- Internal customer satisfaction surveys and performance against service level agreements.
- Balance sheet and working capital measures such as inventory levels or days’ purchases outstanding.
- Group P&L measures such as procurement’s contribution to reported earnings per share.
How that translates has much to do with a business’ outlook and direction, as well as the maturity of a procurement function: Plotting a route to P&L contribution is likely unachievable without registering operational achievements, but it’s incumbent on any developing procurement team to turn directives from the business into meaningful measures.
Take Unilever’s lofty sustainability goals: in order to support those, procurement has to harness elements of scorecarding and reporting in order to understand supplier performance. That then has to translate into progress towards these business goals.
Meanwhile, there are also internal scales of progress, such as the KPIs that get used to mould the personnel into an effective team.
Where the most sophisticated groups are a step ahead, is in bringing these metrics into a line. If what gets measured gets managed; it makes sense that function performance measurements, supplier scorecards and business-oriented goals can all line up.
Still, the question remains: can we define the metrics that will guide us towards business impact?
One interesting take: for most, ‘spend under management’ is the alpha and omega of measurements, but many procurement groups are finding flaws in that approach. Effective governance and, ultimately, spend compliance can give a greater indicator of procurement’s progress and help teams calibrate their own efforts.
Whether or not that chimes with your experience, it gives a sense that some metrics can mislead, but others can also be refined. Spend compliance can be vital to understanding the success of internal governance, just as effective scorecarding can give a window into supplier performance and allow comparisons on that side of the table.
Internally, the quality of the procurement process should also come under scrutiny. Elements such as cycle time, contract compliance and defect rate can give a sense of the efficiency of various processes – a set of vital signs that few will be able to ignore.
Ultimately though, there’s an argument that says the ultimate cap on any set of metrics is ROI, and it’s here that clear thinking is required. If all metrics can be traced back to this idea of ROI – an exercise itself which requires careful management and analysis of data – it’s possible to trace the value of each activity and the outcome of each decision.
And when you can manage that, proving yourself to your counterparts is a more achievable prospect.