Our final rewind article for 2016 is on one of the hot topics of the year – procurement KPIs. More specifically, how do you go about measuring the unmeasurable?
Is it time to develop new procurement KPIs? As the profession delivers more value, we need to consider measuring the ‘unmeasurable’.
How on earth do you put a KPI against innovation in procurement? How about risk management? Or talent? It’s time for the profession to come together and quantify the value we deliver beyond cost savings.
For me, a revelation that came out of the discussion at The Beyond Group’s “Productivity in Pharma” (PiP) Think Tank in Basel last month, was that there is an urgent need to create procurement KPIs that fully reflect the broader value our profession delivers.
Unfortunately, we will never escape the requirement to track savings (and nor should we; we’re good at it!), but it’s time to define the value-addition areas of what we deliver – productivity, innovation and risk management – in hard dollar terms so that we can quantify our value delivery in these areas.
In my previous post, I shared five rules of thumb for good procurement KPIs. To recap, each KPI should be:
- clearly linked to an overall business objective,
- uncomplicated and measurable in hard-dollar terms,
- based on outcomes, not inputs,
- not too long nor too many (five to six KPIs at a maximum),
- achievable and inspirational.
Taking these rules as a starting point, let’s look at five value-addition areas that every procurement professional should be measured against:
I know there are a lot of CPOs out there who are tired of the old ‘cost savings’ metric. And I understand it. But the reality is that cost savings is at least ONE thing that clearly defines our contribution. If we walk away from this, then we have lost an important anchor.
However, we do need to ensure that the broader business audience understands procurement is about so much more than savings, and that we can clearly define value in other areas as well.
One important point I would make (an opinion also shared by ISM CEO Tom Derry at the Procurious Big Ideas Summit) is around cost avoidance. Don’t insult yourself, or your CFO, by reporting on this metric. Costs that have been avoided simply don’t count.
There are so many ways CPOs can deliver efficiency gains that result in bottom-line value for their organisations. In the pharmaceutical world, I imagine this would be measured in terms of speed to market (or “speed to patient”, as one clever pharma Procurement Head put it), faster clinical trials or even the good old basics like reducing inventory.
There are so many ways that procurement can free up cash in the business, but the hard dollar value of this needs to be quantified – which is not impossible.
Business cases are always based on the time value of money. Net Present Value (NPV) is a fundamental financial measurement for businesses. So, before you embark on one of these efficiency projects, work with your finance team to agree on a calculation for the hard dollar value of the efficiency gain, then deliver it, and stick to the agreed value!
Procurement rock-star and former CPO of Deutsche Telecom, Eva Wimmers, talked last year about incentivising procurement-driven innovation by creating a suite of relevant KPIs, including cost and time savings achieved as a direct result of innovative improvements.
Innovation KPIs can be process-centric, behavioural or customer-focused (such as service and net promoter scores). What’s important is that every KPI is measurable in its own right and clearly connected to overall corporate objectives.
This is a powerful measurement that will capture the attention of your CEO and other executives. You see, the challenge with risk management (like safety) is that the ultimate success is when nothing goes wrong!
Procurement and other parts of the organisation can spend a lot of time and energy securing supply relationships and carefully managing contingencies, which result in absolutely nothing happening (which is a good thing!). At the C-level it is, therefore, quite easy to take risk management for granted and be tempted to reduce funding and resources in this area.
Actually, safety is a very powerful metaphor for the role procurement plays in managing risk. Nothing captures an executive’s interest more than safety. The language and methodology of safety measurement is well known to executives, most of whom are rewarded on safety metrics.
So, rather than re-invent the wheel with a whole new set of measurements around risk, simply reframe risk in a safety context. Work with your safety department to understand their metrics, explain what you are measuring and get their advice on how they would construct metrics for risk management in procurement.
When ‘selling in’ your risk management KPI to senior management, don’t underestimate the power of good storytelling. It is critical to illustrate your business case with rich examples of how much market share and stock market value has been lost by competitors and peers when supply chain risk is not properly managed.
Traditionally, we have valued this in terms of potential legal costs, but today it is so much more than that. Social media now ensures that your end customers (and the press) quickly become aware of supply chain issues, and these are amplified to such a point that they result in loss of market share and ultimately share price value.
Supply chain disruptions can have catastrophic impacts on corporate brand and equity value. Procurement, however, can play a huge part in protecting the company from this type of disaster, and I believe this is one of the most valuable roles we can play today. Risk management must therefore be highlighted and reported upon in our procurement KPIs.
As you will see at the close of this story, my bold recommended KPI for risk management is number of days supply chain disruption reported in media (with the objective of keeping this at zero!).
As a side point, research in the US has shown that companies who have invested in appropriate social procurement (projects that aligned and complement your brand) will bounce back faster after a market ‘shock’ event.
Call people what you will – ‘assets’, ‘human capital’, or even ‘resources’ – but I prefer to use the word ‘talent’. People are frequently regarded as an enabler metric, but I think it should be much more than that.
We should position procurement as a source of leadership talent for the business. Particularly if we believe what we say (and I do!) that procurement provides some of the best commercial training of any function.
Procurement offers its team members the opportunity to work across the business internally, as well as externally. So let’s put our money (and our KPIs) where our mouth is! Develop a metric that measures procurement’s contribution to developing leadership talent. Once again, this is something to which senior leadership is very committed in the best organisations.
So, to be provocative – here are six procurement KPIs that I would put forward as a CPO today:
- Cost savings – $ saved in financial year
- Productivity – $ released through working capital initiatives
- Innovation – Projected $ value delivered through procurement-negotiated supplier-led innovation.
- Risk management: Number of days supply chain disruption reported in media.
- Talent: Number of employees who have worked in procurement and are now on the enterprise leadership development program.
Procurement KPIs are a hot topic for everyone, and I’m sure you won’t agree with all my points. So…what are your thoughts?