Tag Archives: KPIs

What Is The Cure To The Side Effects Of KPIs?

If there is one topic in business literature that has been covered exhaustively, it is Key Performance Indicators (KPIs). But if you’re not careful, the indicators you set might inadvertently encourage behaviours that can be dramatically damaging…

By Josep Suria/Shutterstock

“In 19th-century India, the city of Delhi had a snake problem. A rather large population of cobras slithered the streets with impunity. The British government decided to get rid of the snakes through crowdsourcing. Officials offered a bounty for every dead snake that locals brought in.

But something unexpected happened.

Soon after the British started to pay for every dead cobra, they realized that local entrepreneurs had begun to breed snakes in order to get paid.

The government canceled the program. So, the cobra farmers released their worthless snakes into the streets.

It turned out the British didn’t want dead snakes; they wanted fewer live snakes. By incentivizing the wrong thing, they inadvertently doubled their problem.”

The Biggest Threat To A Growing Company’s Culture, By incentivizing the wrong thing, growing companies can create more problems than they solve.

If there is one topic in business literature that has been covered exhaustively, it is Key Performance Indicators (KPIs). In procurement it’s no different; just do a Google search on “Procurement KPIs.”

KPIs have become an integral part of business, but they should still be approached with caution. Because business is human by nature, there are many pitfalls to consider when defining KPIs. If you’re not careful, the indicators you set might inadvertently encourage behaviors that can be dramatically damaging, and lead to a very different outcome than the one you expected.

KPIs can have negative side effects

The story at the beginning of this post is the origin of the term “Cobra Effect” and illustrates the potentially negative impact that poorly designed KPIs and incentives can have.

In the world of Procurement, some KPIs may create similarly problematic situations. For example, the following two KPIs are used or mentioned quite often:

  • Number of suppliers per £/$/€ million third-party spend
  • Number of Procurement FTE per £/$/€ million third-party spend

First of all, both KPIs are useless without context and, what’s more, they can also foster dangerous behaviors and outcomes. For example, spend consolidation or supplier reduction programs are quite common in Procurement, and they can lead to over-dependencies by creating situations of quasi-monopoly. Therefore, such a leading indicator (supply base concentration serves an objective, it is a means, not an end) should be considered in a broader context and need to be counterbalanced with other corresponding leading indicators, such as, for example, the impact on savings and on risk exposure (dependence, single-sourcing, etc.).

Another classic example is related to payment terms. Whenever organisations try to improve their cash management/flow, they also question whether or not to extend payment terms with suppliers, even though it has been proven time and time again that the impact of extending payment terms is minimal. Despite bringing some short term benefits, choosing to extend payment terms could create long-term issues, as suppliers will not consider such procurement organisations as a “customer of choice.” In that specific scenario, it would be much more beneficial and valuable to improve Source -To-Pay processing times. This would improve the management of liabilities and cash by, for example, using supply-chain finance, which is a more effective way to improve cash management and, at the same time, relationships.

Purpose is the most effective way to influence behavior

The science of motivation is a complex topic and there are numerous studies in the field of behavioral economics that demonstrate how people are biased and often unconsciously make irrational decisions. Therefore, organisations must use caution when designing KPIs to avoid the folly of rewarding A, while hoping for B.

Luckily, there is a well-known and proven safeguard against pitfalls like these: create a sense of purpose and give actions meaning.

Rather than just focusing on a target, this approach focuses on outcomes (‘why’), which will facilitate adoption and alignment across the organization. Then, people will be able to define the ‘how’, and engage in the appropriate activities (‘what’) based on the context they are in. This form of “commander’s intent” also gives collaborators and suppliers more autonomy (the topic of KPIs and  their impact also applies to contracts as a measure of the deliverable or outcome). They need this autonomy to adapt their actions in a dynamic and volatile environment.

“When a measure becomes a target, it ceases to be a good measure.” –Marilyn Strathern, British anthropologist

3 KPIs for Digitally Transforming Your Business Spend: How Do You Measure Up?

If CEO predictions are any indicator of what’s to come in the business world, buckle up, because we may be in for a bumpy ride. Here are three of the most influential KPIs for purchasing, invoicing, and expenses. 

By Aaron Amat/ Shutterstock

If CEO predictions are any indicator of what’s to come in the business world, buckle up, because we may be in for a bumpy ride. According to PwC’s annual CEO Survey, there’s been a 436 per cent increase in the number of CEOs saying they expect global economic growth to decline this year. Just 35 per cent said they are “very confident” about revenue prospects for the next year.

So, what’s a business leader to do? The most popular answer seems to be “look inside-out for profitability and growth.” Faced with economic uncertainty, finance and procurement executives are increasingly challenged to not only uncover and deliver savings opportunities, but also to reduce risk, support innovation agendas, and create levers for growth.

3 Digitisation KPIs to Measure Your Procurement and Expense Process Maturity

It’s important to set measurable goals to assess the maturity of your procurement and expenses processes. By analysing the largest accessible source of business spend data (the nearly US$1 trillion that flows through the Coupa platform), Coupa Business Spend Management (BSM) experts have identified 12 Key Performance Indicators to help you gain insight into and advance your organisation’s maturity across the spectrum of BSM processes, from sourcing to procurement to payments.

Here are three of the most influential KPIs for Purchasing, Invoicing, and Expenses and how companies with digitally mature processes are performing in these areas:

1. Purchasing KPI: Percentage of Electronic PO Processing: 89.7 per cent

What it is: The percentage of POs processed digitally measures the success of eProcurement initiatives designed to reduce PO processing time and employee and supplier frustration.

Why it matters: A high rate of digital POs often means that procurement teams have time to focus on strategic initiatives, like lowering risk and optimising productivity, instead of chasing lost orders.

2. Invoicing KPI: Invoice Approval Cycle Time: 30.7 hours

What it is: The average time, in hours, from the time of invoice submission to the time of final approval measures the efficiency of the entire approvals process.

Why it matters: A short invoice approval cycle time assures that there are no unnecessary project delays due to payment delays. It also enables early payment discounts and fewer status inquiries while decreasing the risk of late payment penalties.

3. Expenses KPI: Percentage of Manual Expense Audit: 6 per cent

What it is: The percentage of expense reports that go through human audit reflects the precision and accuracy of existing controls and compliance throughout the expenses management processes.

Why it matters: A low percentage of manual auditing implies that expense policies and automated audits are effectively ensuring compliance. Large numbers of manual audits place a costly administrative burden on AP teams.

Learn More About How to Use Benchmarking Data to Drive Success

Want to find out what the other nine KPIs are and find out how your organisation measures up? Read Coupa’s 2019 Benchmark Report to learn more about how focusing on improving these critical KPIs can help you improve profitability, streamline operations, and achieve efficient growth.

For extra credit, join us at Coupa’s next webinar! We’d love to see you at our discussion about Building A Strategic Procurement & Finance Alliance to Enable Growth with Levvel Research and Coupa CFO Todd Ford to explore how business leaders can use KPIs and benchmark data to reduce silos in the back office. We’ll also take a look at:

  • New data on the state of procurement and finance collaboration
  • Procurement and finance efficiency benchmarks of high-performing organisations
  • Strategies for reducing departmental silos and creating spend management visibility

Reserve your spot today. We can’t wait to see you!