The article below is written by Torbjörn Thorsén on February 18, 2012
Anyone who has taken a look into the world of procurement metrics recently has seen the same thing year after year. Seemingly unaffected by financial woes, the number one metric that is used to measure procurement has stayed the same: spend under management.
Although I understand why it is important, the fuzziness of spend under management actually makes the metric stumble on its own merit. This is because while spend may be crystal clear and easily defined, under management is something that can be defined in a million different ways.
Does spend under management imply that spend is consistently managed using a well defined category management process? Or does it mean that the procurement organization has a contracted and preferred supplier in place (although no one is really sure if the contract is being used or not)? Or does the truth fall somewhere in between? Regardless, the clash between what is clear and simple (the spend part) and what is actually unclear and complicated (the under management part) requires those who want to effectively benchmark their performance to do quite a bit of thinking.
To demonstrate how confusing this actually is, let’s take a look at some recent research on the subject:
In August 2011, Aberdeen (in “Dynamic Procurement: The CPO as Collaborator, Innovator and Strategist”) found that:
- Best-in-class performers: 85% of total spend under management
- Average performers: 70% of total spend under management
- Laggard performers: 21% of total spend under management
A few months earlier, the same research firm (in “The State of Strategic Sourcing”, March 2011) found that:
- Best-in-class performers: 80% spend under management
- Average performers: 62% spend under management
- Laggard performers: 22% spend under management
Still even earlier, in November 2010, Aberdeen (in “Effective eProcurement: Assessing Options for the New ‘Economic Normal’”) reported that:
- Best-in-class performers: 74% spend under management
- Average performers: 67% spend under management
- Laggard performers: 55% spend under management
Now, one could argue that performance should be improving over time (which the best-in-class figures – 74%, 80% and 85% – would indicate), but that does not explain the variance in the average and laggard performers. Instead we’re left with questions concerning the demographics and clarity of the survey; questions that definitely do not disappear after comparing Aberdeen’s figures with other research and consulting white papers.
So what value can actually be drawn out of this research and these benchmarking metrics?
Spend under management actually get’s interesting once you start to correlate the benchmark numbers to other prominent metrics such as contract compliance and realized savings. By calculating averages on all these metrics, from multiple sources, a rather intriguing image appears (here it is really important to understand that benchmarks of any shape and form need to be seen as position indicators rather than stand alone metrics):
These numbers were calculated using metrics from the above mentioned Aberdeen reports, as well as Capgemini, Forrester and Hackett Group research (averaging based on a number of factors including number of survey respondents). Though it can be argued that these figures are truly an exact representation of best practices, what is truly interesting is that any way you look at it, compliance, rather than an ability to bring more spend under management, is more important in achieving the big leap in savings (comparing average to best-in-class performers).
Over the past year, I’ve had numerous conversations with procurement managers, from a wide variety of industry sectors, and all of them agree on the key to successful procurement. Their view, consistent with our findings on procurement metrics, is that once you reach a certain level of spend under management your focus needs to turn inwards towards your organization instead of outwards towards your supply base. In essence, the key differentiator between average and best-in-class performers is the ability to understand the difference between strategic sourcing and category management. Strategic sourcing is the vehicle that brings spend under management while category management is the process that encompasses both supplier facing activities as well as internal activities such as compliance, demand management and continuous improvement initiatives.
This, of course, places a new strain on procurement organizations as traditional competencies such as negotiation skills and category competence need to be complemented by skills such as stakeholder management, executive communication and the ability to build a compelling business case to convince non-compliant stakeholders to put on their spend management hats.
In the end, recognition of the need for change in the procurement mindset may be the most important step a procurement organization can take in 2012, regardless of how much spend they have brought under management.