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analyze this.by richard waugh

analytics insightprocurementperformance+ =

PROLOGUE

The age of Big Data is upon us, and powerful analytical tools are making it possible to measure increasingly minute and granular data, including dashboards tailored specifically for the individual user - everything that matters to the metals category manager for example. It is nevertheless important not to lose sight of the bigger picture at the highest level. So what are the top 10 Procurement Performance Metrics that should be on every CPO's Dashboard as a barometer of leading indicators?

ABOUT THE AUTHOR

As Vice President for Corporate Development at Zycus, Richard leads strategic initiatives in the areas of new product introduction, market development, thought leadership, analyst relations, and strategic partner development programs. Richard has an extensive background in B2B eCommerce, going back to his early career at GE, where he helped launch GE's Trading Process Network (TPN), the first on-line marketplace for sourcing and procurement in the mid 1990's.

SPEND UNDER MANAGEMENTThe most compelling measure of the Procurement Organization's influence and control over

company spending, Spend Under Management (SUM) is most often equated with spend that

is actively managed or controlled by the procurement function where there is clear

responsibility for sourcing the category and corporate agreements are in place with

preferred or at least, approved suppliers. Recognizing that 100% SUM is at best a

theoretical standard – some spending in non-discretionary expenditures such as taxes would

not warrant a Category Manager's focus – top performing organizations are nevertheless

able to account for the vast majority of corporate spending as “Managed Spend.”

According to Aberdeen Group benchmarks, Best-in-Class companies are achieving 80% SUM,

while “Average” Performers are able to account for 62%, and “Laggards” bring up the rear at a

paltry 22%. The obvious implication for anyone other than the top performers is a significantly

smaller base from which to create a savings pipeline, severely limiting Procurement's potential

to impact company profits.

Most procurement organizations are able to exert influence over certain categories – Direct

Materials spending for instance is influenced or managed by procurement at a rate of 79% for

the overall Peer Group and even higher – 87% for World-Class companies according to

benchmarks from the Hackett Group, but it is more often the ability to influence and control

areas of indirect spend where the business has historically operated autonomously, that

separates the top performers from the also-rans.

So while indirect categories such as General Equipment and Supplies are either influenced or

controlled by sourcing 91% of the time, just 64% of Sales and Marketing support expenses have

any sourcing oversight. When tracking the SUM metric, it is also helpful to benchmark against

how others are performing in the same vertical. For instance, the target for an Automotive

Manufacturer – where 93% SUM is the standard according to CAPS Research (Center for

Advanced Purchasing Studies) benchmarks, Financial Services SUM is just below 64% on

average.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

SPEND WITH LINE ITEM VISIBILITYIf Spend Under Management is the foundational metric for overall Procurement

Performance, visibility to accurately classified spend data – granular line item level visibility

that is the pre-requisite for developing and executing effective sourcing strategies – is the

best leading indicator of how effective the organization is likely to be in actually managing

the spend. After all, having influence or even direct control over most major categories of

spend will be of limited value unless the responsible category managers can mine the data

to get insights over opportunities to really manage the spend – insights that lead to

opportunities for supplier, parts, or terms standardization or rationalization, as well as

demand or compliance management which can only be gleaned through current and

accurate line item level spend visibility.

And the correlations between an organization's ability to analyze spend at a detailed level

and the likelihood they will achieve World-Class performance is difficult to refute: 80% of

World-Class Procurement teams have it – less than 50% for the Peer Group overall.


PROCUREMENT CONTRACT COMPLIANCEOften the stumbling block for even World-Class Procurement teams, Procurement Contract

Compliance directly addresses the ability to control not just how goods and services are

sourced – as in the case with Spend Under Management – but how they are actually purchased

by end-users in the business. The difference between SUM that is centrally sourced and

contracted for, and what actually gets ordered off of those approved agreements, represents

Contract Leakage and therefore Savings Leakage – the unintended consequence of the

dreaded “Maverick Purchase.” Rarely the result of willful malfeasance that the term implies,

maverick spending is more often symptomatic of deficient processes and systems that do not

enable non-procurement end users to easily find and order from approved supplier contracts,

leaving them to their own devices to find their own suppliers and negotiate (or not) their own

deals.

Whereas the Best-in-Class experience very little leakage – 78% Procurement Contract

Compliance as compared to 80% Spend Under Management according to the Aberdeen

benchmarks, the drop-off is rather precipitous for all others, where Industry Average

performers experience almost 1/3 leakage – just 30% of 62% Spend Under Management

compliant with procurement contracts – and the worst performing laggards can only muster

11% of 22% Managed Spend on procurement contracts.


SPEND UNDER MANAGEMENT

PROCUREMENT CONTRACT COMPLIANCE

0

10

20

30

40

50

60

70

80

90

100

72%67%

85% INDUSTRIAL MFG CAPSBENCHMARK SUM 2013

ACME2013

ACME2014

OFF CONTRACT

ON CONTRACT

FACILITIESMANAGEMENT

PROFESSIONALSERVICE

TRAVEL &FLEET

INFORMATIONTECHNOLOGY

MARKETING &ADVERTISING

75% 80% 45% 70% 72%

SPENDMANAGEMENT

DASHBOARD

0

20

60

80

40

100

0% 0% 4%

13%

22%

47%

74%

40%

TRANSACTION SPEND

SEGMENT FAMILY CLASS COMMODITY

SPEND WITH LINE ITEM VISIBILITY

SUPPLIERS ACCOUNTING FOR 80% OF TOTAL SPENDFollowing on the theme of focusing the right resources on the right suppliers, this metric

provides a quick read as to whether or not purchasing power and resources are being

appropriately leveraged and allocated, or conversely, diluted due to a fragmented and

unwieldy supply base. Although the 80/20 rule is commonly applied here, as in the top 20%

of suppliers account for 80% of spend, the actual targets should be for an even greater

concentration of spend with fewer suppliers – somewhere in the range of 6-7% of suppliers.

The average across all industries in the CAPS benchmarks is in fact 6.37%, with a high water

mark of better than 12% in Automotive, and a low of just 2.65% in Engineering and

Construction. Although small on a percentage basis, the necessity for supplier consolidation

becomes clear when you consider that the average organization has 3K suppliers per $1B in

spend, so the target would be to have 80% of that spend volume with about 200 suppliers.


SUPPLY MANAGEMENT RESOURCE ALLOCATIONAdmittedly an amalgamation of multiple resource allocation metrics, the ability to track

where and how procurement resources are being allocated is nevertheless a reliable way to

ensure that the right people are working on the right things – more important than ever,

when procurement budgets are actually flat to declining. An effective dashboard view of

resource allocation would allow the CPO to view resource allocation metrics such as:

n Strategic vs. Operational - The CAPs Benchmarks define strategic employees as “engaged

in long range sourcing and procurement activities critical to the organization's ability to

meet its core business objectives,” while operational employees are “primarily engaged in

day- to-day procurement activities that support an organization's standard procurement

processes and procedures,” or in other words – transactional. Intuitively, the desired state

would be to allocate the majority of resources to those strategic activities designed to

meet core business objectives, however, the inverse is actually more often the case, a

roughly 60/40 split of operational to strategic on average, according to the CAPS cross-

industry benchmarks

n FTEs per $1 Billion Spend – useful in “right-sizing” staffing levels to the magnitude of the

challenge, World-Class organizations apply about 44 FTEs per $1B spend in 2013, about

27% fewer resources than the overall Peer Group in the Hackett benchmarks


SUPPLY MANAGEMENT RESOURCE ALLOCATIONn Suppliers/Strategic Suppliers per FTE - the ability to monitor and manage supply risk is

one of the more elusive things to measure. It is the great unknown of unforeseen threats

– natural or man-made disasters, bankruptcy, or product quality issues for example -

which could cause supply disruptions or other catastrophic failures that keep many a

CPO awake at night. Perhaps the only way to assuage these fears is to at least know that

an appropriate allocation of the right types of resources are actively focused on

managing suppliers, and specifically, managing the most critical suppliers. So while

useful to know that in the CAPS Manufacturing Industry benchmarks, for example, a

Supply Management FTE manages 122 active suppliers on average, it is perhaps more

important to keep track of resources allocated to strategic suppliers. And where supply

risk is the concern, the goal is not to increase the span of control, but actually focus

Supply Management FTEs on fewer strategic suppliers. World-Class organizations are

notably devoting about 6x more resources to managing strategic suppliers than the

overall Peer Group. Just like in school, where smaller class sizes usually mean better

teacher-student interactions and outcomes, the ratio of 8 strategic suppliers per Supply

Management FTE is producing better results for World-Class performers than the 47-1

ratio in the Peer Group

CONT.


INCREMENTAL REVENUE FROM SUPPLIER

INNOVATIONA benefit of the increased focus on Strategic Supplier Management, and an increasingly

important metric for quantifying Procurement's value contribution in light of the diminishing

returns available in many cases from cost reduction activities, it is the top line revenue

impact from collaboration with strategic suppliers for innovations in new products and

processes, that has allowed top quartile performers to generate 7.4% in incremental

revenue as a % of total revenue according to the Hackett Group's report on Leading

Procurement Organizations, and an average of 3.5% of total revenue for companies overall.


20

37.5

62.5

62.5

CENTRO INC

FLOWCONTROL

SMC PNEUMATICS

TRI-STATE VALVE

0 20 60 80 10040

AVERAGE OF KEY PERFORMANCE INDICATOR (KPI) SCORE

40%

60%

OPERATIONAL

STRATEGIC

CAPS INDUSTRIAL MFG. BENCHMARK 2013

ACME INC. 2014

SUPPLIERS ACCOUNTING FOR 80% OF TOTAL SPEND

SUPPLIER INNOVATION

44%

56%

SUPPLIER MANAGEMENT RESOURCE ALLOCATION

0

20

60

80

100

40

PAINT PLASTICIZE INORGANIC PETROLEUM PACKAGING

55% 57% 75% 70% 58%0.00%

1.00%

3.00%

4.00%

5.00%

2.00%SPEND WITH TOP 20 SUPPLIERS

SPEND WITH REMAINING SUPPLIERS

SAVINGS POTENTIAL %

SPEND SPLIT IN % &SAVINGS POTENTIAL

SUPPLIERMANAGEMENT

DASHBOARD

NET PROMOTER SCOREWhile the other Top 10 Metrics lend themselves to external benchmarking comparisons to peers,

including a measure of satisfaction with internal customers acknowledges that despite how well a

procurement organization may rank according to external benchmarks, if internal customers are not

happy with existing service levels, any other gains will go for naught. Moreover, while cycle time

metrics such as # days to complete the requisition-to-purchase process are omitted here, overall

customer satisfaction is the best measure of whether various underlying procurement processes

and systems are easy-to-use and meet the needs of the business users, and if budget owners see

value in engaging the procurement function in their initiatives.

The Net Promoter Score has gained increased favor as an effective metric for monitoring

perceptions from other business functions within the organization. As with most customer

satisfaction metrics, a survey tool is used wherein respondents rate their overall satisfaction on a

scale of 1 to 10. In evaluating the responses, the Net Promoter Score consider 0-6 responders

“Detractors,” 7 or 8 “Passive” and 9 or 10 “Promoters.” The Net Promoter Score can then be

calculated as: % of Promoters - % of Detractors. Thus in a survey with 100 respondents where half

are neutral or “passive” but “promoters” outnumber “detractors' 30 to 20, the resulting Net

Promoter Score is 10%.


COST OF PROCUREMENT AS % OF SPENDMost procurement organizations face the challenge of having to do more with less – overall

procurement budgets are flat to declining – so this operational metric gets at the core of

organizational efficiency. The cost of procurement – including labor, outsourcing and

supporting technology costs was reduced by 1.6% in 2013 by World-Class performers and

3% by the overall Peer Group, according to a new Hackett Group report on “How Leading

Procurement Organizations Outperform Their Peers.” The fact that the World-Class cohort

is delivering superior results at 19% lower cost than their peers, is a testament to underlying

organizational efficiency.

As a rule of thumb, the cost of procurement is about 1% of spend overall, according to CAPS

research cross-industry benchmarks for 2013, with significantly higher costs for engineering

intensive industries such as Aerospace and Defense and Engineering and Construction at

2% and 2.74% respectively, with the low water mark in Financial Services at just .28%.

Across industries, Hackett Group data pegs World-Class performers at 0.6% of spend.


REALIZED OR IMPLEMENTED SAVINGSThe most consistently used metric to measure (and often bonus) procurement teams – if not

the most consistently applied - is Savings, so it has to at least crack the top 5, with however,

a few notable caveats:

n The Law of Diminishing Returns - that is to say that the best performing procurement

organizations which have been accruing savings all along, will now see savings leveling

off on a percentage basis, as compared to less mature organizations that may be

attacking neglected spend categories for the first time and finding nothing but upside.

Hackett's report on Leading Procurement organizations shows a marked decline in the

ability of world-class performers to reduce spend and avoid purchase costs – down

17.3% in 2014, returning savings levels to only slightly above pre-recessionary

benchmarks, the last several years ironically being a boon to cost reduction efforts due

to deflationary commodity price pressures

n One Man's Savings is Another Man's… - a generally accepted and commonly agreed

upon savings calculation methodology simply does not exist – even within the same

organization, where there is often a disconnect between Procurement and Finance,

essentially two sets of books being kept, and the official Finance numbers are usually

the ones that really matter. At a minimum, most organizations will track and report

cost reduction, expressed as a year-over-year price variance, where the best practice is

to normalize volume, currency, and market fluctuations to measure true procurement

impact on purchase price as compared to the spend baseline. Cost avoidance on the

other hand, defined in the CAPS Benchmarks as, “The difference between prices for

goods and services and the probable increase in pricing during the reporting year if

actions had not been taken to obtain reduced costs for the same goods and services,” is

a grey area. Finance is often hard pressed to grasp the concept of cost avoidance when

they cannot account for the impact on the financial statements – in other words, if it

does not hit the budget, it didn't happen


REALIZED OR IMPLEMENTED SAVINGSn Savings “Moment of Truth” – another key issue is isolating identified or potential

savings from actual or realized savings. While understandable, the inclination for

procurement to plant the flag and declare savings captured upon contract negotiation,

belies the very real incidence of Savings Leakage as discussed in Procurement Contract

Compliance metric. Actually, realized savings should only be counted when actual

invoices paid against contracts can be reconciled with the historical contract rate, and

in this area, your results may vary as the disclaimer goes. In Aberdeen's benchmarks

for example, Best-in-Class companies are able to validate realized, implemented savings

of 12% on Spend Under Management as compared to just 2% for Laggards

As an overall rule of thumb, World Class organizations reported 6.46% savings as a % of Total Spend in 2013, consisting of about three-fourths cost reduction and one-fourth cost avoidance, while the Overall Peer Group had less than half the total savings at just 2.93% of spend.

CONT.


PROCUREMENT ROIAn effective way to communicate Procurement's contribution to the C-Suite, this one is a

“gimme” if you have the numerator from Realized or Implemented savings and the

denominator from Cost of Procurement as % of spend expressed as:

Total Spend Savings / Cost of Procurement = Procurement ROI

The Procurement ROI measure makes an extremely compelling argument for investing in the

tools and talent to achieve World-Class performance status.

"After all, how many investments have the potential to produce an almost 11x ROI"

– the Hackett Group's 2013 Benchmark for World-Class Procurement ROI


NOT AT ALL LIKELY

NEUTRALEXTREMELY

LIKELY

2 3 4 5 6 7 8 9 101

DETRACTORS PASSIVE PROMOTERS

NET PROMOTER SCORE = % OF PROMOTERS % OF DETRACTORS-

NET PROMOTER SCOREPROCUREMENT ROI

ACME INC2013

5.25%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%WORLD CLASSHACKETT BENCHMARK2013

10.72%

6.73%MFG. CAPS

BENCHMARK2013

ACME INC2013

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%WORLD CLASSHACKETT BENCHMARK2013

1.06%

0.60%INDUSTRIAL MFG. CAPS BENCHMARK2013

COST OF PROCUREMENT AS % SPEND

PROCUREMENTOPERATIONSDASHBOARD

REALIZED OR IMPLEMENTED SAVINGS

0.00

20,000.00

60,000.00

80,000.00

100,000.00

40,000.00

120,000.00

SAVINGS

Q1 Q2 Q3 Q4

SAVINGS TARGET FORTHE YEAR

YTDACTUAL

YTDFORECAST

0.90%

Zycus is committed to positioning procurement at the heart of business performance. With our spirit of innovation and a passion to help procurement create even greater business impact, we have evolved our portfolio to a complete Source-to-Pay suite of procurement performance solutions - Spend Analysis, eSourcing, Contract Management, Supplier Management, eProcurement, eInvoicing and Financial Savings Management. We are proud to have more than 200 solution deployments among Global 1000 clients across verticals like Manufacturing, Automotives, Banking and Finance, Oil and Gas, Food Processing, Electronics, Telecommunications, Chemicals, Health and Pharmaceuticals, Education and more.

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