Measuring the value of procurement – like almost any business function – is guaranteed to generate debate. But if we limit our measurement to the most easily quantifiable factors, what ROI should procurement deliver?
Everyone expects procurement to save the organisation money. The question that it’s often difficult to answer is whether it is saving as much as it should be. Establishing a suitable benchmark can be challenging and, for individual organisations, accessing the data needed to measuring procurement value is difficult.
Can procurement gain strategic acceptance?
A recent study published by management consultants A. T. Kearney – Building a Bolder Legacy: The Procurement Mission is Underway – aims to provide the ammunition to continue the progress of procurement as a strategically important function. Compiled in collaboration with CIPS and the Institute for Supply Management, the study focuses on Return on Supply Management Assets (ROSMA) across over 200 companies in Australia, France, Germany, the UK and the USA.
How is procurement viewed by CFOs?
The survey investigated the perception of procurement within the Finance community, finding that 71% of CFOs think that procurement lags behind most or all other functions in terms of the rigour and depth of its performance tracking. Additionally, only a small minority (20%) thought that their organisation’s procurement team had “clearly defined, well understood and widely respected performance metrics”.
An acceptable level of performance?
The report found that the middle-tier of performers delivering between 3 and 5 times the organisation’s investment in supply management people, process and technology. The poorest-performing procurement teams – the bottom quartile – delivered less than 1.5x their cost in value. Indeed, many of these failed to cover their cost of operation. For many of these organisations, no advantage is derived from advanced methods or systems and they require significant transformation to improve their performance.
What level are the best-performers at?
The top-quartile of performers are found to deliver an ROSMA in excess of 7x. Indeed, many of the leading organisations deliver a return of 10-15x. These leading organisations deliver $1.25m of financial return for every procurement employee.
How are they doing it?
In terms of explaining how the best-performers achieve the higher level of performance, the study found that 25% of the return came from the application of “advanced methods to unlock value beyond unit cost reduction”. Examples of such methods included asset productivity, reduction of complexity and rethinking their processes from the ground up (so-called clean sheet redesign).
The study also found that the leading performers were self-aware in terms of the factors in their organisation that delivered financial results. Maturity of the processes, capabilities and management practices in a procurement function was the clearest indicator of ROSMA performance. Embedding these measures, metrics and practices in the workflow of your procurement software has to be a focus for teams that want to improvement performance.
