Back in the late 1980s, there was considerable debate among procurement leaders as to how to measure procurement's functional performance. Procurement traditionally was seen as a service function — one that processes transactions, manages bidding, and negotiates prices and commercial terms with suppliers — but not really one that makes significant contributions to business performance or market competitiveness. As a consequence, key measures of procurement performance were improvements on metrics such as cost to issue a PO and purchase price variance (PPV).
However, a small cadre of groundbreaking procurement leaders looking to elevate the procurement function to be a strategic contributor to business and competitiveness saw such metrics as very dangerous. They institutionalized and perpetuated the notion of procurement as overhead — a necessary cost of doing business that needed to be burdened across business-unit P&Ls.
The huge challenge at the time was not only defining better, more strategically focused performance metrics for procurement, but also assembling and synthesizing the data needed to produce accurate, consistent, and valid metrics that could be deployed — via team and personal objective setting, job performance reviews, salary, and other incentive processes — to drive different, more strategically motivated behaviors among procurement personnel. Unfortunately, the required sophisticated data collection, aggregation, integration, synthesis, and capabilities simply did not exist.
The age of big data
Fast-forward three decades to the new age of big data. Despite having imperfect metrics for procurement performance, those groundbreaking business leaders have largely succeeded in their quest to transform the procurement function. Their success stories have gone viral. It is now a rare thing to encounter a major global corporation, or even a midsized or smaller one, that operates without some form of chief procurement officer (CPO) who is in charge of orchestrating strategic and competitive sourcing, procurement, supply, and risk management activities at an enterprise level.
The evolution and proliferation of information and automation technology for sourcing, procurement, and supply management — and, more importantly, the ability of that technology to integrate with operational, financial, human resources, and other corporate information infrastructures — have enabled a huge leap forward in the possibilities for designing and deploying strategic procurement performance metrics.
In fact, procurement leaders now face almost the opposite challenge from what their forebears faced in the late 1980s. The age of big data — in which powerful analytical tools enable minute and granular analysis — makes it very easy to measure many aspects of organizational performance. At the same time, however, it makes it very easy to lose sight of the important metrics that truly drive the desired competitive thinking and behaviors of strategic procurement teams. Too many metrics confuse an organization and can often place people and various functions at cross-purposes.
There are a fewer than a dozen metrics that should be on every CPO's performance dashboard. A recent whitepaper titled Analyze This: Top 10 Metrics to Strengthen Organizational Procurement Practices (registration required) offers a list of specific metrics, as well as how to calculate, interpret, and report on them.
What metrics is your organization using today? Where would you like to see it evolve?