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Measuring procurement on value added instead of cost reduction

Data is what can facilitate procurement's move to measuring value rather than cost savings

Posted by: ZivioReading time: 4 minutes

Procurement's ability to contribute in a board-level strategic role is much discussed. How does the function get away from the historical perception of being tactical and purely focused on cost-saving? 
 
Cost savings are an easy default
 
Procurement's desire to move away from being solely measured on cost is not a new thing. As discussed by Jonathan Winters from Allegis in the podcast, it's been an ambition for many years. 
 
"There is a continuous discussion in procurement about moving away from being measure on cost savings"
 
In reality, cost savings aren't really what matter most to a business. The key metric is value. When buying services, businesses care about value – the return for their investment. 
 
But historically, procurement's success has been defined by how much cost they can save. Why is this? As the title suggests, it may be because it's the only thing they can really measure so it's the only thing they can be KPI'd on.
 
ROI is the goal. But the first step is building visibility 
 
To measure procurement's impact on KPIs beyond cost, first procurement needs to build a better understanding. For example, to understand its ability to deliver quality outcomes to deadline/budget, it needs to collect and leverage data.
 
With data on the requirement, budget, deadline and outcome of every milestone of every project, procurement can start to create benchmarks and therefore KPIs around value. Armed with KPIs and performance data around scope-creep, time-to-market, or revenue-uplift, procurement can now talk about the value they bring, instead of just defaulting back to cost reduction.
 
Procurement's role beyond the contract signature
 
To be measured on value and outcomes, procurement needs the ability to affect what happens after the contract is signed and the supplier appointed. Procurement shouldn't get in the way of a business user working with a supplier, but they should be able to assist and provide guidance on defining clear outcomes, mitigating risk, and measuring the deliverables.
The challenge is one of operational efficiency. Procurement's efficacy is predicated on the ability to gather data on requirements, desired outcomes, results, project costs and deadlines. 
 
However, for most services category managers, processes are managed with spreadsheets and statements of work are stored-then-forgotten in dusty sharepoint folders. Getting visibility and control over thousands of milestones across hundreds of projects and suppliers is just not manageable.
 
Of course, the solution is technology. Deloitte's CPO Survey of 2021 recommends investment in next-gen technologies as a key factor for successful procurement teams, "Investments in advanced digital solutions are a key enabler for success".
 
Changing procurements relationships with the CFO
 
In many organisations, the finance team can only look to procurement for reducing cost because it’s the only thing they can see and measure.
 
This leads to a common cost-focused scenario being played out:
 
CFO: "What did we spend on consultancy last year?"
CPO: "We spend £100m."
CFO: "What did we get for that?"
CPO: "We spent it mostly with ABC consultants."
CFO: "OK, we need to reduce spend to £90m next year"
 
A much richer conversation can take place when procurement has visibility of value:
 
CFO: "What did we spend on consultancy last year?"
CPO: "We spend £100m."
CFO: "What did we get for that?"
CPO: "We delivered 150 major projects and we unlocked £500m in additional revenue."
CFO: "OK, we need to increase spend to £150m next year"
 
Data is key
 
Making the transition to value-based measurement starts with data. With rich data on the finer details of its services spend, procurement teams can build tools, processes and teams around measuring and influencing values. And this gives them new value-based metrics on which the business can measure their impact.

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