Measuring procurement performance: Does it need to be complex?

Spend Matters recently linked to an article published by the W.P. Carey School of Business. The article, in the section “Handling challenges”, made the following observation:

Handling challenges

But while companies can achieve great success with their metrics programs, measuring purchasing performance effectively is not without challenges. Particularly for large, global companies, measurement programs need to be very complex in order to make sense across the entire firm, while also addressing the specific situations that occur within different regions or countries. In addition, measurements must vary based on the different activities within that company — metrics for the manufacturing unit of the business will not be the same as metrics for a service unit.

I disagree entirely with that observation. Performance measurement, when done well, is incorporated into the day-to-day operations of an organisation. If done in this way, the measurement system cannot be complex or it will get in the way of the efficient operations of your business.

The magic of effective performance measurement comes from incorporating measurement into the operations so that the measurements are generated without additional effort by those performing the tasks.

Take P2P operations as a simple example. From available transactional data, you can report on timeliness, completeness, cost and, if combined with a help desk ticketing system, quality of service.

Take sourcing as a more complex example. When deciding to go to market, you need to understand what you are paying now and put together a mechanism to compare competing responses. The reporting that drops naturally out of this is the difference between previous pricing and new pricing and the variance between the weighted evaluation scores of the average tender respondent and the selected respondent. Report on this initially and, after a period of time, evaluate if you need to make your reporting more complex.

When setting up your performance measurement system, start by understanding the data that you have at hand and the measurements that drop directly out of that data. Then identify what additional measurements you want, how much it will cost you to get this data, and then do a cost/benefit analysis for these additional measurements. Quite often, you’ll find that these additional measurements don’t add significant value to the effectiveness of your operations or your ability to communicate that effectiveness.