Metrics Matter in Procurement Transformation
Corcentric’s podcast series, Mastering Procurement Transformation, continues to explore different steps in Finance-led Procurement transformation. The second episode discusses ways to evaluate the current condition of Procurement and why it’s necessary to set targeted outcomes.
Acknowledging your Procurement needs a digital transformation is just the first step in the process. Our last podcast revealed that your first goal should be ensuring alignment between Procurement and Finance when it comes to agreement on goals, processes, and the very understanding of the value Procurement can add beyond savings.
Once silos have broken down and collaboration is underway, you need to establish a baseline and that means honestly evaluating your procurement performance as far as where you’re starting and where you’re headed. You need to assess the strengths of your people, processes, and tools/technology that currently exist. But you also need to have strong metrics (including procurement kpis) and dashboards and reporting capabilities in order to benchmark performance and finally demonstrate value. You need to have robust scoring and a scorecard for the initiative. And you need to have a clear understanding of the role that Procurement plays in the organization. If Procurement is seen merely as working on cost reduction through pricing, then its true value is being underplayed and the transformation attempt may be headed for trouble.
Defining outcomes starts with understanding roles
Transformations fail when there’s not a clear definition of what the anticipated outcomes are. But the vision of those outcomes usually correlates to the function involved. Different business units have different points of view. That’s why, early in the process, it’s important to discuss different views and perspectives regarding what each function does and the role it plays. Doing this will eliminate any disconnects and misconceptions that can lead to frustration, disruption, and ultimately the potential failure of the initiative.
There are issues that both AP and Procurement (and other stakeholders) should agree need to be addressed:
- Bottlenecks – Identify where procurement processes slow down. Is it a technology or personnel problem? Is it a quick fix or more complex? Even with automation, barriers to efficiency can still exist. Optimization depends on resolving these issues. Only after you identify where the slowdown takes place can you take the steps to fix them.
- Overlaps – Redundancies can run rampant within an organization. Consider how many different people may be talking to your suppliers…often about the very same thing (only from a potentially different perspective). This can frustrate both buyer and supplier so make sure that only one function should prevail.
- Reverse the flow – We are all more dependent on the supply chain than ever before in recent history. That makes good supplier relationships a cornerstone for success. We recommend looking at a situation from the supplier’s point of view. How are you seen as a customer – easy to work with or a perpetual frustration? If you look at the issue above, Overlaps, you can see how things like redundancies can negatively impact the relationship. If a supplier gets asked the same question from multiple departments that can be quite frustrating. Buyer performance is as important during these times as is supplier performance. Again, this will help designate who should be interacting with suppliers.
There will certainly be other areas that stakeholders can agree on, but these three are ones that need to be addressed at the earliest possible time.
Getting an objective view is essential
When major changes are undertaken (and what could be more major than transformation?), it is vital to have objectivity…and that can be difficult to achieve when the parties building the transformation are also the ones leading the evaluation.
The way a company approaches transformation is pretty consistent, regardless of the function that’s being changed. Each stakeholder involved brings different perspectives and pain points with them. The trick is to aggregate those pain points and balance challenges with the organization’s overall objectives. In other words, it’s necessary to prioritize needs over wants.
The reality is that in-house teams still face day-to-day operational issues that need to be addressed and fires that need to be extinguished. Having the people and tools in place to address these daily challenges can be daunting, especially when also facing the unprecedented challenge of a pandemic. What happens is that resource constraints overtake the overall transformation process.
It may be possible to find the necessary objectivity and candor within the organization, but many companies, to ensure a successful transformation, find it helpful to look to outsourcing, bringing in a third party to share their perspectives. Most important, a third party won’t be distracted by other issues and can therefore focus on a true evaluation within the timelines established. In addition, a third party would likely have more expertise in the transformation process than an internal group would have, as well as have the tools necessary to make the process more efficient.
Set a clear baseline and benchmark
A big mistake that companies often make when going through a transformation is not setting up a clear baseline and benchmark, as well as metrics and reporting policies. Without these, there is no way to validate success or identify areas for improvement. Goals and targets need to be set but they need to be tethered to metrics in order to have any validity.
This is where you can really change the perception of the value of procurement and show that it goes well beyond savings. By establishing benchmarks, participants will know that the procurement metrics that matter are being tracked and measured. Being able to show how transforming the procurement function can lead to improvements in days payable outstanding (DPO), P2P straight through processing time, cost of payment, and other issues can dispel any misconceptions that may arise as regarding how to measure success. Savings that occur in time, efficiency, and accuracy may well outweigh the cost savings realized on lower prices.
It’s important to keep those involved reporting on how they are meeting (or missing) benchmarks and where they are in relation to the established baseline.
When it comes to performance measurement, procurement leaders know that one of the most important ways to gauge success is how you are performing in relation to your competitors. Fortunately, there is a wide variety of public and proprietary data set that will help both identify your goals and detail where you should end up, giving you a competitive advantage. When looking at competitor data (if available), you should focus on the most useful procurement metrics, like DPO. If you can’t get the exact number for a competitor, then check out publicly available data on the average of DPO for your industry, as well as what the average days sales outstanding (DSO) is for suppliers within your industry.
Using data from external sources can help in a wide variety of ways including things like setting payment terms. This is a way of establishing how well you are doing against industry averages. This will help with decision making and setting up targets that are both realistic and achievable.
Building a pathway to success
Bottom line: Whether it’s establishing benchmarks, bringing in a third party to ensure objectivity, improving supplier relationship management, or defining roles, Procurement Transformation will only succeed when all stakeholders (executive, procurement team, Finance, end users, and suppliers) are operating from the same playbook. The path to success is there if everyone follows it.
Listen to our Corcentric Conversations, Mastering Procurement Transformation, Episode 2 below.