Three reasons to measure procurement ROI (and one simple way to do it)
A DEC representative once pointed out how the terms “conservation” and “efficiency” are often (wrongly) used interchangeably. The first means doing with less, the second means optimizing what’s available. Obviously, efficiency is a better way to go. The same can be said of procurement; instead of just trying to cut spend constantly, isn’t it better to manage that spend more efficiently (through P2P automation, for instance)? The result of a more stringent approach to spend management may very well be a noticeable, if not significant, increase in procurement ROI. We’ll show you a simple way to run those numbers.
Why you want to know your Procurement ROI:
- Gain budget approval for the project
- Gain credibility with internal stakeholders
- Better understand the value of implementing more than one application
(1 + 1 = 3)
Before we get into the “how” of measuring procurement ROI, it’s good to have some defined reasons why to do it. Beyond simply tracking KPIs and metrics, Sean Delaney, former VP of Sales and Kevin Turner, former SVP of Customer Success at Determine (now Corcentric), provided the short list above (obviously there are many other reasons, but these show up consistently when talking to customers).
According to the CPO Rising 2018: The Age of Intelligence report from Ardent Partners, the top business pressure facing CPOs is “better communicating value and performance.” Along those lines, according to a report by McKinsey on digital procurement in private equity, best-practice purchasing is a potent source of value creation, using digital tools to create transparency into procurable spend, identifying value potential, and supporting value capture.
Procurement ROI is just one measurable (Spend Matters thinks its importance is overstated), but it can be a quick way to communicate current value and provide a strategic basis for a roadmap. By measuring Procurement ROI, professionals have a better understanding of where and how to boost performance levels and save on procurement costs that can then be allocated to other areas – like implementing performance improvement strategies, solution technologies or other bottom-line initiatives.
Procurement ROI Calculator: What’s behind the numbers
To determine your possible savings, our Procurement ROI infographic starts with your own annual procurement spend. To calculate your potential savings, you’ll need to add in a few more numbers. Here’s how the equations work:
|Spend Under Management Savings: Also according to CPO Rising 2018, best-in-class companies achieve 92% spend under management compared to the average 62%. But, in the calculator we used a good-but-not-best figure of 6.2% (top orgs achieve 7.1%). And that’s for starters; on average one-third or more of purchases in companies are unknown to procurement, so reining in those mavericks will boost savings even more.|
|Purchase Orders Generated: You tend to hear more about the qualitative results of automated PO processing — speed, consistency, minimized errors. Which are critical and valuable, but they’re also cheaper. Manual processing of purchase orders costs roughly $15 more than an audited, validated req-to-PO process. As you will see, that’s adds up.|
|Invoice Volume: In the exact same vein as POs, manual invoicing is slowing you down (which can damage supplier relationships) and eating into your ROI, as well as opening you up to errors and non-compliant spend. Automate to accelerate, folks.|
|Time Value of Work: When your workflows are automated and integrated sharing a single source of data, then people and processes are running at peak efficiency, maximizing productivity and optimizing time. And as the calculator makes obvious, time is money.|
Bottom Line: Along with the total amount of potential savings through automated processes, our Procurement ROI infographic shows you what your ROI could be. This is the money shot, and a good reason to walk into your CFO’s office and make an impact.
On a final note, to Sean and Kevin’s reason #3 above, the “investment” that procurement is making on running an efficient and automated process is what will ultimately decide two critical things: your overall “return,” and just how efficient and effective your automated procurement process. A high ROI because you’re investing too little is a misleading indicator, and a sign that competitiveness may be slipping.
Understanding the value of investing in a procurement solution that’s integrated with other applications – spend analytics, sourcing, contract management, etc. – is what will ultimately position organizations to achieve increased, sustainable procurement ROI in the long run.
If you’ve run the numbers and they’re telling you to find a more efficient way to optimize your procurement, schedule a personalized demonstration of our modular procurement solution on the Determine Cloud Platform.