Can Procurement Set an Example on KPIs?

Dec 14 2015, 8:58 AM5 min read

Metrics, Key Performance Indicators (KPIs), Performance Management – whatever your organisation calls them, it’s almost certain that your procurement team are both measuring and being measured on performance. But are organisations measuring the right areas?

Every week in the procurement and supply chain news, we read reports and headlines focusing on savings and supply chain practices, often highlighting the work organisations are doing to measure these performance areas.

Knowing which elements to measure is tricky, as no two sources will agree on what the ‘best’ metrics are to use. A quick Google search for ‘Procurement KPIs’ comes up with over 400,000 results, with a variety of links to organisations, articles and journals with different views on what constitutes ‘best practice’.

What is clear is from what we read, see and encounter in organisations is that there is a huge volume of resources (time, people, money) being devoted to managing these metrics, but frequently the data produced is poor or the metrics themselves are flawed from the outset.

Defining a Purpose

Anyone in procurement will be able to tell you that the purpose of KPIs is to measure internal and supplier performance across a number of areas. Most of these elements stem from the classic concepts of cost, quality and service. Each indicator focuses on a specific aspect of a contract, has defined what success and failure look like, and should service an organisational need or requirement.

The ‘SMART’ acronym (Specific, Measureable, Achievable, Realistic and Timely) is frequently used in conjunction with the creation of KPIs. Following these steps, the theory is that the KPIs will be both useful and successful and, what’s more, encourage behaviours that drive value.

The Reality

Far too often, however, KPIs in organisations fall short of this. Sometimes it’s because they are poorly defined, other times that they are unrealistic, and frequently that they are measuring the wrong thing entirely. From a procurement point of view, this generally means the focus is on savings and little else.

Externally, suppliers can be given huge lists of KPIs that they are expected to report on as part of their contract. This in turn makes meeting and reporting on KPIs onerous, putting the supplier off focusing on them, and potentially driving behaviours that are carried out to ‘tick off’ the KPIs in order to get paid.

Measuring Intangibles

But examples of good practice are out there. When Ben & Jerry sold their ice-cream brand to Unilever, they were eager for their brand to continue to be associated with the environmental and social activities for which they had gained a great reputation for. This involved the creation of “Social Metrics” – aimed at measuring the social and environmental performance of the brand under Unilever’s auspices.

A difficult task, but one that the organisations stuck with, ultimately creating the concept of “multicapitalism”, a performance accounting system measuring economic, social, and environmental impacts in an integrated way. So far it has been a success, and is setting the bar high for the use of metrics.

This is a good example of performance metrics being used to measure an area that often has intangible outputs.

Taking the Lead

So how can procurement take the lead on creating metrics and measuring performance? If procurement departments are keen to be measured on more than savings, then the organisations need to get their own house in order and create better KPIs for their suppliers.

A recent discussion on Procurious asked about other KPIs to use beyond tracking savings for high value projects. One key point made was to workshop metrics with internal customers to increase engagement. This holds true for suppliers too, and should help to ensure that the right areas of the contract are being measured.

We are not saying that savings trackers should be dropped, but procurement needs to focus on other value areas with suppliers. Once the profession leads by example and stops putting such a high importance on savings externally, the chances are good that this will also happen internally.

Is your organisation setting a good example on KPIs? Tell us what you think and get involved with our discussions.

We’ve scoured the headlines this week and picked out the main ones for you to digest with your morning coffee.

Nations Sign Historic Climate Agreement

The COP 21 event in Paris drew to a close last week, with nearly 200 countries signing a new agreement to reduce global emissions
The agreement sets a new goal for all countries to collectively reach net zero emissions in the second half of the century
The deal includes provision for rich countries agreed to raise $100bn (£66bn) a year by 2020 to help poor countries transform their economies and reduce emissions
The deal has been hailed as a significant step in the right direction by global leaders and environmental campaigners