The last five or so years has seen a very real change in the way that enterprise customers procure products and services regardless of whether the assets are for a line of business, or the whole enterprise, from a major technology project or the companies stationary supplies.
This change is exemplified in no better way than what I refer to as the 'Rise of the CPO' -- The Chief Procurement Officer. Todays Enterprise CPO's are likely to be professionally certified, expert buyers, with many large procurement projects under their belts.
In many cases, an enterprises procurement process is still managed under the responsibility and budget of a line of business. Increasingly, however, the trend in medium to large enterprises, when it comes to big ticket procurement items and key supplier management, is to have the process managed by specialist procurement professionals either at a Category Owner level, or by a specific procurement team.
Nearly all major contracts these days involve specialist procurement professionals taking responsibility during all stages of the contract negotiation and finalisation of related contractual agreements. Procurement's main objectives are to realise new savings in many areas for the business and transform procurement into a more progressive function that delivers quantifiable, and sustainable value over time.
The procurement function at an enterprise level will consist of representatives from one or more of the following areas of the business:
Line of Business RepresentativesOften own the budget, with deep understanding of the specialised business requirements for their line of business. Typically they will only be influencers in the process, with a key stakeholder, or puppet master behind the scenes pulling the strings, until they need to be engaged in the negotiations.
Technology RepresentativesTechnical specialists who are often called in the work with the business to turn the business specific requirements into a specification that will be releases to market. Key in the evaluation process, to ensure that vendor and supplier's proposals meet the specific functional requirements.
Category or Product RepresentativesOften specialist procurement professionals, responsible for the relationship between key vendors and suppliers and the customers organisation
Procurement RepresentativesSpecialist, certified and professional procurement executives and representatives, who will typically lead the process from start to stop and coordinate all players participation in the supplier / proposal evaluation and selection process.
Finance and OperationsRepresentatives from finance and operations, often called; in toe evaluate the commercial viability of specific proposals given budget and capital contention constraints.
Legal RepresentativesNaturally involved in the contract review and negotiation in evaluating suppliers and their proposals.
As an enterprise sales professional, sooner or later you are going to have to interact with your customers procurement department. It is critical that you have a thorough understanding of the motivations and objectives both formal and informal of your customer's procurement teams. This will not only help you with developing important relationships with key procurement team members, but also aligning your sales strategies, and structuring your business cases. Over 20 years I have worked with a variety of Procurement Teams and Executives with a variety of motivations, KPIs and objectives.
Whilst the various informal, unspoken or political motivations of your customers procurement teams might be a major factor in their decision making, I am only covering the formal motivations by way of KPI (Key Performance Indicator) here.
Top Nine KPIs for procurement teams and executives
Total Cost SavingsThis KPI represents the aggregate amount of money that procurement saves by reducing the total cost of ownership year over year, of business assets, excluding changes in volume. Procurement quite correctly shows these as its department's contributions to the profitability of the organisation. These hard dollar savings are captured directly in the P&L. This is a common tactic procurement uses in negotiations with incumbent suppliers.
Implemented Cost SavingsProcurement organisations will track a pipeline of cost reduction savings, similar to a sales pipeline. This KPI reflects hard dollar savings that have been actually implemented and realised by the organisation, not just identified or targeted. Procurement organisations will typically track a top ten supplier pipeline against this metric.
Contract ComplianceProcurement teams are measured specifically on the contract compliance in the following terms
- Does the organisation have current and acceptable contracts for all major vendors products?
- Is the organisation meeting its obligations under the contract?
- Is the vendor delivering its obligations under the contract?
I have negotiated with procurement teams in global organisations whose number one measure was contract compliance over and above all others, even a higher priority than cost reduction.
Quality and Timeliness of DeliveryThis is a key KPI for procurement. Think of it like Procurement Service Level Agreements back to the business. It tracks procurements ability to deliver what the organisation requires when it requires it.
Procurement teams will measure metrics such as the following for example.
- Time from internal requisition to placing purchase order
- Number of errors
- Scheduled Delivery Vs. Actual Delivery
- Delivery Date Vs. Rescheduled Date etc.
This is not a complete list, however, as a key supplier it is well worth understanding the important elements for procurement. These are the metrics that you as a key supplier will be expected to track and report on in a forum such as a quarterly business review.
Costs AvoidanceCost avoidance is often tracked and measured by procurement teams as a direct cost reduction that results from spend that is lower than what it would have been had the cost avoidance exercise hot been performed.
These are often captured as soft costs and include:
- Negotiating to include additional services such as training at no additional costs
- Avoiding an increase in a suppliers price
Procurement Cycle TimeThis is normally measured simply as an average period of time required between a purchase request and purchase order being placed with a supplier. Similar measures reflect time between order placed on supplier and delivery to the business.
Delay's or results outside the expected threshold will often point to process issues internal to the organisation. Poor cycle times caused by the supplier will point to resource levels, skills, or process related issues, which will need to be addressed.
% of Suppliers making up 80% of total spend (The 80% Rule)A key motivation for CPO's is the consolidation of suppliers and vendor partners. This metric measures the current state of supplier consolidation at a point in time. Typically reviewed quarterly and annually, and will also drive the metric for Procurement ROI. Why purchase the same or similar products from multiple suppliers?
Procurement tracks this KPI to show the efficiencies they have achieved within their team at driving down costs. Typically you'll find that as this metric improves, you will see virtually all other procurement metrics, cost savings etc. improve as well. Hence the reason why supplier consolidation is so high on the list of procurement teams.
Note, depending on how critical this is for procurement, if you are positioning yourself to be a new supplier to the organisation, you may find yourself at odds with procurement.
Also, keep in mind 80% is an arbitrary but realistic % for procurement teams.
Procurement ROIThis is a very straightforward metric, which measures the department's overall effectiveness. Typically the measurement is achieved by comparing the implemented costs savings against the operating costs of the procurement team. As I said, pretty straight forward in terms of return on investment for the invested costs of running the procurement team.
Managed Spend as a % of total spendManaged spend is typically viewed by the procurement team as spend which is either:
- Spend influenced directly through the strategic sourcing process, and/or
- Spend which is aligned to strategic supplier contracts
As compared to total spend which is the amount of money the business spends on all products and services each year.
Spend under management is usually reflected as a % of Managed Spend vs. Total Spend.
Depending on the industry, size of business, total spend per year and how aggressive the procurement team is, managed spend targets will vary widely. I have seen them as high as 80 - 85%.
- What KPIs have I missed out here?
- What other KPIs have you seen in Procurement teams?
- Are you aware of the KPI's for the CPO in your key accounts?
- How closely aligned are your sales strategies to helping the CPO' achieve their KPIs?