Master the Metrics that Matter
Which metrics truly count when gauging procurement effectiveness? In this e-book, procurement experts Larry Wood from The Simms Group and Conrad Smith, CEO of Graphite Connect, delve into the critical metrics that matter to executive leaders and how you can better align them to showcase your value to the business.
According to Larry, the CFO, and other top executives focus on three key areas: cost savings, employee productivity, and speed to market. These three pillars encompass a range of metrics, and their significance may vary depending on your unique business cycle and strategic goals.
The first crucial pillar is cost savings. But here’s the catch—the definition of cost savings can vary widely. That’s why nailing down a shared understanding of how these savings are calculated and defined across your organization is essential.
Deciphering cost savings versus cost avoidance
Larry advises, “Get your finance person involved to help determine your definition of cost savings because there are so many use cases you have to think through — ‘is that a real number or not?'” Often, it’s a fusion of both cost savings and cost avoidance.
Take a software deal as an example: if you pay less for software licenses in your current purchase but buy more licenses than the previous deal, is it cost savings or avoidance? The answer lies in understanding the nuances of each.
Generally, savings are when you drive down the cost from what you paid before. Cost avoidance occurs when you leverage intangible benefits to avoid additional expenses. For instance, getting free training with a software purchase you would have paid for otherwise is considered cost avoidance.
Unpacking hard and soft savings
It’s also crucial to differentiate between hard and soft savings. Hard savings are measurable cost reductions that have an immediate financial impact on your organization’s bottom line. These direct savings are often associated with negotiated price reductions, improved supplier terms, and process efficiencies.
Hard savings boost financial impact
For example, if your company negotiates with a supplier for a 10% discount, the resulting cost reduction represents a hard saving. This clear and measurable expense reduction directly affects your organization’s spending.
Buying items in larger quantities to take advantage of volume discounts is another form of hard savings. If your company purchases office supplies in bulk and saves 15% compared to buying them individually, the cost reduction is a hard saving.
Soft savings elevate value
Soft savings, on the other hand, are more difficult to quantify and may not have an immediate financial impact, but they still contribute positively to your organization’s overall value. These savings are often associated with process improvements, increased productivity, and risk mitigation.
For example, implementing an automated procurement system that streamlines your purchasing process, reduces manual work, and speeds up approvals can improve efficiency. While this may not have an immediate dollar value, it can free up employees’ time for more strategic tasks and contribute to long-term operational improvement.
Establishing strong relationships with key suppliers might not result in immediate cost reductions, but it can lead to better collaboration and more favorable terms in the future.
Sometimes, the line between hard and soft savings can be blurry. For instance, a process improvement that initially falls under soft savings could eventually lead to hard savings as the benefits materialize over time. Both types of savings are important to consider, as they contribute to your company’s overall financial and operational health.
Navigating diverse perspectives on cost savings
The complexity of cost savings can lead to different interpretations among teams. The CFO and finance team may focus on spend and run rates, which impact a company’s cash flow directly. In contrast, procurement sees savings as a measure of value added to the deal.
“In procurement, my goal with my team is to talk about cost savings in the context of value-added. What value did you bring to this deal?” says Conrad. “So I would look at metrics generally differently than how finance is going to look at them.”
Both perspectives are valid in their own way. In the end, understanding the many nuances of cost savings helps everyone in the organization make more informed decisions and effectively manage finances.
Aligning cost with business needs
Let’s be honest. Simply cutting costs may not always lead to the kind of success you want for the business. You might come across suppliers that seem budget-friendly at first glance, but if their actions hurt another team’s budget, that won’t cut it.
You must go beyond surface-level savings and dig deeper into strategies that align with your organization’s objectives. Sustainable growth and improved outcomes should be the name of the game. You want to ensure your cost-cutting measures don’t have unintended consequences that end up biting you later.
This means understanding the broader implications of cost-cutting measures and ensuring that they contribute to your business’s overall health and success.
This brings us to the second key metric pillar that your COO has a keen eye on: employee productivity. Burdening employees with complex processes is not the path to achieving optimal outcomes. That’s why making it easy for employees to get what they need is important.
Investing in your procurement systems and streamlining processes can reduce frustrations associated with cumbersome procedures. And, it prevents employees from resorting to makeshift solutions that often fall short.
Larry shares an example from his past experience where the supplier was required to answer many questions about data security. It was up to the requestor to ensure the supplier completed this task, creating an inefficient and tedious process that could have been improved for both parties. That’s why finding the right balance between keeping your organization safe and maintaining operational efficiency is essential.
The third metric pillar that CFOs care about is a subvariant of employee productivity—speed to market.
Speed to Market
While cost savings are a big deal, there are moments when being quick off the mark, innovative, and supporting crucial projects is what it’s all about. And guess what? CFOs are really paying attention to this.
Speed to market ensures that your goods and services are ready to go when the stage is set. But to nail this metric, your procurement team has to be in sync with the company’s overall strategy. You’ve got to be all hands on deck.
But it’s not just about checking off items on a list. It’s about forging strong bonds with other teams and collaborating to ensure everything flows seamlessly. This means partnering up with stakeholders and all working together to ensure the company’s big picture is in focus.
Speed to market isn’t just about moving quickly—it’s about moving strategically. By aligning your procurement strategies with the company’s grand plan, you’re helping to steer your organization toward new opportunities while staying ahead of the curve.
Line Up Procurement Metrics with Company Goals
Understanding what drives success for each department and thinking innovatively beyond traditional approaches enables procurement to become a strategic partner rather than just an order-taker. By embracing these principles and aligning metrics with the organization’s unique goals, procurement can genuinely contribute to the overall success and prosperity of the business.
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