Proxima Blog

Friday Response: Measurement of Procurement Outsourcing Success

  

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Prerna Dhawan, Assistant Manager at The Smart Cube asked (via Linkedin) "Any KPIs or metrics that can be used for tracking the performance of a service provider?"

Within the string of answers, there was a great response from John Sheridan, Director, Head of ITO Advisory at Alsbridge plc:

Here's a few that you could consider irrespective of the general scope of the arrangement:

• Negotiated cost reduction savings
• Implemented cost reduction savings
• Percent of total spend under management
• Cost avoidance
• Procurement ROI (savings/operating costs)
• % of suppliers accounting for 80% of spending
• Supplier performance (price, delivery, quality, service, etc.)
• Contract compliance (quality)
• Requisition, PO, or invoice transaction volume (productivity)
• Subjective feedback (customer satisfaction)
• But you need to avoid treating this as a 'metrics' exercise - it becomes a cottage industry and you lose the general focus of the relationship. Choose those that are best aligned to your business objectives and be realistic / reasonable with their application.

Watch out also for value leakage... negotiating a great deal with a supplier doesn't necessarily mean that the client organisation benefiting from that arrangement realises the intended benefits either through their behaviour or other influencing factors.

Finally, ensure that any future procurement eco-system is part of a wider sourcing strategy that focus on Total Cost of Ownership... recently had an example of what appeared to be a great deal - client team negotiated a great price on printer paper across the organisation saving a few percentage points on paper cost ... but cost the client significantly more in printer maintenance costs and lost productivity due to increased number of paper jams. Needs to be an intelligent relationship.

Further to John's points I would also add the term 'Procurement Outsourcing' is too generic - what part of the process are you outsourcing?

I would recommend you link the metrics to the business case of why you outsourced in the first place. If you are outsourcing the category management/ sourcing/ stakeholder management/change management end of procurement (as opposed to the transactional end) you need metrics which measure the outputs - the results you want to achieve. Don't focus on the inputs, as at the end of the day, its the results you want.

So metrics such as the number of innovative ideas generated, and process improvements made. How much maverick spending is going on and where. Also, we always encourage our clients to major on customer satisfaction – because it really focuses us on making that happen.

I would also break out further the savings metrics. Its important to know a) what savings have been identified, b) What savings have been rejected (and why), c) What in-year cash savings have been generated (not just what has been implemented), and d) how has working capital management been improved.

At the end of the day – you should aim for a list of 8-10 metrics, which represent the business case of why you outsourced.

 * Original question can be read here: How to measure success in a Procurement Outsourcing Contract?