Author: Gloria Qiao, Founder & CEO of Trusli
When I used to lead large procurement teams, we needed to report on our results regularly and go through the much dreaded “budgeting” cycle to show our value, get buy-in, and, more importantly, get more headcounts. How procurement teams are or should be evaluated has always been a hotly debated topic. For example, someone I used to work for would say, “Your savings are not for real. You can just tell your suppliers to give an inflated quote and bump up your savings number.” How silly. Not only did suppliers not do that, we also didn’t have time for that kind of game. The truth is, if we weren’t there, they would have paid the suppliers every dime the suppliers asked for. And, for a profitable company, a dollar saved is two dollars earned.
All jokes aside, how are or should procurement teams be evaluated? What are their KPIs? In addition to savings, there are quite a few other factors at play here. And at the end of the day, the procurement leaders should have a neat, sleek dashboard where all the data can be sliced and diced to show management why the team is doing a good job, thus deserving more funding/headcounts.
1. Savings
The first thing that all procurement managers talk about is always how much money they have saved.
But you will then hear the dreaded term “cost avoidance”. In strict terms, “savings” means year-over-year cost reduction. Meaning if I used to pay five dollars a part, and now I am paying three, then the two dollars are actual “savings”.
Everything else is by definition, called “cost avoidance”. This means, for any new deals, any money you are saving is, by default, “cost avoidance”.
I beg to differ. From a company leader’s perspective, the company will pay for every quote a supplier or service provider sends if the procurement team isn’t there. Anything less than the sticker price is “savings”. I vouch for a more liberal view of “savings”.
Regardless, the procurement team just has a method to achieve and document their savings. You can achieve savings by making a comparison with historical quotes and leveraging expanded spending, conducting an RFP for new potential suppliers, and eliminating unnecessary, antiquated demand, to name a few.
Ultimately, this is how procurement differs from a typical “G&A” function. Yes, the procurement team headcounts are counted as expense items. However, because of the unique nature of this team, they can actually be a “profit” center for the company, by achieving savings and coming up with creative ways to work with suppliers, such as forming strategic partnerships, etc.
The procurement leaders must track and measure their savings religiously, account for them team by team, commodity by commodity, track trends long-term and short-term, identify opportunities, report to upper management regularly to ensure alignment, and build stepping stones for bigger teams and better technology. Here at Trusli, we built a neat dashboard to help you track all of this.
2. Speed of execution
Unlike the sales team, procurement teams sometimes have a harder time justifying how fast they can get things done and why it matters. But it matters greatly.
For the teams who procure direct parts for an actual product to be shipped, this notion is easier to understand. Shortage of supplies equals inability to ship on time, which then, in turn, causes lost profits.
Even for teams that are procuring software and services (i.e., indirect procurement), a delay in procuring certain critical software or services could cause significant delays for important engineering milestones and deliverables. A single-day delay can be quantified by lost engineering hours and/or potential program impacts, whether it’s missing a critical milestone or forfeited sales opportunities.
Therefore, mature procurement teams must track their speed of execution and engage with cross-functional teams to identify priorities and work through them. When an important piece of software doesn’t show up, causing delays to the entire team, a procurement manager does not want to hear: “procurement delayed me.” Nor does she or he wants to respond, “That’s because I didn’t know,” or “ Legal delayed me.” No excuses. Let’s identify the critical items and get them on time, as opposed to pointing fingers.
With our Trusli dashboard, you can easily gather priority info from the engineering team and allocate your workload accordingly. You can also track key metrics relating to the spending of execution, such as cycle time and throughput. More importantly, for cross-functional teams, you can easily measure how long each deal spends with what team, eliminating finger-pointing and blaming. When everything is measured, the results are crystal clear.
3. Spend under management
Many inexperienced managers may overlook this one vs. the last two metrics. But as I mentioned above, for spend not under management, a quote is what a company pays for, with no discounts or concessions.
So looking at what’s not as important as what is. Experienced procurement managers would use the 80/20 and try to bring all major spend/suppliers under management while allowing the tail spend to be on some kind of autopilot, whether it’s outsourcing or software. However, for big-ticket items, the team must have a strategy to bring them under management, as a small discount achieved on a big basis can make a significant difference in the company’s bottom line.
Because this is almost a “shadow” metric, procurement managers must be proactive and measure this carefully. This means capturing all “shadow” spending, such as credit card charges and bill.com payments, to name a few. In the beginning, it may not be a pretty picture, but the more we know, the more we can do something about it. Measuring % of spend under management and its trend is an indication that the team is carefully thinking about the procurement strategy going forward.
With our Trusli dashboard, we connect to systems such as Coupa and bill.com and capture all shadow spend. Then we stack it up with all the actual deals under management, producing the spend under management metric over time accurately.
4. Terms
This is where procurement stops being black and white and quickly gets into a gray area.
For example, what would you rather have, a 10% discount or a better payment term? The answer is it depends. How big is the total spend? What is our cost of capital? What can the cash do for us if it isn’t paid out right away?
Payment term is just an easy and relatively straightforward example. After all, there is a way for you to put a monetary value on it. How about terms such as limitation of liability or indemnity? If I make a concession for a super risky LOL term for the company, in exchange for a little bit better discount, is that good or bad?
Here is yet another reason the cross-functional team must collaborate on the same platform and debate and evaluate such tradeoffs carefully. Some terms are keenly related to engineering, such as warranty and acceptance standards, whereas others are closely related to legal, such as LOL and indemnification. Procurement can’t and should not singlehandedly make such decisions and tradeoffs without consulting the other teams.
Ultimately, the entire team should strike a fine balance between these terms and the pricing and achieve the results that maximize the company’s benefits. The team should also track, measure, and review such tradeoffs over time to ensure the right course of action and strategies. We can help with all of this.
5. User experience
Some of you may think this is a big clichè. You are a procurement team. What user experience?
However, in the companies where I led big procurement teams and conducted surveys of the users’ experience, I’ve always gotten overwhelmingly positive feedback for even caring about this metric.
One of the values I’ve always vouched for is “service”. Ultimately, apart from being “G&A”, procurement is a service function, we are here to provide a service to the rest of the company to ensure they have everything they need on time, with good terms, and through a delightful experience.
So how they submit their requests matters. How they can be provided with transparency and updates during the process matters. How the procurement team can be a trusted advisor that provides professional, prompt, and insightful assistance, as opposed to being a button pusher, or, worse even, a blocker.
Of course, sometimes, there are unavoidable conflicts between the cross-functional teams and procurement teams. For example, it would be silly just to go buy something last minute without any discount because of a made-up deadline. Or, worse, even adhere to a strategy dictated by the team without conducting proper due diligence and having a thorough investigation of all the factors that matter and the competitive landscape. I’ve personally been in fights with engineering/IT teams who want to build a big data center on-prem vs. going through a cloud provider.
It’s ok to have disagreements. Or even haters. Ultimately, we are here to do a job and maximize benefits for the company, not to please or befriend certain individuals. However, having the sense of conducting a cross-functional survey and hearing directly from the users is critical for procurement managers or even upper management to properly evaluate how the team is doing and what we can do to improve. The score doesn’t have to be perfect. What you hear in that process often gives new insights and guidance about how the process can be improved.
Our Trusli dashboard also contains a survey tool where we can deploy easy surveys based on the deal history and common power users from the cross-functional team.
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