Special thanks to Charles Dominick, SPSM3 of the Next Level Purchasing Association for this guest post.

Whenever you get a procurement capability improvement initiative rolling, you have to utilize resources. By resources, I mean money or activities or things that cost money. When you complete a procurement capability improvement initiative – or a segment of it – you will likely be questioned what returns the investment generated. That’s not always easy to quantify, but here are three ways you can measure the value of procurement capability improvement.

Before-and-After Comparisons
When you started your procurement capability improvement program, you did so for a reason. There was something deficient. What was it? What measurements did you use to determine that performance wasn’t optimal? Those are the same measurements you need now.

While all top-performing procurement departments measure cost savings alongside other advanced metrics, even mid-range performers at least measure cost savings. So, let’s use cost savings as an example.

Let’s say that the procurement team saved $1,000,000 before the procurement capability improvement program. That wasn’t enough. So, you put in place the procurement capability improvement initiative. And, now that it’s complete, your annual savings is $6,000,000 per year. Then, the value of the procurement capability improvement initiative is the difference - $5,000,000.

Cost Savings Attributions

Reflecting on the prior example, any good devil’s advocate would say that there may be some of that additional $5,000,000 cost savings that’s not attributable to the procurement capability improvement initiative. And that’s a valid point. For example, maybe the commodity markets dropped, resulting in somewhat “automatic” cost savings that would have been achieved irrespective of whether the procurement capability improvement initiative was undertaken or not.

If labeling all gains as procurement capability improvement initiative-driven would be a problem in your organization, a more granular approach may be needed. For each line item that you record as procurement-generated value, you need to either flag it as related to your procurement capability improvement initiative or not. Then, you simply add up the value of all of the flagged line items to come up with the value that your procurement capability improvement initiative generated.

Again, because most mid-level or better procurement organizations track cost savings, we’ll use that as an example. In whatever system – or spreadsheet – you use to track cost savings, add a field for each record where a user can attribute the savings to the procurement capability improvement initiative. Then, follow the foregoing steps to identify how much of your incremental cost savings was attributable to the initiative.

Performance Appraisal Documentation
A final way to capture the value of your procurement capability improvement initiative is to incorporate value metrics into staff performance appraisals. Throughout the year, encourage each team member to identify the value that they generated that was specifically related to the procurement capability improvement initiative. At performance appraisal time, have each team member report what they’ve measured, then aggregate all of those reports for a team total.

If you’re doing performance reviews anyway, this is an easy approach to identifying the value of better procurement capability.

Concluding Remarks
Improving procurement capabilities is something every procurement leader should do continually. However, sometimes the need for improvement is much more significant than others. Regardless, you need to keep your eyes on the prize. Don’t just make changes for the sake of making changes. Make changes designed to better position your team to achieve its goals and mission. And, right from the beginning, think about how you will measure how much of a difference improved procurement capabilities will make. That way, when it’s time to report the value of your initiative, you can do so knowing that your initiative contributed in a very positive and measurable way.
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