I wrote previously about the difference between metrics and key performance indicators – and why drawing a distinction between the two is important.

In a nutshell, metrics can only become KPIs if they help track progress towards organizational goals. This context is critical: Tracking metrics that don’t tie back to goals is as useful to forecasting success as reading tea leaves. We simply can't develop real insight on how were tracking insofar as performance.

The natural follow-up question is, “what KPIs are relevant to Procurement’s goals?” See below for a non-exhaustive, yet critically important, set of KPIs every Procurement team should be tracking against.

Procurement Effectiveness

Procurement pros can’t drive company efficiencies if they, themselves, aren’t efficient. Tracking our own effectiveness should be a priority. “Cost savings” is often touted as KPI, but I view it as nothing more than a vanity metric (dud #1). Why? Because it doesn’t speak to either the effort (money) that goes into those savings or other opportunities left on the table.

  • Procurement ROI: Beyond total savings achieved (cost reduction, cost avoidance, or both depending on your organization), how does this compare to the total internal cost of maintaining the Procurement team?
  • Spend Under Management: What percentage of spend is managed directly and actively by the Procurement team (see my definition of spend under management for more here)? How does this break out between direct and indirect spend? How does this break out by spend categories?

Contract/Pricing Compliance

I’ve said it many times before – the greatest deal you’ve ever negotiated means nothing if suppliers don’t abide by it after the ink dries. Measuring the percentage of suppliers under contract is, again, a vanity metric (dud #2). Procurement should establish KPIs that track suppliers against their commitments.

  • LPP vs. Contract Price: How many invoice line items are charged above stated pricing in your agreements? What percentage of spend does this overage make up? 
  • Average Delivery/Lead Time: What percentage of deliveries are on-time according to SLAs? For deliveries that are late, what is the average number of days beyond this period deliveries are received?

Policy & Process Adherence

Suppliers aren’t the only ones Procurement needs to keep an eye on. Look towards purchase habits internally as well.

  • On- vs. Off-Contract Purchases: What percentage of spend goes towards rogue, off-contract purchases when an on-contract alternative exists? How much money would have been saved if on-contract equivalents were purchased instead?
  • Purchase/PO Cycle Time: How many hours are required from the time a purchase request is made to the time a PO is initiated, and how many hours again until the PO is issued to a supplier? 

Are you Chasing Red Herrings?

The KPIs above aren’t the only important measures out there, and your own list will vary based on your organization’s goals. However, ask yourself at a high level, “How many metrics am I analyzing and reporting on regularly? How many actually help me track against my goals?” 

I’ll refer to this final seventh KPI as the “Red Herring Ratio.” If you’re pouring too much time into reporting on metrics that don’t move your Procurement team forward, it might be time to reevaluate priorities.

Procurement’s goal should always be to cut through the fluff and get to brass tacks. Confusing metrics and KPIs is a great way to miss the mark by muddying the waters and over-analyzing metrics that don’t move our organizations forward.

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Brian Seipel

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