Isn’t It Time We Diched Procurement ‘Savings’ As A Meaningful Measure Of Performance? (Guest Post)

Posted on June 13, 2022


About my guest author:

With over 20 years Board level experience, Colin Cram, runs successful international consultancy, conference, training and journalism businesses. Specialisms include procurement, outsourcing, shared services, organisational re-engineering, cost reduction and combating fraud. Customers include government organisations and major multi-nationals. Visit Colin’s LinkedIn Profile

Is there any meaningful way to measure the ‘savings’ delivered by a procurement organisation? In the early 1980s, I studied procurement in 11 private sector businesses to see what lessons there might be for the UK’s public sector. IBM was one of them. The head of procurement proudly explained how they were making savings against the retail price index of 2% or more year on year, and that much had been invested in procurement training with people earning membership of the then Institute of Purchasing and Supply. The pay was performance-related. Performance charts were exhibited in the corridors of CSuite members. I was impressed. Then, one year later, a competitor that had reduced costs by 20% compared to IBM nearly caused its collapse. The procurement organisation had been measuring itself against itself, and the retail price index was irrelevant.

Sainsbury, then the biggest supermarket in the UK, was another company I studied. Procurement people were given targets – not procurement targets, but sales targets. They had to purchase products at a price that, when a standard proportion of all direct and indirect costs was added to the purchase price plus a profit margin, the selling price of the product would still be low enough for it to sell well. They could make opportunistic procurements, e.g. a manufacturer’s cheap surplus stock. Still, in calculating the sales prices, the company applied an additional cost uplift to cover the cost of finance and storage. Their performance was judged by the value of sales of the products they were procuring.

Procurement’ savings’ are often measured by cash ‘savings’ and cost avoidance, the latter for contracts, particularly one-offs. However, usually, only the positive side of life is recorded. The figures are rarely netted off against price increases and contracts where costs may have been excessive or did not deliver what was anticipated, resulting in consequent cost increases. Price’ savings’ can be misleading – for example, easy to claim if purchase volumes increase. Also, people tend to measure what is easy rather than what matters. My rule of thumb is that organisations that measure procurement savings of less than 2% per annum overall are probably going backwards.

Twenty years ago, an outrageous approach to claiming savings was introduced in the central government in the UK, where savings were automatically assumed through tendering. There was no sensible way of measuring procurement savings for most contracts. Many were one-offs. So, a way to create fictitious savings was approved. Since tendering was already the norm, this made even the worst procurement organisations look good. Mercifully, that approach was abandoned after a few years.

Traditional approaches to measuring the performance of procurement organisations are bureaucratic, costly and largely meaningless. Instead, Sainsbury aligned its procurement objectives with those of the business. If the business was doing well – profitable and expanding- that was because procurement performance was great. Much more recently, a friend of mine was senior vice president of procurement for a major leisure and retail infrastructure project in SE Asia. His objectives were simple: to deliver the project on time, within budget and fully functioning from day 1. When I asked him if he achieved it, he replied, “We did what it took.”

Great procurement organisations do what it takes to deliver the objectives of the business they serve. For many businesses, procurement represents 40% or more of costs. If such businesses are doing well and beating their competition, then procurement must be doing what it takes. That is the true measure of the performance of a procurement organisation.

©Colin M Cram FCIPS
8 June 2022