Guiding Metrics for Procurement Compliance – Part 1

Having one’s procurement house in order is a very critical aspect of ensuring smooth functioning of an organization in today’s ever-evolving and volatile business environment. Given the global nature of businesses today coupled with increasing regulations to keep up with, it is paramount that procurement has firm control over its policies & processes to avoid any compliance leakages which could have negative ramifications for the organization.

In Part 1 of this blog piece, I would like to cover the metrics that need to be on the watch list for procurement compliance. Part 2 of the series will focus on the benchmarks for these key metrics as well as ways to move the metrics for better procurement compliance.

1. Spend Under Management

Having more visibility into the organization spend as well as having control over this spend can go a long way in helping procurement get a grip on the potential risks that could be emanating due to the lack of visibility & control. It is for this reason that Spend Under Management is a crucial metric for any procurement organization. Having more SUM also is a gateway to driving more value from procurement activities be it delivering on savings or for that matter being the customer of choice for the suppliers.

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2. Contract Compliance

Contracting most often or not plays a critical aspect in business operation & continuity. Contracts are an essential means for an organization to meet its goal of spend protection & cost reduction. Contract compliance is a crucial metric for procurement to track adherence to payment terms, realization of negotiated savings and most important of all, mitigation of risks emanating from transactions outside of negotiated contracts.

3. Transactional Compliance

According to The Hackett Group, operational excellence requires quality across different transactional touchpoints to drive end-to-end compliance with policies & procedures. Some of the critical metrics one can attribute to this would be –

• PO Creation Compliance Rate – Percent of purchase order lines items that are created in the proper sequence, compliant with company policy, as opposed to after-the-fact. A purchase order is non-compliant if the creation date is after the invoice date, in violation of the normal/prescribed purchasing processes (i.e., the requestor is supposed to get an approved PO issued before committing spend).
• Invoice Acceptance Rate – Percent of deliveries that are not rejected back to the supplier at the time of submission (invoice is sent back to the supplier without input into the system due to missing information, etc.). Average of the non-rejection rate for both PO and Non-PO related invoices.
• First-Pass Match Rate – This is the number of entire invoices successfully matched to the PO on the first attempt as a percent of total attempted matches of invoices to POs. It includes all PO invoices [e.g., 3-way match (PO, invoice, receipt) or 2-way match (PO, invoice)]. Only invoices without a PO are excluded. ‘Match’ means the data on the invoice matches the data on the PO (and the receipt, if applicable). There may be additional approvals or fraud checks required for certain levels of spend, but if the PO and invoice match initially without changes needed, it is still counted
• On-Time Payment Rate – Percent of payments made on time per organization’s payment policy. The on-time window may include extra days (“grace period”) if payment terms and cycle do not align. The intent is to measure the consistency of timely payments, relative to the supplier’s expectation. For example, if the buyer has indicated that payments will be issued on the 1st and the 15th of the month, a payment following the schedule is considered on-time. But, if an invoice misses the payment run (1st or 15th) following its due-date because the buyer is resolving invoice discrepancies, it would not be considered on time.

Click here for Part 2 of the blog.