X asks Y lead the procurement function for their respective companies. They meet after a long time. And the usual conversation starter, how is business going on? Y takes a big sip of his coffee and exclaims, “Great! What about you?” X says, “Well after a necessary automation, the cost of invoicing-error has come down drastically. In fact the last quarter reported 44% reduction in operating costs.”
If you are given a role-play, would you represent Y or X? I would certainly enact X’s role who unlike Y, is more sure of what exactly made an impact for her company, which is automation that led to a huge cost difference. I’m happy when my organization makes is able to achieve an impressive savings outcome. Here, Y knows at his heart that ‘Great’ is just a puerile adjective; there are challenges he is trying to tackle but that’s not something he is out to talk to while meeting his friend, and certainly he wouldn’t like to be told ways he can get better at managing his costs much more effectively.
Y asks X, “So, if you are to measure performance on the basis of efficiency versus effectiveness, how would you go about it?”
X: Sure. So I look at efficiency as a control on costs achieved through doing things right. The efficiency of a strategy can be studied through how effective it is on the ROI. The efficiency of i) Expense of cash disbursement, ii) Employee/staff headcount, iii) Purchase order cycle time, iv) Leveraging e-invoicing technology for AP, and v) Percentage of electronic distribution of reports has effective impact on i) economic return, sales outstanding to be received, ii) Percentage of AP errors, iii) Percentage time consumed in automated analysis versus traditional reporting, iv) Percentage of managers filing business performance reports online, and v) Percentage of time managers are occupied in business analysis.
Y: Well, we know that for successful implementation of performance measurement metrics, Benchmarking is the way. Tell me how do we benchmark various costs in Procurement that’ll be both efficient and effective as discussed above?
X: Hey, let’s do this. I have a meeting to run for. It is just for a while. If you don’t have a busy schedule, why not come over for half an hour to my office?
Y: Oh! Where is your office?
X: Man, you surely know your competitor. That’s next to HSBC building behind your office.
Y smiles and both leave.
So X and Y were talking about Benchmarking various costs in Procurement that are efficient and effective on the ROI. The costs they discuss include cover i) Labour, ii) Outsourcing, iii) Technology, and iv) Other/Miscellaneous costs. Their discussion appears in a whitepaper that explains how to control these costs through elaborate tables on metrics and measurements.
To download the whitepaper, bookmark this blog and visit us in a fortnight.
It is important to remember that these cost-reduction efforts are not a magic wand for transforming your entire procurement. These practices are basic hygiene to give procurement a strong foundation in being financially resourceful for their organization/s.
In addition to the above, it is also to highlight how moving away from transaction-based cost center to a more profit-oriented service function, budget owners can extract maximum value of their supplier per dollar spent. World class organizations (950% ROI) beat peer-groups by (457% ROI) by 493% ROI. To calculate procurement’s “ROI” in a profit-oriented move, consider-
Procurement ROI= Spend savings / Cost of Procurement
If you are poised to game up, include cost-savings from low-value transactions within your focal arena than limiting it wholly to higher-impact sourcing and supplier management processes. Note that your investment in processing purchase orders is also an investment in improved customer-relationships and supplier performance management.
For further reading, download whitepaper here.