Daily Archives: September 10, 2013

Have You Aligned Your Measurements?

It’s a simple question. Have you?

I’ll give you 5:1 odds that you’re not. Why? It’s hard to know what the right stuff is, and, these days, there seems to be an overwhelming focus on quantity, and not quality, and savings, and not value.

For example, if we’re talking about e-Procurement, many organizations measure the number or percentage of invoices processed through the system. (As many of the “leading” analyst firms report that as a good measure.) Sounds good, but since the 80/20 rule is just as applicable here as anywhere else, the reality is that 20% of your invoices take up 80% of your time (due to number of line items, number of amounts that need to be checked, number of errors that need to be fixed, etc.) and 20% of your invoices represent 80% of your spend. If those invoices are not being put through the system, then it hasn’t really reduced your processing costs all that much as the most significant cost associated with PO processing is the cost of the personnel doing the processing. What you need to be measuring is the % reduction in human interaction time. If a new system only reduces human involvement by 20%, it’s not working. Sorry.

If you’re measuring year-over-year savings, you’re not measuring the right thing. If your price went down 10%, but the market price of the raw materials dropped 20%, did you do a good job? No. And if your price went up 5% while market indices went up 15%, you did a bang-up job. You have to measure performance against market average, otherwise, you don’t know how good you’re really doing.

And if we’re talking about Sourcing, if you’re measuring the percentage of spend strategically sourced, you’re definitely not measuring the right thing. While it’s true that an organization will not have the resources to strategically source 100% of spend, and that 100% of spend should not be strategically sourced, there is a percentage of spend that needs to be strategically sourced, and a percentage of that which needs to be sourced while the market opportunity is good. You need to determine, with good spend analysis, what that percentage is and make sure you get to that spend – not just the next ten categories on the high volume spend list. The near-decade of near-zero inflation is over. We’re back to inflationary times, and we will probably stay there for the rest of this decade. It’s time to measure what is costing you, and focus on optimizing that.