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Supplier Strategies

Mon 23rd Nov 2020: Measuring The Immeasurable - The Value of Procurement Beyond Savings

Those with a passing interest in economics will be aware of GDP (Gross Domestic Product) as a widely accepted measure of how well the country is performing economically. It measures all the key economic indices such as production, consumption, imports, exports, etc in a particular year. All well and good.

People like me who are more obsessive about economics will understand that GDP isn't at all well and good at measuring all the economic activity in a country in a given year. It does not measure for instance, unpaid care work (and as a partner of an unpaid carer myself I'm not going to listen to any arguments that it isn't work of value). While it will count the value of the logs or palm oil created and sold in the process of clearing an acre of forest, it does not include the environmental costs of that deforestation. GDP makes no attempt to account for the quality of our air or the amount of leisure time we get. But everyone knows if GDP is down on last year, things are, or will get, bumpy.

I mention GDP as a widely accepted but incomplete measure of wealth as a segue into a recent discussion on LinkedIn around the validity of cost avoidance as a measurement. It's a debate I have been party to for years and which to my mind has yet, (and may never) be resolved. What counts as cost savings? Its an interesting and no doubt important debate being had all the time between CPOs and CFOs the world over. I've been in both environments - CFOs who had an inclusive view of an umbrella term of "cost savings" and those that needed hard-coded year on year cost savings as the only measurement allowable. Of course a lot of the discussion hinges upon the various definitions of cost saving and cost avoidance, cost deferral etc, but are arguments, of course for and against both views. If a wise procurement manager works with her stakeholder to avoid completely renewing licences for seldom used piece of software in favour of new built-in features of standard issue applications, why can that work done by procurement not be chalked up as a cost saving? For much of my career this would have counted as cost avoidance and not be included in savings calculations because the PM couldn't point to savings year on year on cost per licence, only that licenses were discontinued and the reasons for that discontinuance could not be attributed directly to the sharp thinking of the PM.

But for me, this argument about the definitions of cost savings is analogous to the debate about what constitutes production or consumption in our GDP comparison. Its a debate over the definition of one constituent of the whole piece.

Just as GDP doesn't tell the whole story of a countries wealth, Cost savings does not give the whole story of the contribution of procurement to the wealth of its host organisation. Overwhelmingly organisations measure Procurement Performance with a balance scorecard of KPIs that might include Year-on-year cost savings, Payment rotation days, On-time delivery, PO cycle time, Spend under management, and so on. All fairly standard. But, what if rather than monitoring procurement performance we measured Procurement Value. My consistent argument is that "Cost Savings" Payment days, IOtD, PO cycle times, etc are the easy bit. Easy to measure and easy to justify an existence through.

But these measures are not even half the story. Whilst it is a hard measurement that gives rubber-on-the-road results to financial contribution to a company's bottom line it misses much else where Procurement is in the prime place to lead. For instance, what is the value of procurement in reaching an organisation's commitment to sustainability? To achieving ISO certifications? To eradicating child and slave labour? To eliminating tax fraud? To improving the mental health of employees, customers and suppliers? To finding and nurturing suppliers and supplier relationships that can ensure supply in supply-constricted periods? To finding and nurturing suppliers who realise that the fortunes of their organisation and their customer are mutually dependent?

All of these things are in the "too difficult" pile for many companies because they are difficult to measure and therefore difficult to justify investment in when money is, as it always seems to be, tight. It takes a brave procurement leader to square up to his CFO to justify why metrics should go beyond hard measurable efficiencies and into the fluffy, woolly, indistinct world of measuring the immeasurable of for instance, procurement's contribution to staff's mental health and the value of that mental health to the companies bottom line.

But like the work of unpaid care givers, who is to say that its not of value? It's only not counted as not of value because quantifying it is difficult, non-standard (in accountancy terms at least) and any efforts to quantify them could be open to interpretation.

My call to action is for CFOs an CPOs to get together and define these measurements, and define them beyond interpretation. Define and communicate what's in and what's out when measuring Procurements contribution to, say, CSR and in measuring the value that CSR to the growth of the organisation. Just because its difficult, it doesn't mean it shouldn't be done.