analyze this.

by richard waugh

procurement
analytics
+ insight
= performance
PROLOGUE

The age of Big Data is upon us, and powerful analytical tools are making it
possible to measure increasingly minute and granular data, including
dashboards tailored specically for the individual user - everything that
matters to the metals category manager for example. It is nevertheless
important not to lose sight of the bigger picture at the highest level. So what
are the top 10 Procurement Performance Metrics that should be on every
CPO's Dashboard as a barometer of leading indicators?

ABOUT THE AUTHOR

As Vice President for Corporate Development at Zycus, Richard leads

strategic initiatives in the areas of new product introduction, market
development, thought leadership, analyst relations, and strategic partner
development programs. Richard has an extensive background in B2B
eCommerce, going back to his early career at GE, where he helped launch
GE's Trading Process Network (TPN), the rst on-line marketplace for
sourcing and procurement in the mid 1990's.
 SPEND UNDER MANAGEMENT
The most compelling measure of the Procurement Organization's inuence and control over
company spending, Spend Under Management (SUM) is most often equated with spend that
is actively managed or controlled by the procurement function where there is clear
responsibility for sourcing the category and corporate agreements are in place with
preferred or at least, approved suppliers. Recognizing that 100% SUM is at best a
theoretical standard some spending in non-discretionary expenditures such as taxes would
not warrant a Category Manager's focus top performing organizations are nevertheless
able to account for the vast majority of corporate spending as Managed Spend.

According to Aberdeen Group benchmarks, Best-in-Class companies are achieving 80% SUM,
while Average Performers are able to account for 62%, and Laggards bring up the rear at a
paltry 22%. The obvious implication for anyone other than the top performers is a signicantly
smaller base from which to create a savings pipeline, severely limiting Procurement's potential
to impact company prots.

Most procurement organizations are able to exert inuence over certain categories Direct
Materials spending for instance is inuenced or managed by procurement at a rate of 79% for
the overall Peer Group and even higher 87% for World-Class companies according to
benchmarks from the Hackett Group, but it is more often the ability to inuence and control
areas of indirect spend where the business has historically operated autonomously, that
separates the top performers from the also-rans.

So while indirect categories such as General Equipment and Supplies are either inuenced or
controlled by sourcing 91% of the time, just 64% of Sales and Marketing support expenses have
any sourcing oversight. When tracking the SUM metric, it is also helpful to benchmark against
how others are performing in the same vertical. For instance, the target for an Automotive
Manufacturer where 93% SUM is the standard according to CAPS Research (Center for
Advanced Purchasing Studies) benchmarks, Financial Services SUM is just below 64% on
average.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 SPEND WITH LINE ITEM VISIBILITY
If Spend Under Management is the foundational metric for overall Procurement
Performance, visibility to accurately classied spend data granular line item level visibility
that is the pre-requisite for developing and executing effective sourcing strategies is the
best leading indicator of how effective the organization is likely to be in actually managing
the spend. After all, having inuence or even direct control over most major categories of
spend will be of limited value unless the responsible category managers can mine the data
to get insights over opportunities to really manage the spend insights that lead to
opportunities for supplier, parts, or terms standardization or rationalization, as well as
demand or compliance management which can only be gleaned through current and
accurate line item level spend visibility.

And the correlations between an organization's ability to analyze spend at a detailed level
and the likelihood they will achieve World-Class performance is difcult to refute: 80% of
World-Class Procurement teams have it less than 50% for the Peer Group overall.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 PROCUREMENT CONTRACT COMPLIANCE
Often the stumbling block for even World-Class Procurement teams, Procurement Contract
Compliance directly addresses the ability to control not just how goods and services are
sourced as in the case with Spend Under Management but how they are actually purchased
by end-users in the business. The difference between SUM that is centrally sourced and
contracted for, and what actually gets ordered off of those approved agreements, represents
Contract Leakage and therefore Savings Leakage the unintended consequence of the
dreaded Maverick Purchase. Rarely the result of willful malfeasance that the term implies,
maverick spending is more often symptomatic of decient processes and systems that do not
enable non-procurement end users to easily nd and order from approved supplier contracts,
leaving them to their own devices to nd their own suppliers and negotiate (or not) their own
deals.

Whereas the Best-in-Class experience very little leakage 78% Procurement Contract
Compliance as compared to 80% Spend Under Management according to the Aberdeen
benchmarks, the drop-off is rather precipitous for all others, where Industry Average
performers experience almost 1/3 leakage just 30% of 62% Spend Under Management
compliant with procurement contracts and the worst performing laggards can only muster
11% of 22% Managed Spend on procurement contracts.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 SPEND UNDER MANAGEMENT
SPEND WITH LINE ITEM VISIBILITY

100
TRANSACTION SPEND
90
INDUSTRIAL MFG CAPS
80
85% BENCHMARK SUM 2013
100

80 74%
70
72%
60 67%
60
47%
50 40%
40
40
22%
30 20 13%
4%
0% 0%
20
0
10 SPEND
MANAGEMENT SEGMENT FAMILY CLASS COMMODITY
0
DASHBOARD
ACME ACME
2013 2014

PROCUREMENT CONTRACT COMPLIANCE

OFF CONTRACT

ON CONTRACT

75% 80% 45% 70% 72%

FACILITIES PROFESSIONAL TRAVEL & INFORMATION MARKETING &
MANAGEMENT SERVICE FLEET TECHNOLOGY ADVERTISING
 SUPPLIERS ACCOUNTING FOR 80% OF TOTAL SPEND
Following on the theme of focusing the right resources on the right suppliers, this metric
provides a quick read as to whether or not purchasing power and resources are being
appropriately leveraged and allocated, or conversely, diluted due to a fragmented and
unwieldy supply base. Although the 80/20 rule is commonly applied here, as in the top 20%
of suppliers account for 80% of spend, the actual targets should be for an even greater
concentration of spend with fewer suppliers somewhere in the range of 6-7% of suppliers.

The average across all industries in the CAPS benchmarks is in fact 6.37%, with a high water
mark of better than 12% in Automotive, and a low of just 2.65% in Engineering and
Construction. Although small on a percentage basis, the necessity for supplier consolidation
becomes clear when you consider that the average organization has 3K suppliers per $1B in
spend, so the target would be to have 80% of that spend volume with about 200 suppliers.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 SUPPLY MANAGEMENT RESOURCE ALLOCATION
Admittedly an amalgamation of multiple resource allocation metrics, the ability to track
where and how procurement resources are being allocated is nevertheless a reliable way to
ensure that the right people are working on the right things more important than ever,
when procurement budgets are actually at to declining. An effective dashboard view of
resource allocation would allow the CPO to view resource allocation metrics such as:

n Strategic vs. Operational - The CAPs Benchmarks dene strategic employees as engaged
in long range sourcing and procurement activities critical to the organization's ability to
meet its core business objectives, while operational employees are primarily engaged in
day- to-day procurement activities that support an organization's standard procurement
processes and procedures, or in other words transactional. Intuitively, the desired state
would be to allocate the majority of resources to those strategic activities designed to
meet core business objectives, however, the inverse is actually more often the case, a
roughly 60/40 split of operational to strategic on average, according to the CAPS cross-
industry benchmarks

n FTEs per $1 Billion Spend useful in right-sizing stafng levels to the magnitude of the
challenge, World-Class organizations apply about 44 FTEs per $1B spend in 2013, about
27% fewer resources than the overall Peer Group in the Hackett benchmarks

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 CONT.
SUPPLY MANAGEMENT RESOURCE ALLOCATION
n Suppliers/Strategic Suppliers per FTE - the ability to monitor and manage supply risk is
one of the more elusive things to measure. It is the great unknown of unforeseen threats
natural or man-made disasters, bankruptcy, or product quality issues for example -
which could cause supply disruptions or other catastrophic failures that keep many a
CPO awake at night. Perhaps the only way to assuage these fears is to at least know that
an appropriate allocation of the right types of resources are actively focused on
managing suppliers, and specically, managing the most critical suppliers. So while
useful to know that in the CAPS Manufacturing Industry benchmarks, for example, a
Supply Management FTE manages 122 active suppliers on average, it is perhaps more
important to keep track of resources allocated to strategic suppliers. And where supply
risk is the concern, the goal is not to increase the span of control, but actually focus
Supply Management FTEs on fewer strategic suppliers. World-Class organizations are
notably devoting about 6x more resources to managing strategic suppliers than the
overall Peer Group. Just like in school, where smaller class sizes usually mean better
teacher-student interactions and outcomes, the ratio of 8 strategic suppliers per Supply
Management FTE is producing better results for World-Class performers than the 47-1
ratio in the Peer Group

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 INCREMENTAL REVENUE FROM SUPPLIER
INNOVATION
A benet of the increased focus on Strategic Supplier Management, and an increasingly
important metric for quantifying Procurement's value contribution in light of the diminishing
returns available in many cases from cost reduction activities, it is the top line revenue
impact from collaboration with strategic suppliers for innovations in new products and
processes, that has allowed top quartile performers to generate 7.4% in incremental
revenue as a % of total revenue according to the Hackett Group's report on Leading
Procurement Organizations, and an average of 3.5% of total revenue for companies overall.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 SUPPLIER MANAGEMENT RESOURCE ALLOCATION SUPPLIER INNOVATION

STRATEGIC
CENTRO INC 20

OPERATIONAL
FLOWCONTROL 37.5

SMC PNEUMATICS 62.5

44% 40%
TRI-STATE VALVE 62.5

56% 60%
0 20 40 60 80 100
AVERAGE OF KEY PERFORMANCE INDICATOR (KPI) SCORE
ACME INC. 2014
CAPS INDUSTRIAL MFG. SUPPLIER
BENCHMARK 2013
MANAGEMENT
DASHBOARD
SUPPLIERS ACCOUNTING FOR 80% OF TOTAL SPEND

100 5.00%

SPEND SPLIT IN % &

80 4.00%
SAVINGS POTENTIAL

SPEND WITH 60 3.00%

REMAINING SUPPLIERS

40 2.00%
SPEND WITH TOP
20 SUPPLIERS
20 1.00%
55% 57% 75% 70% 58%
SAVINGS POTENTIAL %
0 0.00%

PAINT PLASTICIZE INORGANIC PETROLEUM PACKAGING

 NET PROMOTER SCORE
While the other Top 10 Metrics lend themselves to external benchmarking comparisons to peers,
including a measure of satisfaction with internal customers acknowledges that despite how well a
procurement organization may rank according to external benchmarks, if internal customers are not
happy with existing service levels, any other gains will go for naught. Moreover, while cycle time
metrics such as # days to complete the requisition-to-purchase process are omitted here, overall
customer satisfaction is the best measure of whether various underlying procurement processes
and systems are easy-to-use and meet the needs of the business users, and if budget owners see
value in engaging the procurement function in their initiatives.

The Net Promoter Score has gained increased favor as an effective metric for monitoring
perceptions from other business functions within the organization. As with most customer
satisfaction metrics, a survey tool is used wherein respondents rate their overall satisfaction on a
scale of 1 to 10. In evaluating the responses, the Net Promoter Score consider 0-6 responders
Detractors, 7 or 8 Passive and 9 or 10 Promoters. The Net Promoter Score can then be
calculated as: % of Promoters - % of Detractors. Thus in a survey with 100 respondents where half
are neutral or passive but promoters outnumber detractors' 30 to 20, the resulting Net
Promoter Score is 10%.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 COST OF PROCUREMENT AS % OF SPEND
Most procurement organizations face the challenge of having to do more with less overall
procurement budgets are at to declining so this operational metric gets at the core of
organizational efciency. The cost of procurement including labor, outsourcing and
supporting technology costs was reduced by 1.6% in 2013 by World-Class performers and
3% by the overall Peer Group, according to a new Hackett Group report on How Leading
Procurement Organizations Outperform Their Peers. The fact that the World-Class cohort
is delivering superior results at 19% lower cost than their peers, is a testament to underlying
organizational efciency.

As a rule of thumb, the cost of procurement is about 1% of spend overall, according to CAPS
research cross-industry benchmarks for 2013, with signicantly higher costs for engineering
intensive industries such as Aerospace and Defense and Engineering and Construction at
2% and 2.74% respectively, with the low water mark in Financial Services at just .28%.
Across industries, Hackett Group data pegs World-Class performers at 0.6% of spend.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 REALIZED OR IMPLEMENTED SAVINGS
The most consistently used metric to measure (and often bonus) procurement teams if not
the most consistently applied - is Savings, so it has to at least crack the top 5, with however,
a few notable caveats:

n The Law of Diminishing Returns - that is to say that the best performing procurement
organizations which have been accruing savings all along, will now see savings leveling
off on a percentage basis, as compared to less mature organizations that may be
attacking neglected spend categories for the rst time and nding nothing but upside.
Hackett's report on Leading Procurement organizations shows a marked decline in the
ability of world-class performers to reduce spend and avoid purchase costs down
17.3% in 2014, returning savings levels to only slightly above pre-recessionary
benchmarks, the last several years ironically being a boon to cost reduction efforts due
to deationary commodity price pressures

n One Man's Savings is Another Man's - a generally accepted and commonly agreed
upon savings calculation methodology simply does not exist even within the same
organization, where there is often a disconnect between Procurement and Finance,
essentially two sets of books being kept, and the ofcial Finance numbers are usually
the ones that really matter. At a minimum, most organizations will track and report
cost reduction, expressed as a year-over-year price variance, where the best practice is
to normalize volume, currency, and market uctuations to measure true procurement
impact on purchase price as compared to the spend baseline. Cost avoidance on the
other hand, dened in the CAPS Benchmarks as, The difference between prices for
goods and services and the probable increase in pricing during the reporting year if
actions had not been taken to obtain reduced costs for the same goods and services, is
a grey area. Finance is often hard pressed to grasp the concept of cost avoidance when
they cannot account for the impact on the nancial statements in other words, if it
does not hit the budget, it didn't happen

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 CONT.
REALIZED OR IMPLEMENTED SAVINGS
n Savings Moment of Truth another key issue is isolating identied or potential
savings from actual or realized savings. While understandable, the inclination for
procurement to plant the ag and declare savings captured upon contract negotiation,
belies the very real incidence of Savings Leakage as discussed in Procurement Contract
Compliance metric. Actually, realized savings should only be counted when actual
invoices paid against contracts can be reconciled with the historical contract rate, and
in this area, your results may vary as the disclaimer goes. In Aberdeen's benchmarks
for example, Best-in-Class companies are able to validate realized, implemented savings
of 12% on Spend Under Management as compared to just 2% for Laggards

As an overall rule of thumb, World Class organizations reported 6.46% savings as a % of

Total Spend in 2013, consisting of about three-fourths cost reduction and one-fourth cost
avoidance, while the Overall Peer Group had less than half the total savings at just 2.93% of
spend.

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 PROCUREMENT ROI
An effective way to communicate Procurement's contribution to the C-Suite, this one is a
gimme if you have the numerator from Realized or Implemented savings and the
denominator from Cost of Procurement as % of spend expressed as:

Total Spend Savings / Cost of Procurement = Procurement ROI

The Procurement ROI measure makes an extremely compelling argument for investing in the
tools and talent to achieve World-Class performance status.

"After all, how many investments have the potential to produce an almost 11x ROI"

the Hackett Group's 2013 Benchmark for World-Class Procurement ROI

analyze this - top 10 metrics to strengthen organizational procurement practices www.zycus.com

 COST OF PROCUREMENT AS % SPEND REALIZED OR IMPLEMENTED SAVINGS

1.20% YTD YTD SAVINGS TARGET FOR

WORLD CLASS FORECAST ACTUAL THE YEAR
1.06%
HACKETT SAVINGS
1.00% BENCHMARK
2013 120,000.00

0.80% 0.90 100,000.00

%
INDUSTRIAL MFG. 80,000.00
0.60% 0.60% CAPS BENCHMARK
2013
60,000.00
0.40%
40,000.00

0.20% 20,000.00

0.00
0.00% PROCUREMENT
ACME INC OPERATIONS
2013 Q1 Q2 Q3 Q4
DASHBOARD
PROCUREMENT ROI NET PROMOTER SCORE

12.00%
WORLD CLASS
HACKETT
10.72% BENCHMARK
10.00% DETRACTORS PROMOTERS
2013 PASSIVE

8.00% 1 2 3 4 5 6 7 8 9 10

6.00% NOT AT EXTREMELY

NEUTRAL
ALL LIKELY LIKELY
6.73%
4.00% 5.25 MFG. CAPS
% BENCHMARK

2.00%
2013 NET PROMOTER SCORE = % OF PROMOTERS - % OF DETRACTORS

0.00%
ACME INC
2013
Zycus is committed to positioning procurement at the heart of
business performance. With our spirit of innovation and a passion to
help procurement create even greater business impact, we have
evolved our portfolio to a complete Source-to-Pay suite of
procurement performance solutions - Spend Analysis, eSourcing,
Contract Management, Supplier Management, eProcurement,
eInvoicing and Financial Savings Management. We are proud to have
more than 200 solution deployments among Global 1000 clients
across verticals like Manufacturing, Automotives, Banking and
Finance, Oil and Gas, Food Processing, Electronics,
Telecommunications, Chemicals, Health and Pharmaceuticals,
Education and more.