What are procurement benchmarks?
Procurement benchmarks are metrics that teams use to understand and gauge their performance. Benchmarks can either come from best-in-class organizations or from a team’s past performance. They can also serve to compare performance at a high level or on specific issues.
Why is procurement benchmarking important
Just like a rubric in school, benchmarks provide objective standards teams can use to grade their performance. These metrics move performance management beyond vague feedback like “good,” or “below expectation.” This clarity produces practical benefits, which we’ve explored below.
Increased effectiveness and efficiency
Sometimes you’re so close to a process that you can’t see anything wrong with it. Benchmarking data will erase that bias without room for debate. Whether your metrics are external or internal historical, benchmarks are great reality checks. With them, you can easily find the processes that need improvements.
Discover new opportunities
Benchmarks don’t just diagnose processes that aren’t working, they can also highlight where the breakdown or inefficiency is occurring. Many procurement processes are lengthy and touch multiple parts of the business. Without an independent standard to know what each section should look like, it can be difficult to find what’s limiting the final result. But combining multiple benchmarks makes it possible to evaluate each step in a process to understand which ones are living up and which are falling behind.
Evaluate your organization’s tech stack
Because Procurement is so involved and broad, there’s no way to manage purchasing at even mid-sized businesses without technology. But as great as procurement software usually is, it’s not always a magic solution. Many companies have completely disconnected tech stacks, for instance. Others have outdated tools that don’t give them the controls or insights they need to manage operations.
Like the previous two benefits, benchmarks are a great diagnostic tool for this problem. At a high level, a team that can’t track and benchmark its performance against even internal historical data should know it has a problem. Benchmarks can also pinpoint the cause of these breakdowns, either because the data isn’t available or because that area of performance is far lower than it should be. Procurement benchmarks for evaluating a tech stack don’t even have to be purchasing and sourcing focused. They could simply be the number of clicks an action takes or how long it takes to access specific data.
Best practices for indirect procurement benchmarking
The benchmarks that matter for your organization will be unique. However, there are best practices you can follow to maximize their value. Below, we’ve listed a few, including core benchmarks most organizations should track, how you should use them, and how you can start tracking your performance.
Number of suppliers
Benchmark: Company-specific
Sometimes, organizations like to frame the size of their operations by the size of their supplier bases. Unfortunately, more isn’t always better. In fact, a large number of vendors is usually a sign of supplier fragmentation, an inefficiency that bloats spend, complicates the supply chain, and introduces third-party risk.
This isn’t a KPI you’ll benchmark against outside performance—your supply chain needs are relatively unique—so you should track against your own performance. If you see your number of suppliers increase over a quarter, half, or year, you should investigate why and drill down into the relevant categories. You may catch supplier fragmentation early, but the increase may also tip you off to greater supply chain issues that are forcing buyers to find new suppliers.
In theory, tracking your number of suppliers should be easy. But there are two roadblocks that complicate it. First, a company’s full spend data is usually spread across multiple systems. Second, a single supplier could have multiple naming conventions in this data. Untangling this messy data manually isn’t feasible because there’s so much information. Instead, you need a way to normalize and categorize this data automatically, with refreshes built in, to benchmark the size of your supply base.
Percentage of spend under management
Average: 64.9%
Best-in-Class: 91.5%
Spend under management is a way of describing purchasing behavior that Procurement controls one of its various sourcing and purchasing processes. These include contracts, e-sourcing, purchasing catalogues, etc. In general, teams want to maximize this number because, according to Ardent Partner’s research, every dollar Procurement manages brings 12-18 cents back to the business.
However, Procurement can never manage 100% of an organization’s spend. There will always be a percentage that, for a variety of reasons, is unimpactable. Instead, teams should focus on placing as much of their addressable spend under management as possible. By tracking this as a percentage, teams can quickly rank their performance and isolate the areas where they’re leaving value unclaimed.
In 2023, Ardent Partners found that the average spend under management percentage was 64.9% while the best-in-class teams managed 91.5% of their spend. So how can you track your performance? Like the previous section, it starts with being able to see your spend and refresh that data regularly. An advanced spend analytics or intelligence solution can automate tracking by recognizing your addressable spend and calculating the percentage. From there, you can track your management percentage as a trend line over time to report continuous improvement and locate areas of the business that need additional attention.
Cost savings
Procurement may not want to wear the label of “cost cutter,” but saving money is still the function’s most direct and obvious way to impact the bottom line. If a team could only use one metric to track its performance and report its impact, this would be it.
The problem is that most teams are generating a lot of savings; they just don’t have a centralized place to track the projects that generate them. The result is that no one knows how much value Procurement is generating, not even Procurement.
Unlike the previous benchmarks, intelligence alone won’t solve this problem. Teams need to go a step further and cement visibility into their activities as well, tying each project to its financial and non-financial outcomes. When teams track all their performance this way in one place, they gain a single source of truth and accurate benchmarks become a natural consequence of thorough project management.
Analyze contribution to total spend
Even the most mature centers of excellence manage purchasing and sourcing at the category level instead of the business level. Tailored category management maximizes efficiency and savings in a way a blanket approach never will.
Therefore, tracking each category’s contribution to overall spend is foundational to thorough procurement management. First, there’s no way to manage categories without knowing how their spending fits into the bigger picture. More importantly, this metric shows Procurement where it should prioritize looking for opportunities. Finally, breaking down spend by category makes reporting more efficient. It’s easy to explain your team’s focus areas and the value of their work when you can point to the highest spenders and how trends have developed over time.
Of course, the specifics of this benchmark will depend on business size, industry, annual revenue, etc., so you’ll usually track it against past performance. It’s also worth noting that categories aren’t the only way to analyze contribution to total spend. You can drill down and filter your data to represent it by several factors like geography, location, purchasing manager, supplier, etc. This multi-dimensional view will equip your team to find opportunities that would have stayed visible before. But like many of the other benchmarks in this guide, tracking at that level requires complete spend intelligence.
Cycle times (and costs!)
We already called savings one of two metrics all teams must track—cycle efficiency is the second. No matter how strategically a team sources or how thoroughly it chases cost reductions, none of it will matter without a reliable purchasing process.
Cycle times describe how long it takes a purchase request to go through the necessary steps and receive approval. The American Productivity and Quality Center reports that best-in-class organizations can turn over purchase orders in five hours or less. These organizations have well-defined purchasing processes that get stakeholders goods and services quickly. The long-term result is a reliable business where stakeholders don’t worry about supply disruptions and the emergency spending that comes with them.
Procurement ROI
Let’s conclude with a benchmark metric that has a more strategic focus. Procurement’s ROI is its bottom line contribution for every dollar invested in the function. Why it matters is a complicated issue with historical background. But to simplify it, Procurement teams are actively trying to prove that they’re value generators instead of cost centers. Maximizing and reporting ROI proves that Procurement is a serious part of the organization that, when given more budget, can reliably turn it into profit.
The Hackett Group reports that best-in-class procurement organizations produce 9X ROI. Calculating this number requires teams to calculate the difference between its value contribution and its operating expenses with the following formula:
There are two issues that make this formula challenging. First, you need a comprehensive log of savings. Second, you need a way to assign value to cost avoidances. Those with a direct monetary value, like negotiated price increases, will be easy. But more qualitative examples like risk mitigation, supply chain disruption avoidances, and ESG-related value may be more difficult.
The good news is that the solution to tracking cost savings is the same solution for more accurate ROI reporting. Tying projects and outcomes together even makes the value of cost avoidances easy to demonstrate, even if they don’t have a measurable financial impact. At worst, they may require some manual estimation, but Procurement’s impact and ROI will never be uncertain.
Boost your purchasing KPIs with SpendHQ’s spend management solution
Benchmarks are the greatest tool for understanding and reporting Procurement’s performance. Unfortunately, benchmarks at most organizations are little more than vanity metrics because teams don’t have the visibility to see their performance and compare to these standards.
SpendHQ changes that by giving teams uninterrupted visibility into their spend, projects, and impact. By combining 100% spend intelligence with procurement-focused pipeline management and savings tracking, our platform solves each of the challenges that keep teams from their data. We’ve helped 500+ companies around the world turn their vision into measurable impact. Now discover how you can become best-in-class as well. Schedule a demo for a tailored tour of SpendHQ.