How to Calculate Procurement’s ROI
As with anything in the business world, it’s a good idea to know what you’re getting for your money. Your return on investment is a critical metric for identifying value and knowing where to focus. But it can be hard to know how to calculate Procurement’s ROI as much of the value provided also involves cost avoidance, process efficiency, supplier quality, or risk avoidance—items that can be difficult to measure. However, with some work, you can learn how to calculate Procurement’s ROI, report your successes, and replicate the results.
Why You Need to Measure Procurement’s ROI
Demonstrating ROI for procurement is a critical measure of success. Showing that procurement is providing value is indeed essential for organizational credibility, trusted partnerships with stakeholders, buy-in from the larger business, and future investment in procurement. Being able to illustrate that value to the business as a whole also validates the work procurement is doing.
While it may be stating the obvious, it is important to remember that ROI is a function of two variables: the return and the investment required to achieve it. Let’s look at some of the challenges you need to address to improve the way you achieve and measure ROI for procurement.
Looking at returns
Almost every procurement organization measures savings, and most of them measure the percentage of spend under management. But once you get past these two metrics, there is significant variation in what procurement teams measure, and rightly so. After all, cash flow varies by industry. It’s likely far more important to a retailer than to a public sector organization.
Therefore, you should consider return in terms of both value (cash, cost, and innovation) and risk (security of supply, financial stability, sustainability, cyber risk, etc.). There is no point in identifying a 25% savings if you have no security of supply and a resulting loss of sales. Equally, reflecting on Drucker’s quote, it is important to use what you measure to drive the right behaviors in the organization.
Whatever the case, the metrics that procurement is measuring should link strongly to the strategic goals of the organization as a whole. For example, in regulated sectors, measures of compliance should always be featured on the scorecard. It is always better to measure something that matters, even if it’s slightly less than perfect, than to measure unimportant factors accurately and efficiently.
Measuring the ROI of procurement will help you accomplish other tasks that are important to overall business goals, such as:
- Tracking Savings: A valuable metric for finance and the overall organization.
- Creating value: Identifying areas where you are optimizing processes or making advancements that are difficult to identify in monetary terms.
- Identifying and enriching the metrics you can use to measure success: Knowing what metrics the organization is using will help you determine how to measure your contributions and how they are benefiting the business as a whole.
- Developing trusted relationships with stakeholders: Showing the value you bring creates stronger collaboration, which can enable greater business success.
Looking at investment
Now, let’s consider a few questions you should ask about the investment itself:
- How much effort is required to generate accurate measures for the organization? Often, an effective, quickly generated, slightly less-than-perfect measure is better than a completely accurate one that requires far more work.
- What level of manual intervention will be required? At SpendHQ, one of the biggest wins for our clients is reducing the effort required to generate savings reports and supplier scorecards, which enables them to focus more time on value-added work.
- What do you truly need to measure? Think about the number of measures you absolutely need rather than the longer list that you want. Will those additional measures drive a disproportionately greater ROI? If not, don’t measure them.
- How frequently will you actually meet and communicate on each metric? Remember, you don’t fatten the pig by weighing it.
- Do you have to meet a goal internally or can a third party do this more effectively? For example, if you are measuring cyber risk, it might be better to use a third-party technology whose primary business objective is to measure and rate the cyber risk of companies. You would likely lose more time and investment by attempting to perform and maintain this task internally.
“If you cannot measure it, you cannot improve it. When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind.”
–Lord Kelvin
How to Calculate Procurement’s ROI
Determining the ROI of procurement can sometimes be a moving target, especially in organizations that are less mature and who tend to focus on a tactical approach instead of a strategic one. Before you can even begin to measure your ROI, you have to do some work upfront.
- Work with finance and executive leadership. What will you be measuring? It’s important to identify which metrics will resonate with finance and other key stakeholders so you aren’t neglecting those out of the gate.
- Implement methods for tracking savings. Before you can show savings, you must have a way to track them. There are a variety of tools available to help you monitor and report on savings.
- Gain organizational buy-in for your methods and processes. This creates alignment between teams so that all stakeholders are working from the same set of assumptions and procedures.
Key steps for calculating and reporting Procurement’s ROI
Learning how to calculate Procurement’s ROI can certainly seem like an overwhelming task, but with the right tools, you can successfully showcase the financial gains you bring to the organization.
Here are some keys to success:
Align metrics
It is absolutely essential that procurement aligns goals, metrics, and reporting expectations with finance, key stakeholders, and the organization’s strategy. You can only successfully demonstrate financial advancement if you are working from an agreed-upon set of KPIs and everyone is clearly able to evaluate the reports. Otherwise, you’re doing extra work with little benefit. Work alongside key stakeholders to put these expectations in place from the start and you will succeed in proving the ROI of procurement.
Consistently communicate results
Communication is critical. Any gains should be shared transparently and consistently so that all stakeholders can see progress as you’re making it. Develop a routine way to provide updates and make the process visible to all key players, especially executive leadership. A single source of truth for all reporting can be a beneficial way to communicate the advancement of procurement over time.
Commit to specific ROI goals
Once you know what you will be measuring, it is important that the entire procurement team commit to those goals. This will greatly impact your ability to accomplish and report on those goals. It is also critical that all members of the procurement team actively adhere to the objectives and work towards meeting them. Also, make sure you are attaching variable compensation in your calculations.
Use ROI to justify additional needs
Knowing how to calculate Procurement’s ROI and illustrate gains is important. It allows procurement to demonstrate added value and is a means for justifying increases in staff, resources, and budget.
Procurement is a unique business function. While it can sometimes be challenging to demonstrate the ROI, it is certainly not an impossible task. If you have strong processes, transparent communications, the right metrics, and a good tool, you will have the necessary foundation for a strong and strategic procurement team.
Want to learn how SpendHQ can help you measure ROI for your procurement organization? Click below to schedule a demo now and see it in action for yourself!
