Underutilized Procurement KPIs That Will Cement Alignment This Year
Usually, procurement KPIs exist to spotlight the positive aspects of the function’s performance. But an often missed benefit of key performance indicators is how they highlight areas that need improvement, and open the door for collaboration as a result.
At SpendHQ, we believe that all procurement KPIs present new opportunities to drive value. So to start this year the right way, don’t only use your KPIs to focus on your team’s achievements. Instead, lead with numbers that highlight the need for collaboration. We’ve prepared eight procurement KPIs here that will help you do just that.
Percent spend increase per category/business unit
Every stakeholder expects to know how much Procurement has saved their business unit. They also want to know their net spend totals. But what they may not be prepared to hear is how much their spending has increased in a given period of time.
This isn’t information Procurement likes to share, mainly because it invites questions about why the function didn’t stop the increase. However, many of the factors that drive spend increases are out of Procurement’s control—low compliance, new initiatives originating inside business units, poor working relationships, lack of executive sponsorship, etc.
If roadblocks like these are limiting your impact, show stakeholders the numbers. Often, rising spend is enough to kick off conversations about changing these trends.
Gap to budget
Businesses must be good stewards of their financial resources. When they fail to live up to that standard, effective businesses identify the leaks and course-correct. Ineffective companies keep moving without noticing a problem. Unfortunately, it’s not always easy to cultivate the alignment needed to course correct. In those cases, you need a metric that will get leadership’s attention.
Like spend increases in a category, gap to budget will shine a light on the state of organizational spend. Unlike spend increases, this procurement KPI will spotlight areas where refusal to work with your team is costing the business money. While alignment is something we always want to grow gently, sometimes that’s not possible. In those cases, showing leadership the financial impact can be the key to mandating your involvement in certain projects.
Of course, gap to budget isn’t always a negative metric. When it shows positive results, use them to illustrate the impact of Procurement’s relationships with other business units. However, when your exclusion leads to overspending, you can leverage this procurement KPI along with areas of positive impact to show leadership why your involvement is the solution to the problem.
P&L impact percentage
Every dollar Procurement saves has a positive impact on the company’s profit and loss statement. But does the rest of the business understand this contribution? It’s no secret that Procurement can have a contentious relationship with its stakeholders.
The function usually has to play the bad guy by rooting out non-compliance and playing hardball with suppliers. If not, some of the most impactful partnerships you could form may be held up by misconceptions and biases against Procurement.
If business units don’t understand why you play this role, they’re likely to avoid your team until they have to involve it. That means more last-minute negotiations, fewer cross-departmental projects, and more fragmented spend. If that sounds familiar, reporting your P&L impact to Finance and business unit leadership alike can go a long way to building the right relationship with trickier stakeholders.
Supplier depth, fragmentation, and single-sourced spend
Supply chain risk is an ever-present threat to today’s businesses. Even with efforts to re-shore and nearshore production, nearly every company’s vendor profile is several times larger than it was a decade ago.
Because of this complexity, it’s easy for business units to overlook areas where they don’t have enough vendors. Then one day they don’t receive a crucial shipment, and the entire business descends into crisis mode.
Supplier depth, especially instances of single-sourced spend, is a non-negotiable procurement KPI that you should report on a regular basis. Not only does it forge a communication chain between you and nearly every business unit, but it allows you to raise the alarm on glaring issues before they become a problem.
On the other hand, supplier fragmentation causes overspending. It introduces varied payment terms, purchase price variance, and other issues that inflate costs. If you regularly take inventory of the suppliers in each subcategory, we guarantee you’ll find consolidation opportunities that will save money and optimize your colleagues’ processes.
See also: Why a sourcing-level taxonomy is key to high-level performance
New supplier spend
Reporting on fragmentation can lower spend, but what if you could help business units correct trends before they became problems? New supplier spend is a procurement KPI built for that purpose. Simply report on the amount or percentage of spend coming from new suppliers across the business.
Then break down the totals and percentages by each supplier to highlight the concerning ones. In most cases, your team won’t have to do anything beyond that. When you equip business units with actionable information, they can usually handle the rest on their own.
Contract impact percentage
How many times a year does a business unit bring you into a contract negotiation at the last minute? It may be one of the most frustrating parts of Procurement. Many stakeholders will do whatever they can to avoid working with Procurement until they have to.
You can whittle away at this culture, though. In your first reporting series of the year, put the impact of your contracts in percentage form, front and center. Not only will stakeholders see that including your team benefits them, but your impact will also be clear for Finance and other leaders. Like gap to budget, this procurement KPI may even encourage leadership to mandate your early involvement in supplier selections.
Compliance rate
There are two ways to leverage compliance rates to your advantage—show how effectively Procurement has handled maverick spend or raise the alarm that it’s getting out of control.
Use the first method if you’re winning the battle. It will show your ability to push spending in the right direction. It will also show business units how compliance benefits their operations.
On the other hand, non-compliance can get out of control. Reporting negative compliance trends will highlight the behavior of buyers and internal customers, especially if Procurement is decentralized in your business. You shouldn’t use this approach to tell on anyone, but it can be a great way to harness executive influence if other strategies haven’t worked.
Managed spend rate
In early 2023, Ardent Partners’ Founder and Chief Research Officer Andrew Bartolini reported that every dollar of spend put under Procurement’s management decreased costs by 12-18 cents. However, Procurement’s influence usually runs out before its opportunities do. In most companies, Procurement is managing a shockingly low amount of spend—an average of less than 70%.
If you want to change that in your organization, show leadership what percentage of spend your team has an influence over. If you’re feeling persuasive, you can even use Bartolini’s numbers to forecast how much money you can save the business by increasing collaboration and your spend under management as a result.
Conclusion
Key performance indicators are a vital part of tracking the health of a business. Unfortunately, many KPIs only exist to give credit and earn praise from executives. Unlike those metrics, the Procurement KPIs in this guide give you a chance to expand your influence, cultivate collaboration across the business, and increase your impact.
However, there’s no way to report on any of them without comprehensive visibility into your spend data. If you’re ready to harness the spend intelligence you need to cultivate alignment in your organization, click below and schedule a demo with us now.
We’ll show how you can unlock insights into nearly 100% of your spend data to make calculating, reporting on, and doing something about these KPIs easier than ever before.
