How to Use Procurement KPIs to Motivate Process Excellence
Procurement operations teams face big challenges, even if they have access to data from procurement KPIs. First, getting their stakeholders to use contracts that are pre-approved by procurement and include specific and necessary terminology. Second, convincing stakeholders to adhere to common sense standards around issues like competitive pricing and best value award decision-making. Third, getting stakeholders to use processes that are compliant.
Getting stakeholder buy-in is a challenge because often stakeholders lack the incentive to do so. Following procurement’s processes is not directly beneficial to them. In addition, stakeholders often see their job as critically strategic to a company’s operational performance. From their perspective, that beats complying with procurement standards—even though those processes are designed to be in the company’s best financial interest.
The solution may not be what you expect. Burying stakeholders in transactional cycles involving tedious email chains and spreadsheet management doesn’t work. It’s seen as forcing “busywork.” Instead of trying to force business process compliance, consider gamifying procurement KPIs.
Why? Because people balk against being forced to follow what they feel is an unnecessary process, but they love to play games. Turn compliance into a competition, and you will see results. Here’s how to transform a basic, backwards-looking KPI report into a dynamic leaderboard that motivates everyone (including stakeholders) to embrace procurement process excellence.
Gamification of Procurement KPIs
Key Performance Indicators (or KPIs) are traditionally backwards-looking. That’s fine for reporting on what happened over a period of time. But real-time data is needed for real-time feedback to create gamification.
Stakeholders will lose interest if you distribute a weekly KPI report. They need to see instant feedback on the moves they make and their relative position compared to others. This visibility is a big motivator. People don’t just want to “win,” they also don’t want people to see them as someone who is “losing.”
Creating Visibility in Backwards-Looking KPIs
People want to be the best at something, and if they are visibly besting everyone else on a leaderboard, that is a powerful incentive. However, some companies find that participation levels become even more impressive if they offer a small personal reward, like a gift card.
As a bonus, real-time data related to KPIs can provide valuable, up-to-date feedback for stakeholders that guides them in undertaking sourcing activities. That feedback provides guidance that helps to keep them following the procurement team’s processes.
The following three procurement KPIs that are particularly important. These are the ones you’ll want to focus on first when developing a dynamic procurement leaderboard.
Cost Savings Forecasting
The cost savings forecasting KPI is one of the most critical for procurement. Corporate overspending is endemic, but this means procurement has a real opportunity to deliver savings. Typically this will be through bulk volume discounts or by centralizing a series of fragmented purchases into a single contract.
Procurement teams can generate a savings forecast based on the planned activity pattern in their project pipelines. With this forecast, they can then set an attainable target: a cost savings forecasting KPI.
The reality is that most companies tend to prioritize purchasing activities based on business urgency. That runs contrary to what procurement is trying to do. However, by using this KPI, you can instead steer the decision-making toward business impact. Doing so can be recognized as being a positive action, which is then reflected on the leaderboard.
Purchase Price Variance and Sales Equivalency
Next, we have the purchase price variance and sales equivalency KPI. This one is a favorite of CFOs and finance departments. They can use it to understand how many more sales would need to be closed for margins to reach the expected level.
What the purchase price variance and sales equivalency KPI does is to use best operational practices to help normalize the price of a single SKU or part number across an area of spend. This could be through supplier consolidation, but it could also be a matter of the sourcing team leveraging approved or preferred price agreements. The money saved by normalizing the price (ideally to the best price among transactions) can be quickly translated into an equivalency number for top-line revenue. That’s where the CFO finds the KPI so valuable.
Finally, the exception frequency KPI. When a category or workstream within an organization conducts transactions with such frequency and randomness that each one has the potential to be exceptional, this makes it all but impossible to benchmark. At the other extreme, some departments may see transactions follow regular patterns, such as seasonal purchases.
The exception frequency KPI can be a valuable tool for finding similar transactions at a given time, based on frequency. This means those undertaking the sourcing have an added layer of confidence around the transaction and the interval.
Take the Next Step
Gamification is a proven way to get stakeholders to adopt your procurement processes. However, you can’t have a leaderboard with static and backward-looking KPIs. You need real-time data. Visit Arkestro to learn how to orchestrate your procurement operations and get a customized KPI dashboard.