Is Spend Under Management a “Has Been?”
In this, the third of our four-part blog series for the release of CPO Rising 2018: The Age of Intelligence, Kelly Barner of Buyers Meeting Point delves into the myriad facets of Procurement Performance in Chapter Three. There’s no debate that the importance and influence of procurement is on the rise across industries, but the question is, are procurement’s metrics – like spend under management – truly representative of those accomplishments?
This year’s CPO Rising 2018: The Age of Intelligence report ends the chapter on procurement performance with a compelling reflection point offered up by the report’s authors. They write about the role that spend under management has played in the perception and measurement of procurement maturity. For the analysts at Ardent Partners, spend under management has not only been central to their models and evaluation of best practices, it has been a “powerful comparative metric that can be uniformly applied to procurement organizations no matter their size, vertical or region.”
The phrase “…has been…” says it all. [inlinetweet prefix=”” tweeter=”” suffix=”#SpendUnderManagement”]The question on the table is whether spend under management is still a representative performance metric, one that is able to reflect procurement’s financial contributions, strategic effectiveness, and operational priorities[/inlinetweet].
Do procurement metrics measure up to reality?
To be fair, neither I nor Ardent Partners (making an assumption based on the myriad of metrics that comprise their annual report) are suggesting that spend under management has been the sole and all-encompassing measure of procurement’s success. Far from it. Their comparative framework also includes metrics such as savings (of course), contract compliance, contract accessibility, digital supplier enablement, and percentage of addressable spend that is strategically sourced.
At the same time, spend under management “tells” us more than just how much spend procurement has had an impact on. Buried in that one number are the implications of procurement’s size relative to the enterprise (capacity), and our availability and application of procurement technology (automation). It also reflects our ability to handle supply chain complexity and unpredictability (category knowledge), and the access we have to spend regardless of category, supplier, functional ownership or direct/indirect categorization (influence).
The possible change to the Ardent Partners maturity framework is not solely based on their interpretation of procurement’s strategic direction. It is also playing out in the information gathered by the annual survey:
- The average percentage of spend under management across all companies was “flat” this year. From 2017 to 2018, it only increased 1% to 62.1%. If we narrow this metric to just best-in-class companies, the percentage of spend under management skyrockets to 92%, leaving “all others” far behind at 55.2%.
- Static spend under management rates also seem to be having a corollary effect on savings: both actual and projected numbers. In 2017, best-in-class procurement organizations realized 7.1% savings and yet their target for 2018 is only 5.8%. “All other” organizations reported 5.6% realized savings in 2017, and anticipate that they will deliver a lower but much closer 6.1% savings in 2018.
Time to change the playing field?
It is highly unlikely that procurement teams mature enough to bring 92% of their spend under management have decided they don’t need to work as hard this year, so something other than savings must be driving their efforts. [inlinetweet prefix=”” tweeter=”” suffix=”#SpendUnderManagement”]The challenge for anyone who tracks procurement performance, whether the analysts at Ardent Partners, thought leaders, or procurement leadership teams, is to figure out what to replace spend under management with.[/inlinetweet]
A mandate to focus on strategic, value-oriented efforts is not a free pass on quantitative procurement performance evaluation. At the same time, enterprise spending is not static – in fact, spend under management averages may appear to have stalled out (a “fading goal” as it is represented in the 2018 CPO Rising report) because corporate spend has changed. For example, corporate talent models are leveraging the gig economy and operations are trending towards increased virtualization. This means that addressable spend is a shifting concept, one that needs to be re-examined just like spend under management.
Procurement must consider seemingly parallel enterprise changes involving spend before we try to establish a new basis for evaluating procurement maturity.
Is it time to replace spend under management as a core procurement performance metric? What would you replace it with?
In Chapter One: The State of the CPO, Andrew Bartolini explained how the rise of Big Data and powerful analytics is creating “procurement intelligence,” an area that will be one of the drivers to change the current paradigm of the procurement industry.
In Chapter Two: The State of Procurement, Determine Chief Product Officer Julien Nadaud examines the concept and reality of an intelligent procurement department, one that is not dependent upon a single technology, process, or strategy but rather an ecosystem of interconnected and interdependent plans, solutions, and innovations whose whole is greater than the sum of its parts.
Check out our on-demand webinar with Dan Roehrs of Tradeshift and Andrew Bartolini, Managing Partner and Chief Research Officer of Ardent Partners, where we explore CPO Rising 2018 in the context of Increasing Intelligence with Smarter Platforms.