Performance measurement
How do you measure up?

Standard metrics tell senior management little about a CPO's personal performance. Here's how to set yourself more stretching - and rewarding - goals.
By Andrew Likierman

How can a chief procurement officer move the purchasing function from an operational to a strategic resource? Answer: not easily. But it's certainly more difficult without proper performance measures. This isn't the only reason to measure CPO performance, of course; it's essential to make sure that personal and functional priorities are clear, and for the CPO to improve his or her personal performance. Without the right measures, however, it will be difficult to ensure that the CPO is recognised as a key member of the management team, rather than a purchasing officer in all but name.

This article sets out how performance measurement can support the authority of the CPO's position. It is based on larger organisations, on the assumption that smaller ones will generally only have a head of procurement, rather than a CPO. It provides a framework that will need to be tailored, since differences between organisations and the CPO's role within them have to be recognised in implementation.

The article also focuses on the private sector, though many of the principles will apply to public-sector bodies as well.

The CPO performs three roles in an organisation:
procurement expert;
head of the procurement function;
member of the senior management team.

Each role requires assessment. None is straightforward. This is not because the CPO post is a particularly difficult one to measure, but because of generic problems that apply to many aspects of performance measurement. For example, few senior colleagues will know how good the CPO is, any more than they can judge the quality of the chief financial officer, the marketing director or any other specialists.

It doesn't help that so much of the work is with external organisations and that CPOs are therefore less visible to other senior colleagues. But mainly it's because colleagues rarely have experience across a range of organisations and therefore of other CPOs. Alas, the first time many companies realise the calibre of a specialist head is when he or she leaves – not the right moment for either.

Another problem is the lag between action and result. Performance this year will be the result of actions taken in previous years. Much of the action taken this year will be reflected only in future years. Again, this is a common measurement problem for the whole senior management team, but is of special significance for a CPO seeking to move from performance based on short-term cost savings to a more strategic role.

And finally, with comparisons, there's the issue of how to treat cost savings or to measure the relationship with suppliers – as important for the CPO as it is for the procurement function. The key with costs is not how much more or less than we were paying last year, nor how much more or less it is than budget, but what might have been possible. This is more difficult to compare, but far more relevant. It also applies to suppliers – the key comparison is with what might be possible.

The measurements chosen need to recognise these problems. Some can be solved, but most can only be mitigated. The ways to do so, some of which are outlined in more detail below, include:

using the strategy, planning and budgeting processes to identify the objectives of a wider CPO role;
managing the expectations of senior colleagues in clarifying the CPO role;

using outsiders, such as the non-executive directors, to help identify good practice elsewhere;

improving feedback from inside the organisation to ensure that the CPO's own perceptions and those of colleagues are matched;

supplementing financial numbers with non-financial measures and a commentary to put all the measures into perspective.

Meaningful comparisons Let's get some traps out of the way first. “Adding value” is a great slogan – who isn't going to claim that they add value? – but difficult to pin down. A purchasing decision based on low cost this year may well prove disastrous in two years' time, giving lots of value today but then big-time value destruction. Adding value needs to be carefully defined.
Simple number measures on their own are also a trap. Cost savings, numbers of suppliers or cost of procurement as a percentage of company turnover are inadequate. Cost savings are easy as long as nobody worries about quality or security of supply. More or fewer suppliers are not a good thing in their own right. And the percentage of turnover in isolation certainly isn't helpful – presumably the ideal number is zero. What matters is what procurement does, not how much it costs.

To even start to be useful, any measures need one of the three comparisons given below. But even with comparisons, procurement needs to take into account key trade-offs, such as quality and long-term supplier relationships. Traditional simple number measurements represent a very narrow view of the function.

Measures also need to distinguish between the essentials of the job (knowledge of new e-procurement techniques, the impact for procurement of new international accounting standards, and so on) and performance. The former relates to a “licence to practice” based on professional competence; the latter to the quality with which the role is carried through, not only as a professional but also as function head and member of the management team.

Measures need to be devised for each of the three roles, using comparisons with plan or objective, with others and with what's possible. Figure 1 shows the framework and also gives an indication of how easy it will be to find measures. The colours can only be illustrative, of course, since organisations vary so much. It could also be that measures cannot be found for every box and that the measures and colours change over time. But the framework will apply to most circumstances and some generalisations are possible – for example, that it will be easier to measure against plan or objective than against what's possible.

Note that comparison with last year is missing from the chart. This is because any improvement or deterioration has to be seen in the context of objectives or what's happening elsewhere. A brilliant hedging strategy could mean that although the cost of oil is rising, it's rising a lot less fast than for competitors. A less brilliant one could mean that although costs are falling, competitor costs are falling faster.

How do the comparisons work? Let's take each of those in the chart.
Compared with plan/objective: The budget will set out the measures to be compared with objectives and the annual appraisal will normally be the basis of comparison. But budgets don't always include the full range of measures necessary and many appraisals place too much emphasis on activity and process, and not enough on outputs and outcomes.

Objectives set in the budget need to be explicit about the strategic nature of the procurement process. This means linking them to the objectives of the organisation as a whole and to other functions. The trade-off between price and security of supply demands close liaison with the objectives of those responsible for the supply chain. The development of commercial strategy needs links to marketing objectives. The CPO should also be involved in discussions about risk levels in relation to other functions, as well as taking part in overall risk assessment on behalf of procurement.

There is room for cost and activity measures but the latter, in particular, should be used only inside the function. Reporting on how busy everyone is or how quickly work is done does not carry clout. Everyone is busy. Objectives also need to include the CPO's role as head of the function and their broader role as a member of the management team. Omitting these elements runs the risk of downgrading the function, and the CPO should ensure that measures based on feedback from colleagues on this aspect are included in annual appraisals.

Compared with others: Performance measures for the CPO as function head should include internal and external comparisons. Internally, an example of a measure might be the level of commitment shown in staff feedback compared with other functions. Externally, comparisons should be possible, but they do not have to be for the function as a whole. Indeed, there may be no relevant comparisons for the whole function because no other organisation has the same structure, or is willing to swap information. So there may be only comparisons rather than more formal benchmarking.

In any case, it may be more useful to compare parts of the function with those in other organisations, as a basis for asking good questions rather than getting poor numerical answers. Comparing cost per transaction, software or the involvement of procurement in certain key decisions may all be useful, but the results need careful interpretation.

As a senior management team member, measurements should include information on the CPO compared with other senior managers. That must cover the CPO's ability to move outside the procurement area, and contributions should be possible not only in operations but also in the implications for commercial and financial policy. An international perspective is increasingly essential.

The CPO will also need to demonstrate, and be judged on, people and interpersonal and influencing skills. Being able to communicate with other members of the senior management team is just as important as for all the others. Together with knowledge of wider business needs, these will help to establish good relationships with other heads of functions and move the CPO outside the procurement boundary.

Compared with what's possible: This is by far the most difficult of the comparisons. But taking the trouble to look at what's possible is worthwhile as a means of developing the function and showing its worth. While comparing with others gives a context for the work of the CPO in relation to current practice, comparing with what's possible gives the basis for the even more demanding question of looking at the leading edge of practice.

This comparison is also relevant in specific cases. For example, in an acquisition when synergies need to be identified and then delivered, outside commentators will not look at savings (taken for granted), against target (generally assumed to have been conservatively set), or against others (rarely comparable), but against what is perceived to be the best that could be achieved.

Questions to be asked here might include:

What might have happened if procurement had not intervened?

How well trained are procurement staff compared with the best in the field?

How far has the CPO made other management team members aware of what procurement can offer?

Is the CPO linking the function to an emerging agenda for corporate social responsibility?

These are not always comfortable questions to ask, but they should be part of the way the best CPOs approach their job. They are also essential to maintain the substance of the claim to sit at the top management table.

To make sure any claims about comparisons of what might be possible are justified, the CPO needs to take the initiative in several ways. Regular contact with other heads of functions will ensure that the procurement function is tied into the mainstream of the business and can justify claims made about meeting the needs of the business as a whole; while contacts with leading procurement practitioners outside the organisation will help to establish whether practice is as good as it might be.

Best-practice benchmarking is available from a variety of sources and can help to establish criteria for measurement. The CPO's positioning, visibility and influence can be compared with best practice worldwide, giving ammunition to those ambitious to be involved strategically, as well as providing a basis for comparison. Awareness of management developments more generally will be needed to keep the CPO as a valued member of the top team.

Personal qualities are particularly important in all aspects of achieving what's possible, particularly as function head and as member of the senior management team. As one procurement leader puts it: “You have, in effect, a dual role as CPO. You are leading internally, but also steering and encouraging externally towards the corporate vision, underpinned by your vision as CPO. This visionary approach adds enormously to your credibility.”

The annual appraisal is not only the time to check that all this is understood by the CPO's line manager; it is also an important opportunity to discuss what might be possible for the function – for example, participation in new cross-functional teams.

A powerful weapon

Better measurement is also a powerful weapon in the battle to raise and maintain the status of the procurement function. It's up to the CPO to force the pace here. Leaving it to others to decide on performance measures runs the risk of a limited set of objectives that diminish the role.

Don't rely on questionnaires to get feedback. They will be useful to cover the more straightforward parts of procurement, but colleagues will not know enough to give the CPO information on the more subtle aspects. That will need face-to-face discussions – not only an opportunity for some real listening to pick up the signals about how procurement is perceived, but also a further chance to inform others.

The CPO title is an important signal about the status of head of procurement. But as many know only too well, membership at the top table is more difficult to earn than for some other functional specialists. The CPO has to work hard for a place, and performance measures are an essential ally.

That's why, looking at the framework set out above, it's a mistake to think it's all too difficult and to succumb to the temptation to stick to what is simple and known. Using measures that are based on a limited role for procurement, the CPO is confined to that role. By actively promoting a more comprehensive framework that covers the managerial as well as the technical aspects of the role, the CPO can shape the rules of the measurement game. By extending comparisons, colleagues can be better informed about its importance.

The upside is there for the taking. So is the downside for those who don't. As a CPO, the choice is yours.

Sir Andrew Likierman (alikierman@london.edu) is professor of management practice at the London Business School