How to Measure and Optimize Procurement Performance

Procurement performance is more than just cost savings. Here's how to measure it holistically to drive continuous improvement in your purchasing.

What is Procurement Performance? 

Procurement performance refers to how well the procurement function buys goods and services, achieves its objectives, and supports the organization's overall goals. It includes procurement's efficiency in managing spend, effectiveness in delivering value, and alignment with corporate priorities. 

Key dimensions of procurement performance include cost savings, spend under management, supplier performance, risk management, innovation, sustainability, and operational efficiency. Ultimately, high procurement performance means being a strategic partner to the business.

Why is it important to measure procurement performance?

Procurement performance measurement offers a plethora of benefits — from reducing costs to improving supplier relationships. 

Here are five key reasons why you should be tracking procurement metrics:

1. Optimize spend and drive cost savings

With procurement KPIs in place, organizations can gain better visibility into their spend patterns across categories, business units, and suppliers. This enables you to identify opportunities for spend consolidation, supplier negotiation, and overall cost reduction. 

Specific metrics around spend under management, cost avoidance, and realized savings help ensure procurement is strategically managing and optimizing the organization's spend.

2. Mitigate supply chain risk

Procurement performance indicators around supplier performance, compliance, and risk enable more proactive supply chain risk management. By closely monitoring metrics related to supplier quality, on-time delivery, financial health, and continuity, procurement can identify and mitigate potential supply disruptions before they impact the business.

3. Align procurement with business objectives  

A balanced scorecard of procurement metrics helps tie procurement activities directly to broader organizational goals around cost reduction, quality, innovation, sustainability, diversity, and more. This ensures procurement's strategies, initiatives and day-to-day decisions are fully aligned with and effectively supporting the company's top-level objectives.

4. Demonstrate procurement's strategic value

Last but certainly not least, developing a robust set of procurement KPIs allows you to quantify and communicate the function's contributions and ROI in terms the C-suite understands. Metrics around cost savings, cost avoidance, spend influence, supplier-driven innovation, risk mitigation and more help tangibly demonstrate procurement's strategic value to the organization.

5. Enhanced Compliance

Measuring procurement performance helps track adherence to internal policies and external regulations. This allows organizations to identify compliance gaps early and take corrective action. Regular monitoring reduces legal and financial risks associated with non-compliance.

6. Strong procurement team management

Performance data reveals skill gaps and process inefficiencies within the team. Managers can use this information to tailor training programs, adjust workloads, and implement targeted process improvements. It also provides objective criteria for evaluating team members and making promotion decisions.

7. Long-term supplier relationships

Consistent performance measurement allows for fact-based supplier evaluations. This data supports strategic decisions about which relationships to deepen or phase out. It also allows procurement to quantify the value suppliers bring beyond price, such as innovation contributions or flexibility during disruptions.

Common Challenges in Measuring Procurement Performance

While the benefits of measuring procurement performance are clear, many organizations struggle to do it effectively. 

Some common challenges include:

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- Lack of clean, consistent, and timely spend data across systems and categories 

- Difficulty quantifying intangible value beyond cost savings

- Lack of alignment on procurement goals and metrics with stakeholders

- Undefined or ambiguous metrics that are hard to measure consistently

- Shortage of analytics skills and tools to derive insights from data

- Organizational resistance to change and adopt new KPIs

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To overcome these hurdles, procurement must invest in foundational data management, work cross-functionally to define meaningful KPIs, leverage technology to streamline tracking, and commit to using metrics to drive action and results.

How do you measure procurement performance?

Measuring procurement performance takes some upfront work - particularly around defining the right metrics, gathering necessary data, and implementing systems for ongoing tracking, analysis and reporting.

If you already have foundational spend analytics capabilities in place with visibility into supplier performance data, getting a procurement performance measurement program off the ground will be much easier. 

If not, consider investing in a spend analytics solution as part of step 2 in this process. 

With that background, here is a step-by-step guide to launching a procurement metrics program:

Define your procurement objectives

Effective procurement KPIs must start with a crystal-clear understanding of what procurement is ultimately trying to achieve for the business. If you have a documented procurement strategy in place, your objectives should align closely with the goals outlined there.

Engage with executive leadership, finance, and other key stakeholders to identify and prioritize procurement's top objectives, which may include things like:

- Reducing costs and increasing realized savings 

- Optimizing working capital 

- Mitigating supply chain risk and disruption

- Driving product and process innovation

- Supporting corporate sustainability goals

- Improving procure-to-pay cycle times and efficiency

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The specific objectives will vary based on your company's industry, maturity, and overall corporate goals. But the key is to define a clear set of 3-5 measurable objectives that will serve as the north star for designing your procurement performance metrics.

Identify data sources

Once you've aligned on objectives, the next step is to determine what data you'll need to actually measure procurement's progress and performance against those goals. You'll need to map out where all of that data currently lives across your procurement and enterprise systems. Key data sources often include:

- Spend data from your ERP, P2P, or dedicated spend analytics system

- Supplier performance data from your supplier relationship management or supply risk tools  

- Contract data from your contract lifecycle management (CLM) system

- Savings data that may be tracked in spreadsheets or savings management tools

- Procurement process data from your P2P suite or other procurement tools

If this data is scattered across multiple disconnected systems and databases, consider investing in a spend analytics solution to pull it all together into a single source of truth. You'll need granular, accurate, and timely data to develop meaningful procurement KPIs.

Define your procurement KPIs

Armed with clear objectives and a solid handle on your data, you're ready to define your actual procurement performance metrics. The goal should be to create a balanced scorecard that measures procurement performance holistically across cost, quality, delivery, innovation, sustainability, risk, and other key dimensions. 

Some examples of commonly used procurement KPIs include:

- Spend under management

- Realized cost savings vs. goal

- Cost avoidance  

- Spend compliance/maverick spend

- Supplier performance (quality, on-time delivery, responsiveness, innovation, etc.)

- Supplier risk indicators 

- Contract compliance  

- Requisition-to-order cycle time

- Invoice accuracy/first-pass match rate

- Procurement ROI

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For each KPI, clearly define what it's measuring, how it will be calculated, the target or benchmark to aim for, and who will be responsible for tracking and reporting on it. To ensure focus, limit your initial KPI set to 8-12 of the most critical metrics, with flexibility to add more granular ones over time.

Implement a performance tracking system

With your core KPIs defined, you'll need to implement the processes and systems to measure, track and report on them continuously. Many of the source systems noted in step 2, such as spend analytics, SRM, and P2P suites often have built-in performance dashboards you can leverage.

However, you will likely need to supplement those with some custom tracking, calculation and reporting, especially for metrics that span multiple different systems. Options can range from basic spreadsheets to more sophisticated business intelligence and analytics tools.

Whichever route you choose, the key is to automate as much of the data collection and calculation as possible so that you can easily monitor performance trends over time. Aim to track and review your KPIs at least monthly, if not weekly.

Communicate and act on the insights

The last and most important step is to actually share procurement performance insights broadly and use them to drive action and improvement. Establish a regular cadence, whether monthly or quarterly, to review the KPIs and key takeaways with your procurement team and leadership. 

Discuss what the data reveals in terms of procurement's strengths, weaknesses and opportunities. Identify the root causes of underperforming KPIs and brainstorm potential actions to improve them. Take time to celebrate progress in key metrics as well.

Most critically, use the KPI insights to inform adjustments to procurement strategies, processes, training, tools and technology in order to optimize performance. And regularly re-evaluate your KPIs to ensure they remain relevant as business needs evolve.

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Using Technology to Boost Procurement Performance

The right technology tools can make all the difference in procurement's ability to track and improve performance metrics. Some key solutions that support procurement KPIs include:

- Spend Analytics: 

Provides visibility into procurement spend data to identify savings opportunities, manage compliance, and monitor supplier performance. Enables spend analysis by category, supplier, business unit and more.

- eSourcing: 

Helps maximize value from strategic sourcing by streamlining and automating the RFX process, negotiations, auctions, and award decisions. Provides savings tracking and pipeline reports.

- SRM (Supplier relationship management): 

Manages supplier information, performance, risk, and relationships in a centralized platform. Tracks supplier scorecards, KPIs, compliance and risk data. Enables collaboration.

- CLM (Contract lifecycle management): 

Repository for procurement contracts that helps manage the contract lifecycle from authoring to execution to renewal. Ensures consistency and compliance.

- P2P (Procure-to-pay): 

Procure-to-pay automates transactional procurement processes like purchasing, invoicing, and payments. Enables spend controls, policy compliance, and efficiency.  

Investing in a procurement technology ecosystem that integrates these key capabilities can provide a single source of truth for spend and supplier data, while reducing manual effort in KPI tracking and reporting.

Benchmarking Your Procurement Performance Against Industry Standards

To put your procurement KPIs in context and identify gaps, it's important to benchmark them against industry peers and high performers. 

Procurement organizations can access benchmark data through:

- Procurement research firms and consultancies that conduct annual cross-industry studies

- Industry-specific procurement associations that aggregate blinded member data

- Procurement solution providers that have compiled benchmarks based on customer data

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Some common procurement benchmarks to consider include:

- Spend under management as a percent of sourceable spend

- Procurement ROI (savings as a percent of total spend)

- Addressable spend per procurement employee 

- Percent of spend under contract

- Procurement cycle times for PO, sourcing, contracting

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Comparing your metrics to relevant benchmarks can help you gauge your procurement maturity, set realistic performance improvement goals, and make the case for more strategic investments.

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Avoiding Common Mistakes in Procurement Performance Measurement 

In the rush to implement procurement KPIs, organizations often fall victim to some common pitfalls, including:

- Metrics overload: Tracking too many KPIs that create confusion and lack of focus

- Vanity metrics: Measuring things that are easy to capture but don't drive business value

- Lack of context: Reporting metrics in a vacuum without tying to objectives or benchmarks

- No follow-through: Failing to use metrics to inform procurement strategies and decisions

- Lack of business linkage: KPIs that are siloed within procurement and not aligned with enterprise goals

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To avoid these mistakes, procurement must be purposeful in designing a lean set of meaningful metrics, diligent in linking KPIs to business outcomes, transparent in reporting results to stakeholders, and disciplined in using them to drive continuous improvement. 

Future Trends in Procurement Performance

As procurement's role continues to evolve, so too will the metrics used to evaluate its performance and value. 

Some of the emerging areas procurement is increasingly being measured on include:

- Supplier-driven innovation

- Supply chain sustainability and diversity

- Risk management and resilience

- Stakeholder satisfaction  

- Data-driven procurement

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Leading procurement organizations will be proactive in expanding their performance metrics to encompass these areas and redefine what best-in-class procurement looks like.

Real-Life Examples of Procurement Performance Excellence

Need inspiration for your procurement performance journey? Here are some real-world examples of how Spendflo - a procurement and SaaS management platform helped organizations excel in procurement metrics and value delivery:

• Spendflo was able to upgrade Sand Tech into a niche plan in Zoom, saving close to $4.5M in a single day since the renewal request was raised. By leveraging Spendflo's data-driven insights and negotiation prowess, Sand Tech secured 575 free Zoom Webinar licenses and eliminated operational bottlenecks.

• With Spendflo's support, Hubilo successfully optimized and consolidated their software stack, reducing their annual spend by nearly 40%. Hubilo now maintains a leaner, more efficient toolset that supports their growth without unnecessary expenditure.

Check out other Spendflo's customer case studies

Frequently Asked Questions About Procurement Performance

1. What are the top procurement KPIs every organization should measure?

While specific KPIs vary by industry and maturity, most procurement teams should track metrics related to spend under management, savings, spend compliance, cycle times, and supplier performance/risk at a minimum.

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2. How often should I be reporting on procurement metrics?

Aim to track and review KPIs at least monthly, but ideally weekly or even real-time where possible. The faster you identify performance gaps, the quicker you can course-correct.

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3. What benchmarks should I use to compare my procurement metrics?  

A mix of cross-industry and industry-specific benchmarks from procurement research firms, associations, and technology providers can help provide relevant comparisons. Choose peers of similar size and complexity where possible.

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4. How do I get started with tracking procurement performance? 

Start by defining clear objectives and KPIs, assessing your current state metrics and gaps, and investing in enabling technology and processes to streamline data collection and reporting. Partner with stakeholders to drive adoption.

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5. How do I turn procurement KPIs into action?

Review metrics regularly with your team to identify root causes of underperformance and brainstorm improvement ideas. Use them to inform adjustments to strategies, processes and technologies. Celebrate quick wins to gain momentum.

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How Spendflo Can Help with Procurement Performance

At Spendflo, we understand the challenges procurement teams face in measuring and optimizing performance. Our all-in-one spend management platform is designed to help you overcome these hurdles and achieve best-in-class procurement outcomes. Here's how we can help:

• Spend Visibility: Spendflo provides complete, real-time visibility into your procurement spend data across categories, suppliers, and business units. Our AI-powered spend analytics helps you identify savings opportunities, manage compliance, and monitor supplier performance.
• Savings Tracking: Our platform streamlines savings tracking across sourcing events, negotiations, and contracts. We help you measure realized vs. identified savings, cost avoidance, and cumulative savings performance against goals.
• Procurement Analytics: Spendflo offers a suite of procurement-specific analytics and KPI dashboards that make it easy to track and report on key metrics like spend under management, contract coverage, cycle times, and procurement ROI. We also provide benchmarking data to help you compare performance against peers.

To see how Spendflo can help you drive procurement performance excellence, schedule a demo with one of our experts today.

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