A lot of companies are eager and required to demonstrate the success of their Source-to-Pay (S2P) implementation.
Just like a lot of countries are seeking to demonstrate the success of their COVID19 strategy. How to go about it and what are the most frequent errors? We live in a time when data is readily available, timely, plenty and cheap. The real challenge is to select the right data to look at, the right time to look at the data and to have the right reading of the data. Which cookie to select from a jar which overflows with cookies?
The most important concept which analysts grapple with is the distinction between KPIs and operational Indicators. An operational indicator, is the reflection of some activity which needs to happen for a KPI to be reached.
In the case of the pandemic, whereby the KPI is to contain the spread of the virus, the operational indicator is the number of people infected. There is no chance to contain the spread of the virus, if you have no idea who is infected and who might infect others and how.
In S2P, this means that you have no idea about whether you are achieving your savings, unless you are running sourcing events and your organisation purchases goods and services based on the results. Therefore, if you don’t run sourcing events, there is no basis whereby users will call-off goods based on the contracts born from these events. So you cannot measure one without the other: In order to achieve your KPI on savings, you indeed need to measure: spend sourced, # of events run, # of responsive bidders per event to ascertain competitiveness etc… otherwise measuring savings is a mere reflection of having performed an event as opposed to having run an effective event.
The first step is to define what is it you want to achieve. From there everything flows, quite naturally.
At the beginning of this pandemic, health officials wanted to know who has the virus and how it spread. This meant; testing and revisiting the instances of infection, as this would allow to identify and isolate infected individuals as well as study the circumstances of transmission. In S2P, this would translate into who is spending and for what. This means that the operational indicators are based on who, how much and for what while the KPI would be bottom line savings.
To illustrate the difference objectives make in the definition of KPIs, a basic example is compliance vs. risk. If I want to measure compliance in S2P, I measure how much of my spend is derived from contractual arrangements, while if I want to measure risk; I measure how much of my spend is not. So in the first case, my objective is maximum compliance while in the second, my objective is minimum risk. While in the first case my KPI can be broadly set across the company, in the second it needs to be more specific, which means I have a risk framework, which defines my risk exposure and my risk tolerance. In the first case, I am looking forward to an overall compliance improvement while in the second, I am looking at a specific reduction of my risk exposure, in particular where it exceeds my risk tolerance. Therein lies all the difference.
Making the parallels with the pandemic; while at the beginning, the strategy was to contain the spread of the virus not to overwhelm health infrastructures, in this phase, with vaccines available, the objective is to save as many lives as possible within a given timeline; that is when everybody is vaccinated. There are several strategies one can pursue to achieve this: Vaccinate all vulnerable and exposed people to limit the number of people contracting the disease; that is those with a high likelihood of death or severe long-lasting consequences or alternatively limiting the number of super-spreaders likely to infect vulnerable people and healthcare staff risk due to exposure. It is not the same objective as eliminating the likelihood of vulnerable people getting the virus, is not the same as preventing that they get in contact with someone likely to infect them . In one case, you are reducing the probability of people dying from the disease, while in the other you are limiting the likelihood of vulnerable people getting infected in the first place. Two different objectives. Therefore, objectives are determining.
The deciding factor in between is obviously how many people you have to vaccinate in each population and how fast you can do this. There come the practicalities, the economics as well as the timeline.
Without drawing an inappropriate parallel with S2P, this means that as a company, there is a choice to be made between compliance and savings. The question is: do I maximise the savings I acquire through sourcing/contracting with a certain probability that these will not materialise in daily operations or do I maximise daily operation savings instead, as in enforcing the savings which I have captured at sourcing/contractual level. In my view, the answer is clear: the weight of the population and the impact is far greater in compliance, than it will ever be in sourcing. Therefore, I would recommend that the emphasis be put on compliance. The few or many contracts in place should be enforced with requesters as this will increase trust in the marketplace, empower users and deliver bottom line savings and in the mid-term, increase the sourcing power/trust.
In terms of KPIs, this means clearly, that while fostering a culture of compliance, I diminish my risk, promote the trust of my suppliers with regard to my commitments, introduce a level of visibility and predictability in my spending patterns which render my operations more reliable, thus more cost efficient and thus more cost effective. By intertwining my operations with those of my suppliers, they become part of my echo-system, their understanding of my requirements and exigencies augment and we reach a kind of symbiosis.
Concretely, that means my key S2P measures are:
Operational Indicators at sourcing level are:
- Spend sourced
- # of Sourcing events
- # of invited supplier
- # of responsive bids
KPIs are savings contracted
Operational Indicators at Procurement level are:
- % spend linked to Sourcing/Contracts
- % maverick spend (eg. where a contract/arrangement existed but was disregarded)
KPIs is Spend under Management and Spend with preferred suppliers (eg. where a contract/arrangement exist)
To return to the pandemic, this would mean, (and this is strictly my view):
Success would be measured by KPI:
- the % vulnerable people within the population vaccinated within a determined timeframe
- the % of super-spreader (cluster) population vaccinated
as they go hand in hand and impact each other.
in S2P, it would translate into:
- % Savings achieved through sourcing/contracting
- % Spend under management.
My final words on this topic are:
- It is crucial to choose KPIs wisely after intensive discussions (the law of unintended consequences is always awaiting to play out)
- Identify the operational indicators which will make the KPIs happen
- Choose fewer KPIs rather than more (7 at max. would be my recommendation)
- Decide upon what you want to display in your dashboard for immediate action as opposed to what you want to see in reports on a regular basis (process modification)
- How you want to report to your Management to make your actions meaningful to you and to them.
With this I wish you a Merry Christmas and a Happy New Year!