How should Procurement measure its value contribution to its organization? How does the C-Suite assess Procurement’s value?
Cost Reduction is THE metric used to evaluate Procurement by C-Site
Yet another survey tells us that Procurement’s value is all about cost savings! The latest in the series is the CPO STUDY 2021, Pursuing Sourcing Effectiveness Among Disruption and Shifting Priorities published by WBR Insights and Jaggaer identified 6 measures – all of which measure cost reduction.
The fact that Procurement’s value is measured by financial benefit should surprise no one. Dr. Elouise Epstein, VP at Kearney in a recent talk entitled The Business Case For Sourcing Productivity said that
… there are some benefits to be gained in procurement operations … sometimes there is value in contract management and SRM … however, most of value will come from Sourcing. Value from procurement almost 100% comes from Sourcing.
Strategic Sourcing is an untapped opportunity for most firms
The value creation opportunity is both enormous and largely untapped for most firms. For example, firms in the S&P500 index have seen limited – if any – bottom line cost improvement in their vendor spending (using OpEx as proxy) given that their spending is increasing nearly as fast a Revenue growth.
Our analysis of published financial reports shows that Vendor Spending, for many firms, is increasing as fast – and sometimes faster – than Revenue growth. Fewer than 5% of firms show any meaningful Strategic Sourcing results, based on my work evaluating Strategic Sourcing results for hundreds of companies.
20%+ EBITDA increase opportunity
The good news is that virtually all firms can deliver market-moving results by applying best-practice Strategic Sourcing practices. My experience shows that 20% EBITDA increase can be achieved for firms in the services & technology sectors, and more than 100% EBITDA increase for firms in the industrial and manufacturing sectors.