25 February 2011 | Lindsay Clark
Finance chiefs need to come up with broader measures of procurement’s performance rather than just focusing on savings.
Research from supply management consultancy Ardent Partners found the relationship between procurement and finance heads continues to be inconsistent and less effective than it could be.
The study said both functions often work with different definitions of what savings are and how they can be measured. In addition, final savings may be beyond the control of purchasing, making them an incomplete measure of the function’s performance. This can cause difficulties because savings are the chief metric the CFO will use to demonstrate procurement’s value.
The report added CPOs who have a successful relationship with finance often consider it, and their alignment with the CFO, “almost solely in the context of having an agreement on the definition of performance metrics, specifically savings”.
”Savings for most CFOs remain the primary and, in many cases, the sole measure of procurement’s performance,” it continued. “…but a focus on it to the disregard of other key metrics does procurement and the CPO a huge disservice and devalues their contribution. More importantly it can serve to limit procurement’s actual contribution to the business.”
It recommended the CFO and CPO develop a clear and consistent definition of savings used by the entire organisation. They also need to work together to develop a “scorecard” measuring a wider range of procurement performance.
Although savings would be included, other measures should include feedback from stakeholders, supplier performance and risk. Meanwhile metrics around process and technology, and people and knowledge should also be included to be able to evaluate procurement’s success in executing a strategy.
Andrew Bartolini, the report’s author and Ardent Partners’ chief research officer said: “The CFO and CPO transformations are each a relatively recent phenomenon of executive leaders and their departments actively seeking responsibility, influence and accountability. And, although the starting points in history for the CFO and CPO were very different, their paths are converging around a common set of financial and business goals and objectives.”
The study was sponsored by software firm Puridiom and based on interviews with 30 procurement and finance executives.
