How can procurement add more value to your organization? First, you will need more visibility and efficiency into your process.
You’ve recently made the decision to invest in procurement software to optimize your organization’s purchasing and expense management processes. That’s great news. But how exactly can you tell whether your investment has been worthwhile?
Keep tabs on these seven spend management key performance indicators (KPIs) to measure how effective your procurement optimization efforts have been to date:
1. Year-over-year savings
One of the main goals of a proactive procurement process is cost savings seen through the elimination of inefficient processes and less-than-ideal agreements with suppliers. To get a good idea of how well—or how poorly—your procurement software investment is paying off, you need to track year-over-year savings. It will give you a bird’s-eye view of your procurement department’s activities.
Of course, you’ll then have to drill down into the data to see exactly where you’re reducing your costs. That way, you can identify even more cost saving opportunities.
2. Maverick spending
Maverick or rogue spending is a major problem at most organizations. According to one report, 54% of employees admit that they’ve made purchasing decisions without going through the proper authorization channels. In order for your organization to be as profitable as it can be, you need to curtail all superfluous spending. One study found that the average large organization stands to save millions of dollars by reducing rogue spending by 5–10%. The more progress you make on reining in maverick spending, the healthier your bottom line will be.
3. Supplier management
How many suppliers does your company work with? Best practices indicate that the fewer suppliers you work with, the better the chances you’ll be getting great deals. By keeping tabs on the number of suppliers you work with and consolidating orders to get lower prices, you can save significantly while streamlining the procurement process. This spend management KPI is particularly important for organizations that have recently undergone mergers or have acquired other companies.
4. Cost reduction metrics
Which specific procurement accounts have you been able to reduce the most? Keeping track of cost reductions, either by project or over a period of time, enables you to see where your spend management efforts are working most effectively and which other areas need more attention.
Track vendor spend and build projections for projects of a certain size or time period. Then, dive deeper into overall cost reduction strategies for those projects. Over time, you'll gain key insights on how to replicate and improve reductions in future procurement.
5. Cost avoidance
In order to understand the actual ROI of your procurement investment, you need to consider how much money you’re saving overall. But you also have to determine how many excess expenses you’re avoiding by optimizing purchasing. For example, if investing in a new e-procurement system enables your employees to work 20% faster, your organization can stretch salary expenses considerably.
6. Contract pricing/compliance
Negotiating favorable terms won’t get you far if you’re not taking advantage of every discount available to you. Similarly, if a supplier isn’t holding up its end of the bargain, you may be able to negotiate price concessions. To optimize and consolidate spend management, you need to pay attention to whether your purchasing managers are always taking advantage of favorable payment terms and leveraging spend data to qualify for bulk discounts or lower prices. You also need to ensure contracts are enforced to gain more spend under management.
7. Contribution to total spend
Some departments or business functions will inevitably take up more funds than others. It’s important to study which facets of your organization are using the most resources. That way, you’re able to understand where you need to focus the majority of your energies to improve procurement efficiency.
Improve spend management KPIs and cost savings with the right software features
In an ideal world, you’d be able to throw money at improving your organization’s spend management strategy and it would translate seamlessly into cost savings.
But it’s not that simple. Every organization has different needs. However, by keeping track of these seven spend management KPIs, you increase the chances that your procurement software investment returns the rewards you’re looking for.
And of course, you can refine your spend management strategy even more with key time and cost-saving procurement software features. Download our recent Buyer’s Guide here to learn all about these features, their benefits, and how your organization can make the most of them.