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savings types

You get what you measure

You’ve probably heard the saying “you get what you measure” and this is certainly often the case with procurement. When KPIs are set at an individual or team level they are designed to shape the focus of that particular individual or team. Procurement KPIs may be multi-faceted and include “soft” objectives which are measured subjectively. The most commonly occurring ones however are the objective, number-driven KPIs, quality focused such as parts-per-million targets, consolidation focused supplier reduction targets, or the most common of all – savings targets.

Measuring savings is no simple task and behaviour will be altered depending on the nuances of the measurement. For example I worked at one company where no carry-over from one calendar year to the next was allowed, so savings starting in December only achieved one twelfth of the value of an equivalent saving starting in January. This is of course tempted buyers into delaying savings implementation until the new year in order to maximise the recorded benefit.

How rebates and signing bonuses are measured can also affect behaviour. If every rebate received can be “banked” as a saving, then there are likely to be more rebate-based deals where savings can theoretically be banked every year, than straightforward price reduction were the benefit may only be claimed once.

The key for any business is to understand the behaviour it wants to encourage, then set the savings measurement rules and KPIs accordingly. Is a price reduction better than an equivalent rebate for the business? Is an extension of payment terms from 30 to 60 days better than a 2% price cut? Would just buying less of something (e.g. travel) be better than reducing the price so people can buy more for the same total cost? Once a business can answer these questions, setting its goals appropriately will encourage the procurement team to deliver real benefit.