Key Process Indicators (KPIs) to Guide Your Journey
Contents 3-5 6-9 Introduction Key Process Indicators (KPIs) Supplier Base Supplier Management Sourcing Contract Management Supplier Catalogues Authorisation Compliance Purchase Compliance Coding Accuracy Procurement Efficiency Accounts Payable Efficiency Employee Efficiency Spend Visibility 10 Summary 11-12 How PROACTIS Helps Organisations Increase True 13 About PROACTIS 14 Glossary We have identified 50 approximately KPIs that are the most useful for measuring and monitoring an organisations overall Spend Control 2
Introduction In a previous PROACTIS paper titled Spend Under Management: Take a Broader View of Enterprise Spend Control, we outlined a more useful view of Spend Under Management that goes beyond the traditional procurementcentric use of the term to encompass an organisation-wide Spend Control process that addresses three key elements. The 3 Key Elements of Organisation-Wide Integrated value creation and capture The efficiency with which things are purchased and paid for (cost of the process) Management visibility of spend activity We defined spend that is truly under management as purchases that meet the following six criteria: 1. Made with suppliers that were properly sourced & managed 2. Made with proper purchase authorisation 3. Properly coded for both financial allocation and purchase category 4. Paid with correct pricing & terms 5. Processed quickly & efficiently by everyone involved: employees throughout the business, procurement and accounts payable 6. Clearly visible to management at all times Each of the six criteria are described in more detail in that paper. In that paper, we also discussed why maximum bottom-line results are achieved only when all elements of an organisation s Source-to-Contract and Purchase-to-Pay processes are operating effectively and efficiently; and, most importantly, in integration with each other. Like many important initiatives, Spend Control is a journey rather than a destination. This paper takes the subject to the next level by outlining Key Process Indicators (KPIs) that Procurement, Finance and other senior managers can use to monitor and improve each of the individual activities required to gain a high level of true. Using these relatively few KPIs, you can ensure that each activity is continually improving its contribution to the enterprisewide Spend Control process. 3
The Strategic Goals are Clear The strategic goals of an organisation s Spend Control efforts are, of course, to: Maximise savings and value Minimise risk Minimise process cost Combined with high level measures such as cumulative savings from sourcing, the percentage of Spend Under Management as we have defined it is a valuable KPI that will track closely with achievement of those goals. But Effective Spend Control is a Many-Faceted Process A high level of performance against those goals, however, requires that a number of individual inter-related activities are each working well. The process to achieve a high level of organisation-wide is much like the engine of your car where the ignition system, fuel system, timing belts, etc. must all be working correctly and together in order to power you forward. Led by Procurement and Finance, the Spend Control process needs to be firing on all cylinders in order to deliver best-in-class results. That means: In the Source-to-Contract cycle, Procurement needs to be effectively finding, qualifying and managing a strong supplier base; performing a high number of well-run sourcing projects; keeping close track of contracts; and making a broad range of appropriate suppliers and catalogues easily accessible to employees. In the Purchase-to-Pay cycle, Finance and IT need to be providing the organisation with a systems framework that makes it easy for the organisation to get the goods and services it needs while complying with established authorisation and supplier usage policies. That framework must also ensure that purchases are properly coded and categorised, and that both operational managers and procurement professionals have full visibility of all purchase activity. That is a lot to do. The full process may seem overwhelming and difficult to monitor, manage and improve. Different parts of the process are the responsibility of different people. And it may seem difficult to tie strategic objectives to specific day-to-day activities. The 3Strategic Goals of an organisation s Spend Control efforts Maximise savings and value Minimise risk Minimise process cost 4
Breaking it Down Makes it Manageable But, by breaking the overall process down into individual areas of focus, Spend Control can become quite manageable. Once your organisation s senior managers have a common understanding of the role each area plays, as well as how they inter-relate with each other, they can focus on lower-level KPIs that are more easily measured and monitored. Each area can then be individually improved with an understanding of how that will ultimately improve the overall Spend Control process and increase the organisation s level of. In each stage of your Spend Control journey, these KPIs will help you better understand where your weakest link lies and what you need to do to improve it. Early on, that will give you a good idea where to start in order to achieve the fastest initial payback; later it will help you prioritise efforts across your organisation to realise steady incremental gains. Understand where your weakest link lies and what you need to do to improve it About These KPIs Over the years, organisations have identified thousands of different KPIs related to procurement, accounts payable and other aspects of Spend Control. The approximately 50 KPIs listed here are those that experience has shown to be the most useful for measuring performance in the areas requiring focus in order to increase organisation-wide Spend Under Management. Broken down into 12 key areas, no one area has more that 2-7 items. You might very well add or delete certain KPIs for your organisation, but this list should be very close to what you need to effectively measure performance and monitor improvement over time. Your measurements should be as objective as possible. Some KPIs are simply yes/no; some may be practical only on a spot check basis; and some may simply be a manager s best guess with some level of explanation so others can interpret them. Some measurements are somewhat arbitrary and not overly meaningful at a single point in time; but plotting the trend will be very meaningful in terms of showing progress over a period of time. One very important note: These KPIs do not attempt to measure the skill with which Procurement, Finance or other functions perform their roles. Rather, they are intended to indicate a) how well the necessary framework has been established to leverage the skills that are available, and b) how well that framework is operating. For instance, regardless of whether a particular organisation s procurement professionals negotiate an average of 5%, 10% or 15% in potential savings through supplier agreements, that organisation will realise more actual benefit from those agreements if it has a well-functioning Spend Control framework that results in a higher level of compliance to the use of those agreements. 5
Key Process Indicators (KPIs) Below are the approximately 50 KPIs that PROACTIS has identified as being the most useful for measuring and monitoring an organisation s overall Spend Control process. They are broken down into the following 12 areas: Supplier Base Supplier Management Sourcing Contract Management Supplier Catalogues Authorisation Compliance Purchase Compliance Coding Accuracy Procurement Efficiency Accounts Payable Efficiency Employee Efficiency Spend Visibility Supplier Base These KPIs help Procurement know where they stand in terms of a) rationalisation of the supplier base, and b) the level of standardised information they have available for those suppliers. These KPIs do not attempt to define or measure how well the supply base is established; simply the level of focus that is being given to the process of managing and documenting that base, and making it visible to the organisation. Purchase categories clearly identified (y/n) % categories with rationalised, competitive supplier lists (reviewed in less than xx months) Centralised, searchable electronic supplier directory established (y/n) Standard supplier profile information identified (y/n) % suppliers with up to date profiles (reviewed in less than xx months) Supplier Management These KPIs help Procurement know where they stand in terms of defining and executing a standardised process for supplier qualification and review. Consistent use of a standardised qualification and review processes should ensure that the suppliers used by the organisation meet basic capability, risk and performance criteria. % categories with standard supplier qualification and performance review criteria defined % suppliers qualified using standard process % suppliers with overdue performance reviews (goal is fewer) 6
Sourcing These KPIs help the organisation know where it stands in terms of the standardisation of competitive sourcing processes, as well as the rate at which the organisation is using those processes to gain optimal value for its spend. Well-thoughtout sourcing processes enable the organisation to better leverage procurement professionals, category experts and other specialised resources while ensuring the best suppliers are selected using a fair and transparent process. In turn, that enables a higher rate of competitive sourcing, leading to increased savings. All sourcing event types defined (y/n) % sourcing event types with standard process defined % contracts or agreements awarded using standard process # of sourcing events per year Average cycle time per sourcing event Contract Management These KPIs help Procurement know where it stands in terms of the standardisation of contract management activities, as well as its level of execution. A high level of performance against these indicators ensures that a) contracts are visible to the people who should be buying against them, and b) suppliers are consistently performing to established criteria (e.g. certifications & insurance, pricing, etc.) # contracts in centralised, searchable electronic repository (note: % could be estimated) All contract categories identified (y/n) % contract categories with standard milestones defined % contracts with milestones established % contracts with overdue milestones (goal is fewer) % contracts auto-renewing without review (goal is fewer) Supplier Catalogues These KPIs help Procurement know where it stands in terms of the level of access it is providing the organisation to appropriate supplier catalogues or web sites within its purchase-to-pay framework. High performance in this area has a significant effect on the ease with which employees can self-purchase what they need from the right supplier s. That, in turn, has a significant impact on both organisational efficiency and compliance with purchase policies. Categories appropriate for a catalogue or web site punchout identified (y/n) % suppliers (in appropriate categories) where catalogue or punchout is available to purchasers Intuitive, easy to use search capabilities are provided to employees (y/n) Authorisation Compliance These KPIs help financial and operational management know where they stand in terms of organisational adherence to established purchase approval policies. A high level of performance in this area indicates that a) only proper purchases are being made, b) managers have control over their budgets, and c) costs are properly allocated. Categories where POs add value identified (y/n) % of invoices that should have POs that do when invoice received Purchase authorisation rules identified and documented/implemented (y/n) % of purchases approved via established process (e.g. P2P workflow) % invoice-only spend with supplier match 7
Purchase Compliance (i.e. usage of approved suppliers) These KPIs help Procurement and senior management know where they stand in terms of organisational adherence to usage of established suppliers and items. This critical area is a measurement of how well the organisation is actually capturing the potential savings created by Procurement. High levels of performance in supplier management, sourcing, contract management and catalogue management, combined with a high level of purchase compliance ensure that the organisation is achieving a high level of value with a low level of risk when it purchases goods and services. % POs with qualified suppliers (existing supplier or proper spot buy process) % PO lines with item selected from a catalogue or punchout where available Coding Accuracy These KPIs help Finance and Procurement managers see where they stand in terms of the quality of information captured about spend. Accurate financial coding is, of course, critical to budget management and financial reporting, while accurate spend classification is essential to meaningful spend analysis. The more this coding is automated based on data associated with the purchaser, supplier, item, and other factors, the more accurate and complete it will be. Periodic audits or spot checks are probably the most practical way to measure these. % POs & invoices with correct financial coding % POs & invoices accurately classified by spend category Procurement Efficiency These KPIs help Procurement know where they stand in terms of how productive they are in doing what they do for the organisation. When functions are performed more efficiently, procurement can address more categories and more purchases, and therefore add even greater value to the organisation. % POs sent electronically % sourcing events run electronically % suppliers maintaining own profiles % Catalogues being self-maintained by supplier # phone/e-mail supplier enquiries (goal is fewer due to supplier self-service) KPIs help financial and operational management to know where they stand in terms of organisational adherence to established purchase approval policies 8
Accounts Payable Efficiency These KPIs help Finance know where they stand in terms of how productive they are in processing invoices. The goal, of course, is to add as little cost as possible to the overall purchase process while at the same time ensuring only valid invoices are paid. The bottom line measure is invoices/fte as that translates most directly into cost; but the other KPIs are very good leading indicators and help identify specific areas for improvement that naturally lead to reduced cost. Note that the straight through processing and invoices sent outside AP metrics, though measured in AP, are actually indicators of how well the overall purchase-to-pay process is working. Also note that, although early payment discounts may not always be available or desirable, that measure does indicate actual savings AP is contributing through efficient operations. Invoices processed per FTE (and/or average cost per invoice) % invoices received electronically % invoices automatically matched and approved (processed straight through ) % invoices sent outside AP for discrepancy resolution (goal is fewer) Average invoice processing cycle time (receipt to payment authorisation) # phone/e-mail supplier enquiries (goal is fewer due to supplier self-service) % invoices with available payment discounts taken (or total discounts taken) Employee Efficiency These KPIs help the organisation know where it stands in terms of the overall time and effort required of employees throughout the organisation to obtain the goods and services they need to perform their respective functions. Do employees have access to the purchasing system from anywhere? (y/n) Can managers see and approve requests from anywhere? (y/n) % purchases auto-approved per authorisation policies Average approval cycle time when approval required Average spot purchase cycle time when sourcing required Spend Visibility These KPIs help the organisation know where it stands in terms of its visibility of spend for purposes of budget management, cash management and spend analysis. Visibility is usually a by-product of performing well in the areas outlined earlier. Do department managers have easy access to purchase commitments when approving new requests? (y/n) Do financial managers have easy access to open invoices and purchase commitments for cash management? (y/n) Does procurement have visibility of all spend by category and supplier? (y/n) 9
Summary Balanced improvement to these KPIs will increase your organisation s. That, in turn, will increase your savings, reduce your risk and reduce the process cost associated with procuring the goods and services your organisation needs to run the business. PROACTIS solutions have that flexibility, as well as the breadth, depth, and scalability you require to support a truly effective approach to centre-led spend control. The 3Strategic Benefits of Maximise savings and value Minimise process cost Minimise risk 10
How PROACTIS Helps Organisations Increase True PROACTIS specialises in helping organisations across both the public and private sector incrementally increase their level of true organisation-wide Spend Under Management as defined here. We do that through a combination of: Guidance eprocurement solutions Category services Managed services Guidance Though PROACTIS is primarily a Spend Control and eprocurement solution provider, we always start our relationship with clients by understanding their current environment and goals. In many cases, we also work with finance and procurement leaders to help refine their Spend Control vision, communicate that vision to the broader organisation, and establish a phased approach to realising that vision with incremental return along the way. Specific services include: Advisory Services such as our Rapid Spend Review structured to quickly identify and prioritise opportunities for savings, efficiencies and risk mitigation Transition Services such as consulting, training and integration to help make each step in the journey as predictable and smooth as possible eprocurement Solutions The PROACTIS Spend Control & eprocurement Solution Suite is among the broadest available today. It integrates: Source-to-Contract (value creation) Sourcing Supplier Management Contract Management Catalogue Management Purchase-to-Pay (value capture) Purchasing Invoice Receipt Invoice Matching Employee Expenses 11
The PROACTIS suite is highly modular and configurable so that you can deploy the specific areas you need in the context of your existing systems, and do so in the sequence that delivers the best overall value. You can also deploy defined subsets of the PROACTIS suite to address areas such as: Supplier Engagement AP Automation Spend Reporting & Analysis Category Services PROACTIS provides optional commodity services that help you realise the lowest process and best value for select tail spend categories you may not wish to address directly. Categories covered include: Stationery Paper Catering Janitorial items Workwear Workplace environment products Lighting Managed Services PROACTIS can help simplify solution deployment and daily operations by providing managed services where we take responsibility for key activities so you can focus on your core business. These include: Cloud hosting Invoice capture Print services In-house print management Business machines Office furniture Promotional items and more... 12
About PROACTIS PROACTIS is a leading provider of spend control and eprocurement solutions. Hundreds of organisations around the world use PROACTIS software and services to streamline the purchase-to-pay process and obtain best value and control in procurement. Procurement Solutions: to help organisations to automate the full buying cycle from improving the way they find, evaluate and engage suppliers to increasing on-contract spending and enabling more effective collaboration with their trading network Purchase-to-Pay Solutions: to enable organisations to streamline the purchase-to-pay process, eliminate labour-intensive manual registration of invoices, speed up invoice matching and approvals and gain control of after-the-event purchase claims Widely used in mid-to-large sized organisations across private, public and not-for-profit sectors, PROACTIS is routinely integrated with ERP and financial systems. PROACTIS also offers a range of on-premise and cloud-based delivery options, including Software-as-a-Service (SaaS) and dedicated-hosted application delivery, and flexible licensing models. PROACTIS Group was founded in 1996 and has been listed on the London Stock Exchange since 2006 (AIM: phd). Headquartered in the UK with operations in North America, PROACTIS has an extensive accredited partner network in EMEA, Americas and APAC regions. 13
Glossary - PROACTIS uses the term as much more than just the traditional Procurement-only measurement (i.e. spend influenced by procurement). We see it as an organisation-wide measurement of spend that is truly under management from beginning to end, performed efficiently, and visible throughout. As such it is a very meaningful measurement of the results from an organisation s Spend Control efforts. This organisation-wide view of provides a practical framework for identifying, executing and monitoring performance of the activities that are key to realisation of substantial savings. In addition, it clearly identifies the role modern eprocurement systems play in enabling an organisation to create savings opportunities in the Sourceto-Contract cycle, then capture those savings through an integrated Purchase-to-Pay cycle. PROACTIS Terminology Spend Control: The business processes an organisation uses to obtain best possible value for the goods and services it purchases : The portion of an organisation s spend that is fully under management of its Spend Control processes eprocurement: The information systems framework that supports an organisation s Spend Control processes and enables increased levels of The full range of guides in the series Take a Broader View of Enterprise Spend Control Key Process Indicators (KPIs) to Guide Your Journey The Business Case For eprocurement Systems Take a Broader View of Enterprise Spend Control Key Process Indicators (KPIs) to Guide Your Journey The Business Case For eprocurement Systems Download at proactis.com 14
Over 350 customers across 70 countries PROACTIS: Spend Control & eprocurement Streamlining the purchase-to-pay-process Obtaining best value and control in procurement 15
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