Promoting The Value
of
Public Procurement
MEASUREMENT SYSTEMS AND PERFORMANCE METRICS FOR PUBLIC PROCUREME NT
PAUL J. BRENNAN, CPPO
Procurement’s Problems
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Lack of acceptance
Lack of strategy
Lack of methods
Lack of trust
Lack of know-how
Lack of competence
Why Salespeople Are Better
Rewarded
• They must reach goals
• Their results are directly identified on an
organizations profit and loss statement
• They are assigned monthly and annual goals
• The goals are easily measured
How many public procurement professionals are
assigned a monthly and annual savings goal?
Management’s view of
Procurement
• “It is much harder for top management to judge
that their purchasing people are doing a good
job. As a profession we have not been very
good at measuring our performance, therefore
we can hardly gripe when salespeople come to
call in their latest BMW while we are driving
around in ancient Nissans”
(Roylance, 2006)
Are we willing to change the status
quo?
• Many public procurement professionals are
happy with the status quo and do not want the
requirements to meet similar performance
targets that salespeople are required to meet
(Roylance 2006)
• Public Procurement Professionals must be
willing to identify and adopt meaningful
measurement targets in order to show we add
value to the organization
Procurement Measurement
Systems
• If we do not measure the value we add; how
can we expect others to recognize it?
• Procurement Measurement Systems measure
the effectiveness (and the efficiency) of the
procurement function
• Widely used in the private sector and the
European public sector, they are just starting to
be recognized, understood and implemented in
the United States public sector
Procurement Measurement
Systems
• Provide the procurement professional with the
information and data to tell their story of adding
value to the organization
Balanced Scorecard
• Establishes a set of strategic performance
metrics to support the organization
• Provides elected officials, senior management
and even the taxpayers with a detailed view of
the procurement organization’s performance
over a period of time
• Reviewing these metrics on a regular basis
allows you to identify areas that may need
improvement
• Identifies the accomplishments of the
procurement organization
Strategic performance metrics for a
Balanced Scorecard
• Reduce the cost of products and services
• Identify new sources of procurement related
revenue
• Leverage organization buying power
• Meet or exceed customer expectations
• Increase spend with local suppliers
• Increase spend with diversity owned suppliers
• Update internal processes and redesign to
improve efficiency, increase compliance and
improve customer satisfaction
The Profit and Loss Measurement
System
• It is difficult for elected officials and senior
management to judge if their procurement
organization is doing a good job
• Most elected officials do not know how effective
their procurement organization is
The Profit and Loss Measurement
System
• As a result, many procurement organizations are
considered a necessity that provides very little
strategic value (Roylance 2006)
• The procurement organization is viewed as a “cost
center” that adds to the overhead of the
organization
• When this is the case Elected Officials and
Management may even try to reduce
procurement’s FTE’s during difficult financial times
The Profit and Loss Measurement
System
• How do we change elected officials and top
managements view of procurement as just
another “cost center”?
• We must start thinking of the procurement
organization as a commercial entity, as a
business within a business
The Profit and Loss Measurement
System
• Two principal concerns for elected officials are
taxes (revenue) and expenses.
• Public Procurement has the ability to lower
expenses, which would reduce the need for
revenue (taxes)
• Public Procurement has the opportunity to be a
strategic player
• We do no take advantage of this opportunity to
sell this benefit to elected officials and other
stakeholders
The Profit and Loss Measurement
System
• When procurement savings are discussed,
quite often they are met with skepticism by top
management and finance personnel
• Procurement’s expenses are rarely mentioned
by the procurement professional when
discussing cost savings
• There is no agreement on cost savings
definitions between procurement and top
management and finance
The Profit and Loss Measurement
System
• What top management and elected officials really
want from procurement is a bottom-line profit
(revenue or value) contribution
• Most elected officials have a business or legal
background
• By presenting procurement’s contributions in a
financial accounting manner (Profit & Loss
Statement) you will be able to show the value the
procurement function brings to the organization in a
manner that both top management and finance
executives understand (Roylance 2006)
The Profit and Loss Measurement
System – How Does it Work?
• Producing a simple profit and loss statement
for a procurement organization is not a difficult
task
• The idea behind the P&L Statement is to
identify all revenue and expenses associated
with operating the procurement function
• Start with your annual budget
• You will also need to maintain some sort of cost
savings record or log
P&L Statement - Revenue
• Some common examples of budgeted revenue
for the procurement function include:
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Surplus Sales revenue
Vending revenue
Interfund revenue
Centralized Contract Fee revenue
P&L Statement - Revenue
• A second source of revenue is various Cost
Containment activities which include:
– Contract savings – current contract prices compared to
previous contract prices
– Cost Avoidance
– Contract Extension Cost Savings
– P-Card Administrative Cost Savings
– eProcurement transaction savings
– Improved Terms
– Logistics and Inventory Savings
– Revised Specification Initiatives
– Elimination of Purchase requests
P&L Statement - Revenue
• A third source of revenue is from Revenue
Generation Activities which include:
– Negotiated Revenue increases on revenue
generating contracts
– Rebates negotiated/received
– Refunds from Audits of contract payments (Utilities,
Telecommunications)
P&L Statement - Revenue
• The total of your Budgeted Revenue, Cost
Containment Activities and Revenue
Generation Activities is the total income entered
on the profit and loss statement
P&L Statement - Expenses
• Your procurement organization will have both
direct and indirect expenses. Some examples
of direct expenses include:
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Wages
Overtime
Travel
Fringe Benefits
Training
P&L Statement - Expenses
• Examples of indirect expenses include
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Equipment
Supplies
Contractual Expenses
Telephone
IT
Repairs
Utilities (Light, Heat, Power)
Rent
P&L Statement – Net Profit
• Net Profit is the total revenue less total
expenses and shows the contribution to the
bottom line of the organization
P&L Statement – Breakeven Goal
• The goal of every public procurement
organization should be to cover their annual
expenses by the revenue and cost savings
achieved during the fiscal year
P&L Statement –
Market the Results
• By using a profit and loss measurement
system, the results can be marketed in a format
that elected officials and finance executives are
familiar with and one they can appreciate
(Roylance 2006)
Savings Must be Factually Proven
• All figures used in the profit and loss statement
must be accurate and factually proven
• You must work with your finance executives to
come to agreement on what will be considered
genuine savings, and what will not
• Documentation of savings and revenue
generation activities should be of sufficient
caliber to satisfy the scrutiny of external
auditors
Example – 2008 P&L Statement
Rockland County’s Results
• Rockland County’s results from tracking cost
containment activities, revenue generation
activities, and budgeted revenues and
expenses were a net profit of over $1 million in
2008
• The Profit and Loss Measurement System was
the subject of an article in an issue of
Government Procurement Magazine
Examples – Cost Savings &
Revenue Generation Definitions
Other Procurement Performance
Metrics
• There are many other Procurement
Performance Metrics that can be utilized to
track the performance of the procurement
function
• Utilization of such performance metrics will
enable the Procurement Function to quantify
results of business goals such as cost
containment, contract compliance, training, use
of technology and other value added benefits
the procurement function brings to the
organization
Other Procurement Performance
Metrics
• Europe and the U.K. are far ahead of the U.S.
Public Sector when it comes to measuring
procurements performance
• The national government in the U.K. sets Local
Performance Indicators for Procurement
• Download the publication Local Performance
Indicators for Procurement at:
http://www.idea.gov.uk/idk/aio/1721848
Other Procurement Performance
Metrics
• Strategy Implementation - % of milestone
activities completed in the organizations
Strategic Plan
• Skills Development – Average time per Buyer
spent on structured training in procurementrelated skills
• Aggregation - % of corporate spend aggregated
through annual term contracts
• Aggregation – % of corporate spend
aggregated through cooperative purchasing
efforts with other public sector organizations
Other Procurement Performance
Metrics
• Sustainable Procurement - % of annual term
contracts awarded following best practice on
sustainable procurement
• Local Government Market #1 - % of corporate
spend placed with small and medium
enterprises
• Local Government #2 - % of corporate spend
placed with non-profit and social enterprise
organizations
Other Procurement Performance
Metrics
• Local Government #3 - % of corporate spend
placed with ethnic minority businesses
• Internal Customer Satisfaction - % of all
responses either very or fairly satisfied
• Supplier Satisfaction - % of all responses either
very or fairly satisfied
• Predictability – Average time from publication of
official solicitation notice to contract signature
• Energy Price comparison of gas, electricity, oil
and water
Other Procurement Performance
Metrics
• Commodity goods price comparison – a
“shopping basket” of 10 commodity goods
• Average minimum cost of issuing an order –
total cost from requisition to payment
• Average Invoice value – Corporate spend
divided by total number of invoices
• Accuracy of deliveries - % of orders that were
correct when received
• Average spend per supplier – Corporate spend
divided by the total number of suppliers
Other Procurement Performance
Metrics
• Percentage of corporate spend through
electronic orders
• Percentage of invoices received electronically
• Percentage of corporate spend through
electronic sourcing
• Percentage of orders raised electronically
• Percentage of invoices paid electronically
• Percentage of corporate spend through P-cards
Other Procurement Performance
Metrics
• Minority Business satisfaction with the
Procurement Function
• Small and medium sized business satisfaction
with the Procurement Function
• Non Profit sector satisfaction with the
Procurement Function
Sources for Additional Information
• Marketing 101 for the Procurement
Professional – NIGP One-day Class
• Purchasing Performance – Measuring,
Marketing and Selling the Purchasing Function
(Roylance, D.)
• Procurement Marketing – A Strategic Concept
(Koppleman, U.)
• Measuring Purchasing Performance (The
Chartered Institute of Purchasing & Supply)