Benchmarks and Beyond: A Balanced Scorecard Helps Procurement Soar
Early in my career, when I was in the procurement group at Sun Microsystems, I had the privilege to watch our group leader successfully introduce the balanced scorecard, first to our group and then to the entire company.
This was a new concept at the time--or maybe not so new. In 1992, two respected Harvard researchers, Kaplan and Norton, wrote a big paper about the balanced scorecard, but they didn't cite any references. That was controversial, not because the model was bad, but because it was felt that they were not giving credit to some folks who had come up with the concept of the corporate scorecard in the '50s.
In fact, the model is excellent, and no matter what you call it or who gets the credit, after seeing it in action at Sun, I became convinced that using a four-part balanced scorecard that measures financial stewardship, process efficiency, customer service and internal capabilities is the key for procurement, or any group, to operate strategically.
Cost and process, cost and process
Before the balanced scorecard, I had been used to measuring the cost savings of our organization, along with some other metrics of process efficiency: turning over purchase orders, requisitions, and contracts. Being early in my career, I thought that was entirely how you measured an organization.
The balanced scorecard introduced two new areas to consider: Are we taking care of our customers, whether they be internal or external, and, as we're doing all this, are we also building organizational capability? Are we developing our people?
Only when you look at all four of these areas are you thinking about your future vision and strategy.
My boss was leading adoption of the balanced scorecard, but the concepts were also being adopted by the manufacturing group, and by operations, and logistics. Eventually, towards the end of the ‘90s, Sun used it on a very broad scale.
Today, the balanced scorecard is very well-known in business management. It's gone through iterations, but at its core, it's still those same four pieces. And it’s still just as relevant.
In my experience, most procurement groups today are good at two of the four parts, the financial measurements and process efficiency benchmarks—just like I was back then. The good news is that if you’re doing that, you’re halfway there. But by failing to balance those two metrics with the other two, you fall into a trap that I think probably half of indirect procurement groups are in today.
That trap is, they go to conferences and whine about the mavericks that are going around the procurement group, and they wish their companies would issue mandates for everyone to work with them.
Well, if that’s your gripe, you've failed to consider the customer service section of the scorecard.
Falling down on financial stewardship
I'll tell you how wrong this can go.
I once worked at a company that emphasized the policing nature of procurement--meaning we stopping people from buying, and issued them “citations” when they went around us. People avoided us like the plague. When we weren’t nagging and yelling at our business partners, we were complaining amongst ourselves that they weren't being collaborative.
Well, the only reason procurement exists in a company is to help other business groups get great suppliers, great quality, and great prices. If your internal business partners are avoiding you, and not telling you about big procurements coming up, you can't help them do the kind of sourcing and competitive assessment that will lead to lower prices and higher quality. That’s going to hurt you on the first part of the scorecard, financial stewardship.
That’s exactly what happened at that company. They had, on average, lower cost savings and lower quality suppliers compared against industry benchmarks.
Leveling up the organization
You can also go wrong by failing to consider the organizational capacity section of the scorecard.
When there’s a constant stream of new supplier deals coming down the pipe, and people want their purchase orders turned around, it's easy to get caught on a tactical treadmill and neglect thinking about how well you're developing the people in the organization.
Not only is that a risk to retaining the people you have, but in today’s world it becomes a challenge to attracting new people, because these days people write reviews on Glassdoor that say the company doesn't care about developing its people.
This is a hard needle to move. In one organization where I worked, we had gotten feedback along those lines in the annual employee satisfaction survey. We worked on organizational development for three years, and we saw our scores increase, but not dramatically.
That’s because it’s not just about growing individual people. You have to up-level everyone. If you're not growing all the people, you're not becoming a stronger organization. When your organization becomes stronger in the company, you deliver more value. Then the procurement organization becomes a much better group to work in.
Maturing in your journey
If you're in the very early stages of developing your procurement organization, it's okay to focus first on the more traditional financial stewardship and business process metrics. You've got to get your arms around those.
To grow your vision, strategy, and value to the company, you will have to quickly move into identifying specific goals and developing programs around the other two sides – stakeholder satisfaction, and how well you're developing your people and your organization. You cannot become mature in your journey of procurement unless you are looking at all four.
Take a look at your goals today. Look at your boss's goals. Frankly, a lot of bosses aren't going to have a balanced scorecard. That's no excuse. You can still have your own balanced scorecard. My boss at Sun did, and he ended up leading the entire company in that regard.
Report whatever your boss wants you to report, but take on the initiative to report the other sides, You don't have to use fancy jargon or cite Harvard articles. Just talk about how you're going to look at four areas. That's what will lead you, over time, to get that seat at the table and be looked at as a valued business partner in your organizations. And who knows? Maybe your boss will see that it’s beneficial, and you’ll be the one leading company-wide adoption of the balanced scorecard.
In my next article, I’ll be talking about how to develop a customer service scorecard. Meanwhile, if you’re looking for some good benchmarks for process efficiency, get the new Coupa Benchmark report.