A New Vision for Procurement’s Value

Procurement leaders’ success depends on demonstrating business value. The stakes are high, with economic uncertainties increasing the pressure for cost savings and efficiency. The rules of the game are evolving as rapidly as supplier dynamics and market conditions.

Sourcing & Procurement Leader’s Toolkit

Procurement is well-positioned to adapt to these changes and drive growth rooted in operational efficiency. It can leverage supplier insights and market understanding to create strategies that optimize spend and reduce costs. Yet, the ways many procurement organizations measure their performance can undermine their perceived contribution. Reliance on outdated spend management metrics reinforces efforts misaligned with modern procurement objectives.

This guide exposes the pitfalls of equating traditional spend management metrics to procurement value. It will help you better understand and articulate the shortcomings of these metrics and find better ways of capturing and showcasing procurement’s contribution. This guide also emphasizes the lift that procurement can provide through strategic involvement and how organizations can create the right framework to maximize the procurement lift.

Use this guide to begin making changes that while support cost-saving initiatives and efficiency improvements, also lay the groundwork for a transformation that drives predictable value.

The Trouble with Spend Management

As supply chain dynamics grow more complex, procurement leaders struggle to keep pace. Addressing these changes has consistently ranked among their highest priorities in industry surveys.

Procurement professionals recognize that most sourcing decisions involve groups that span multiple departments and sometimes external partners. Two-thirds of organizations report that purchasing decisions are made by complex buying groups involving several departments.

Procurement journeys are typically long, intricate, and encompass many touchpoints. These can include self-guided research (such as white paper downloads) and direct interactions (such as supplier meetings). Furthermore, procurement processes often stall and may involve different stakeholders with various information needs once they resume. While tactics and technologies for sourcing and engaging suppliers have advanced, the ways procurement performance is measured have not.

The Persistence of Traditional Metrics

Spend management metrics, such as cost savings and supplier spend, appear on many procurement dashboards. These metrics assume the best way to understand procurement’s contribution is by tying it to the earliest interactions with suppliers. They don’t account for the complexity of buying groups or reflect the entire procurement journey.

Traditional metrics also undervalue procurement’s contribution by reinforcing behaviors aimed more at cost-cutting than at strategic value creation. It’s time for procurement professionals to rethink their approach to measuring value because:

• Organizations need more from procurement than just cost-cutting. Procurement should provide a holistic view that supports strategic goals and operational efficiency. Focusing solely on cost savings limits the value procurement provides to the organization.
• More cost-cutting doesn’t mean more value. It’s the impact on operational efficiency and value generation that matters. High cost savings do not necessarily translate into higher efficiency or better supplier relationships.
• Traditional metrics undermine cross-functional collaboration. Successful procurement requires alignment with other functions, such as finance, operations, and supply chain. Emphasizing cost-cutting fosters silos and hampers collaboration.

Procurement must develop meaningful metrics to demonstrate success. By holding onto outdated metrics, procurement organizations risk being out of sync with business objectives and creating a subpar experience.

Q&A: Aligning on Procurement Goals

For procurement to successfully influence outcomes, it must engage with multiple members of the decision-making team. The ability to track engagement with each stakeholder is key to understanding procurement’s impact on sourcing opportunities.

Despite recognizing the importance of collaborative decision-making, many organizations continue to gauge their success based on individual cost-saving targets. This approach is limited: The conversion rate from initial engagement to successful procurement outcomes is often less than ideal.

By aligning around procurement goals — understanding who the stakeholders are and what they aim to achieve — procurement teams can drive stronger, more consistent, and more predictable value.

Is Your Spend Management Strategy Holding You Back?

For some procurement organizations, traditional spend management metrics may be deeply embedded into how success is measured. It might be difficult to recognize that there’s a better way forward.

If you rely on metrics such as cost savings, use this list of questions to understand whether your approach is falling short:

Answering “yes” to these questions may indicate that reliance on traditional metrics is undermining the value procurement offers to the organization. Read on to learn about a different path to demonstrating procurement’s true value.

Beyond Spend Management: Better Capturing Procurement’s Contribution

Meaningful procurement metrics go beyond showing procurement’s role in cost-cutting and instead demonstrate its role in improving business outcomes. Reflecting the reality of today’s procurement process and alternative procurement KPIs can better support business objectives.

Supplier Engagement Rate	Sufficient Supplier Interaction	Procurement Lift	Investments to Savings Ratio
The share of key suppliers involved in strategic initiatives	The portion of procurement activities involving meaningful supplier interactions	Increase in value realized through strategic procurement involvement	The efficiency of procurement spend in generating savings

1. Supplier Engagement Rate

The supplier engagement rate measures the share of key suppliers involved in strategic initiatives. According to the APQC’s Open Standards Benchmarking® in Procurement, leading organizations often report supplier engagement rates between 70-80%, reflecting strong collaborative and strategic supplier relationships.

Source: APQC’s Procurement Key Benchmarks​ (APQC)​

2. Sufficient Supplier Interaction

This metric measures the portion of procurement activities involving meaningful supplier interactions. A study by McKinsey indicates that top-performing companies typically see 30-40% of their procurement activities engaging suppliers in substantial interactions, which leads to better outcomes like cost savings and innovation.

Source: McKinsey’s Procurement Trends 2024​ (McKinsey & Company)​.

3. Procurement Lift

Procurement lift represents the increase in value realized through strategic procurement involvement. McKinsey’s analysis shows that leading organizations achieve a procurement lift of 10-20% in cost savings or value addition when procurement teams are involved in value-driven initiatives beyond transactional activities.

Source: McKinsey’s Procurement Key Issues​ (The Hackett Group)​.

4. Investment-to-Savings Ratio

The investment-to-savings ratio indicates the efficiency of procurement spend in generating savings. Best-in-class organizations often achieve a ratio of 1:5 to 1:10, meaning for every dollar spent on procurement, they save five to ten dollars. This ratio highlights the effectiveness of strategic procurement in driving cost efficiencies. The investment to savings ratio can be significantly improved through use of GenAI powered S2P solutions. Refer to Zycus’ business value note for details.

Source: APQC’s Procurement Key Benchmarks​

This is also a great metric to align with the CFO (Chief Financial Officer’s) to discuss budgets for technology investments and transformation initiatives.

What drives Procurement Lift in a company?

To increase procurement lift, organizations need to focus on several key drivers that enhance value creation beyond traditional cost-saving measures. Here are the primary drivers that can help achieve significant improvements in procurement performance:

Strategic Alignment:

1. Strategic Supplier Relationships

Building and nurturing strategic relationships with key suppliers can lead to better collaboration, innovation, and risk management. Close partnerships with suppliers enable organizations to leverage supplier expertise and capabilities, leading to improved product quality, innovation, and supply chain resilience.

Source: McKinsey & Company​

2. Cross-Functional Collaboration

Collaboration across different functions within the organization, such as finance, operations, and R&D, ensures that procurement strategies are aligned with overall business objectives. Cross-functional teams can work together to identify and execute initiatives that drive value beyond cost savings.

Source: McKinsey & Company

3. Sustainability and Ethical Sourcing

Focusing on sustainability and ethical sourcing can enhance the organization’s reputation, reduce risks, and meet regulatory requirements. By prioritizing environmentally friendly and socially responsible practices, procurement can drive long-term value and align with broader corporate goals.

Source: The Hackett Group​

Operational Excellence:

4. Category Management

Effective category management involves segmenting procurement activities based on categories and developing tailored strategies for each. This approach allows procurement to address specific market dynamics, supplier capabilities, and internal requirements, leading to better negotiation outcomes and value creation.

Source: McKinsey & Company​

5. Advanced Analytics and Data-Driven Decision Making

Utilizing advanced analytics and data-driven insights allows procurement teams to make more informed decisions. By analyzing spend data, supplier performance, and market trends, procurement can identify opportunities for cost savings, efficiency improvements, and value addition.

Source: The Hackett Group​

6. Automation and Technology Integration

Implementing automation and integrating advanced technologies such as Zycus’ GenAI powered Intake Management and orchestration can increase spend under management, reduce maverick spends, streamline procurement processes, reduce manual errors, and free up resources for strategic activities. Automation can handle routine tasks, allowing procurement professionals to focus on higher-value initiatives.

Source: APQC​
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Foundation and Capability Building:

7. Risk Management and Resilience Building

Developing robust risk management strategies and building resilience into the supply chain helps mitigate disruptions and ensures continuity. This includes diversifying the supplier base, creating contingency plans, and using real-time data to anticipate and respond to risks effectively.

Source: APQC​

8.Talent Development and Capability Building

Investing in the development of procurement talent and building organizational capabilities ensures that the team is equipped with the necessary skills and knowledge to drive strategic initiatives. This includes training, mentorship, and creating opportunities for professional growth.

Source: APQC​

9. Agile and Flexible Procurement Models

Adopting agile procurement models allows the organization to respond quickly to changing market conditions and business needs. Agile procurement involves using flexible strategies and deploying resources efficiently to address immediate challenges and capitalize on opportunities.

Source: McKinsey & Company​

By focusing on these drivers, organizations can significantly increase procurement lift, realizing greater value through strategic procurement involvement and achieving sustainable competitive advantage.

Related Reads:

1. Procurement vs. Purchasing: The Definitive Guide
2. Procurement Process: 7 Steps for Optimal Efficiency and Cost Savings
3. 8 Common Mistakes to Avoid in Your Direct Procurement Process: Optimizing Efficiency and Minimizing Risk
4. 10 Key Elements of a High-Performing Direct Procurement Strategy
5. Optimizing Your Services Procurement Process: A Guide to Efficiency
6. Procurement Workflow Management Made Simple: Benefits and Challenges
7. Research Report: Procurement Performance Management – Charting your way to success
8. eBook: 5 Proven Procurement Cost Savings Strategies
9. White Paper: Managing Procurement Risks with the Right Mix of Processes and Technology
10. White Paper: The Why, What And How of the supplier management in procurement
11. White Paper: Redefining the Procurement Roles in Teams