28 September 2010 | Lindsay Clark
What is ‘world-class’ procurement? Lindsay Clark finds while benchmarking performance is helpful, buyers might not be doing it as well as they could.
Former US defence secretary Donald Rumsfeld (pictured) baffled the world’s media in 2002 with a now legendary thesis about unknown unknowns. Behind his perplexing explanation lies a serious point, which could be pertinent to your business.
Professor Andrew Cox is chairman of the advisory board for not-for-profit organisation the International Institute for Advanced Purchasing and Supply (IIAPS), which counts global firms such as Shell, Halliburton and the Lloyds Banking Group among its members. He says the problem with judging world-class performance of individuals or departments is many buyers do not know what world-class is.
“Sometimes they think they know what good practice is and then, when you actually demonstrate it, they say, “I didn’t realise you could do that”.
So it is partly an educational process,” he tells SM.
For example, Cox said, procurement teams benchmarking their power and leverage methodology might use Porter’s Five Forces, which is based on five variables. Most buyers were surprised to learn there are benchmarks on the market with 142 variables.
In research expected to be presented at the E-World Purchasing and Supply conference this week [28-29 September], IIAPS shows where a score of 100 represents world-class procurement performance, most organisations benchmark themselves between 60 and 90. But when audited by the Institute, these scores fell by between 10 and 20.
This week’s SM100 survey illustrates many buyers still see value in self-benchmarking – 72 per cent of respondents say they believe in measuring their own performance.
“Benchmarking is always a good thing,” says Mike Flanagan, a retail purchasing manager. “You rate yourself, first, have internal customers rate you, then external ones. This would be followed by a rating in general by industry. It is very similar to comparing the yearly salary survey.”
Gary Moore, procurement performance manager, BAE Systems Insyte, says benchmarking your own department is a good idea, with some limitations. “The difficulty is ensuring the benchmarking model allows like-for-like comparisons – a great procurement department in retail is going to look and feel different than, say, a procurement team supporting local government social services. There will be some core similarities but procurement operates in such a wide variety of sectors, industries and technologies that it won’t always feel, for some, that apples and apples are being compared.”
In the SM100 survey, a significant minority, or 26 per cent, say they do not believe benchmarking your own organisation provides valuable insight. Two per cent are undecided.
Tim Weston, independent procurement consultant currently working at ING Direct says: “If the case exists to perform a function then the only thing that matters is whether it’s correctly constituted and aligned to the structure and objectives of the organisation. Its performance is a matter for the management chain. An external comparison will reveal very little about the function unless compared with an identical organisation. Anyone proposing such a benchmark exercise should find a better use for their consultancy budget.”
Benchmarking relies heavily on subjective or anecdotal evidence that, in itself, is not enough to make it reliable, says Andy Foulis, head of procurement and FM services at the Highlands and Islands Enterprise.
“Benchmarking should ideally be carried out by peers in other organisations as other internal departments may have insufficient insight into how a function actually contributes to the parent organisation’s goals. The actual usefulness of the process is doubtful as different organisations may require significantly different strengths in a particular area – there is no one-size-fits-all solution.”
However, professor Cox makes a case for benchmarking to be done with greater detail and sophistication, in particular across business functions. “People are human beings and they want short cuts,” he says. “But there is no short cut to competence.”