Top Procurement KPIs Across Source-to-Pay (S2P)

Key performance indicators (KPI)?are a set of quantitative indicators that can help us evaluate business performance over a period. Specifically, they allow us to monitor the organization’s efficiency in achieving goals.

There is an old saying in procurement: "What gets measured gets done" However, knowing what and how to measure underpins the success of your performance management framework.

Let’s right away jump into each KPI –

1. Environmental, Social, and Governance (ESG)

Achieving ESG goals has really jumped into top 5 most important KPI’s among the boards of directors, investors, customers, employees, and the general public. Companies are expected to prioritize meaningful ESG initiatives, measure impact, and be transparent about their progress.

Post Covid, supplier diversity is a growing corporate ESG priority that can be readily measured with data and technologies available today.

Spend With Diverse Suppliers measures how much of a company’s total spend goes to suppliers classified as diverse across a range of categories established by governments around the world. Government contractors are required to track their spend with diverse suppliers and meet aggressive targets (15% of their total spend, in the U.S.)

2. Source-to-Contract

Being able to deftly create, access, and apply contracts is essential. Quickly moving the results of sourcing activities and risk mitigation terms into contracts increases agility and maximizes the value of supplier negotiations.

Below are the top 4 KPI's under source-to-contract.

2.1 Contract Management Cycle Time

Contract Management Cycle Time is the time between requesting a contract and the contract being signed.

Typically, companies have already done the up-front work of sourcing a supplier to meet a business need. A contract is necessary to formalize the relationship. Long contract cycle times delay the business benefits of new agreements.?Faster time to execute contracts also removes uncertainty in the overall supply chain, leading to better planning and quicker business enablement.

2.2 Structured Spend

Structured Spend describes the percentage of spend that goes through company-hosted and vendor-hosted catalogs (a.k.a. punch-outs).

Catalogs and guided forms drive control, efficiency, and lower prices. Standard item descriptions with preferred prices and terms avoid the proliferation of items and suppliers that result from ad-hoc purchases.

Maximizing structured spend offers a scalable way to manage change and enables your business to adapt quickly as goods and services are introduced.??

2.3 On-Contract Spend?

On-Contract Spend measures the percentage of spend put through pre-negotiated contracts to enable better prices and terms.

Having greater on-contract spend reduces the financial risk and business costs from supplier liability or wrongdoing by channeling spend to suppliers who have risk-related contract protections.

Greater spend on contract enables procurement to negotiate even better terms and lower pricing in the future by highlighting the fact that a large amount of spend has gone through existing contracts.

2.4 Primary Suppliers

Primary Suppliers is the percentage of total suppliers with whom a company spends 80% of its total spend.

Spending with tail suppliers is undesirable because you aren’t consolidating your spend to get better prices. It also creates excessive costs and potential danger, since resource constraints often force risk management efforts to prioritize suppliers with greater spend.

Reducing tail suppliers (increasing primary suppliers) generates increased value through negotiated contracts, greater buying power, lower risk, and favorable payment terms.

3. Procurement

Procurement's success hinges on several factors including: having complete visibility into company spend, ensuring strong relationships with suppliers, and driving digitalization.

Below are the top 4 KPI's under procurement.

3.1 Electronic PO Processing

Electronic PO Processing describes the percentage of total purchase orders that are approved and received by suppliers electronically.

Many companies still struggle with highly manual PO processes. Digitizing purchase orders includes the electronic transmission and supplier confirmation of PO's. This drastically reduces low-value, manual work while accelerating the process to manage, confirm, and change PO's.?

3.2 Requisition-to-Order Cycle Time?

Requisition-to-Order Cycle Time is the average time it takes to process purchase orders, from the initial requisition to the final, approved PO.

Shorter cycle times improve employees’ experience with the ordering process, creating greater user adoption of spend management systems and maximizing spend under management. Reducing cycle times increases supplier satisfaction, thereby strengthening supplier relationships.

3.3 Services Procurement Work Confirmation Cycle Time

Services Procurement Work Confirmation Cycle Time is the time between when the supplier submits a time sheet to the customer and when the customer completes approvals.?

Better visibility into actual costs and progress of projects helps managers proactively identify and reduce the impact of any issues sooner.??Shorter cycle times improve supplier relationships by giving suppliers better insight into work that’s been approved, reducing billing cycle times.

3.4 Pre-Approved Spend

Pre-Approved Spend is the total amount of invoiced spend linked with approved PO's.

Spend that’s pre-approved is more likely to go onto negotiated contracts, resulting in lower prices and better terms. Pre-approval also helps avoid unnecessary spend and ensures that budget limits are met.?

Pre-approved spend gives finance teams visibility into spend that’s committed but not invoiced, making it easier to generate accurate accrual estimates. It also helps to avoid paying fraudulent invoices via improved invoice matching against PO's.

4. Supplier and Third-Party Risk Management?

The relationship between buyer and supplier is so critical that it can determine whether business continues or suddenly stops during a disruption or inciting incident. Creating mutual trust with suppliers is essential for reducing third-party risk.

Below are the top 3 KPI's

4.1 Supplier Information Management Cycle Time

Supplier Information Management Cycle Time is the time it takes for suppliers to respond to digital requests to update their supplier information.

Inaccuracies or gaps in supplier data can lead to major problems for businesses. Suppliers may change their bank accounts or payment information and fail to notify buyers, resulting in bank fees and delays

Suppliers managing their own information through a self-service digital process prevents error and fraud — no more manual data entry errors, no unauthorized changes.

4.2 Risk Management Evaluation Completion Rate

Risk Management Evaluation Completion Rate measures the completion rate, by third parties, of digitally administered risk questionnaires.?

Businesses interact with many third party suppliers of goods and services; some carry out critical functions for the organization. It’s important to identify the suppliers and any subcontractors who represent risk in areas like information security.

By sending out risk questionnaires to critical third parties digitally, you can more efficiently understand the risk and mitigation measures in place, allowing you to assess a greater number of suppliers and perform vetting more frequently and consistently.?

4.3 Risk Management Evaluation Cycle Time

Risk Management Evaluation Cycle Time is the time it takes for third parties to respond to risk assessments.

The faster critical third parties complete risk assessments, the faster the information can be evaluated and scored, and the greater the service levels to the business can be. Buyers can make decisions regarding supplier preferences and alternatives faster.

5. Invoicing

Digital invoicing prevents invoices from getting lost or forgotten. This helps accruals because you’re able to process more invoices each period before closing AP. If invoices are received just prior to close, they are more likely to be processed by the time of close because digital invoice processing time is faster.

Below are the top 3 KPI's

5.1 Electronic Invoice Processing

Electronic Invoice Processing represents the percentage of invoices processed through any electronic, highly automated means.

Replacing paper with electronic invoicing improves compliance by having automated controls that catch out-of-compliance invoices. Additionally, suppliers can gain real-time visibility into invoice approval and payment status, which can streamline dispute management.

A high percentage of electronic invoices also makes it more likely that payments are made on time, not sooner or later, which, in turn, optimizes working capital and strengthens supplier relationships. It also ensures that early payment discounts can be leveraged when desired, since invoices with early payment terms are automatically paid early, thus ensuring compliance.

5.2 Invoice Approval Cycle Time

Invoice Approval Cycle Time is the average time from when an invoice enters the system to the time that it’s approved for payment (but not necessarily paid).?

With paper invoices and disjointed approval processes, it can take days, if not weeks, to approve a simple invoice. Accounting teams do not have visibility into the backlog of unprocessed invoices.?

Faster approval times help avoid late payments, penalties, and potential supplier frustration, which in severe cases may even void contracts or lead to the refusal of future projects.??

5.3 First-Time Match Rate

First-Time Match Rate describes the percentage of invoices that are two-way or three-way matched with POs and receiving documents without the need for exception handling. A high match rate indicates efficiency, since invoices that fail the match have to be reviewed manually.??

A high match rate can also signal the effectiveness of compliance policies and substantially benefits risk mitigation.

6. Payments

In today’s remote work environment, paper-based payments are a burden as they increase logistical complexity for manually approving and disbursing payments to suppliers.?

Digital payment solutions offer many advantages in agility and efficiency. By digitizing the data transfer process for approved invoices and expenses from your P2P system to the bank to make payments, you break down silos, enable automatic reconciliation, and mitigate risk of error and fraud.

Below are the top 3 KPI's

6.1 Invoices Paid Digitally

Invoices Paid Digitally describes the percentage of invoices that are tied to digital payments out of all the total electronic invoices processed.

Increasing digital payments reduces transaction fees by optimizing payment rails, improves operational efficiency by reducing manual effort, and also reduces the possibility of errors, thereby mitigating risk.?

Digital payments offer a chance to optimize working capital, increase savings through rebates for virtual cards, realize early pay discounts, and strengthen relationships with suppliers even further by reducing the amount of time and error in paying suppliers.

6.2 Suppliers Using Digital Payments

Suppliers Using Digital Payments reflects the percentage of suppliers who receive payments digitally, i.e. not via paper checks or external bank-to-bank transfers.

Digital payments streamline your AP process, since all of your payments are made from the same system. You can track and address payments in one place, increasing efficiency.

Digital payments also ensure that there are proper controls in place, increasing compliance. By setting rules on who can approve and how the approval chain works, digital payments reduce opportunities for bad actors to commit fraud.

6.3 Payment Batch Approval Cycle Time

Payment Batch Approval Cycle Time measures how quickly a payment batch made to a supplier can be approved.

Streamlining the batch approval process digitally allows for greater automation, faster and more secure approvals, and overall increased efficiency.?By paying suppliers faster and on time, you strengthen supplier relationships. You can take this further by leveraging the benefits of early payment discounts.?

Today’s greatest business challenges require surpassing what procurement, finance, supply chain, and IT functions have traditionally done alone. Every spending decision within a company carries the potential for exponential impact on business and the world. Uniting around the common thread of business spend is essential for fueling widespread success.?

Insight Plum?is a purpose driven start-up which can help you modernize and improve your procurement processes and performance. We are a team of??Procurement Experts who drive meaningful procurement transformation &?skill enhancement.

Insight Plum offers free maturity assessment for your procurement function and skill assessment for individuals to help you understand the current state and roadmap to best-in-class.

Visit the link to book your free assessment https://www.insightplum.tech/contact#BookFreeAssessment

To learn more, visit our website- https://www.insightplum.tech/

Do check our blog on 'The Great Procurement Gap' written by our Founder and CEO, Mayank Chandla, which explains the current procurement and industry challenges & why Insight Plum was born.

https://www.insightplum.tech/addressing-the-great-procurement-gap