Why Having Price Down As A Measure Causes A Lack Of Ambition

Posted 11/05/2017

Our regular reviews of strategies for clients suggests that there are a whole host of challenges being faced by Category Managers. One of the most noticeable is an internal constraint placed by the organisation, the consequences of which are both material and significant. 

That constraint is having price change as such a significant measure for procurement organisations. Price variation drives a whole set of behaviours for procurement, and to the detriment of a huge range of potential value which is left to one side in category management. 

This isn't a single company failing: we see it everywhere, largely because Procurement effectiveness is still regarded as measured by experienced price. It’s not single sector either; we’ve seen it in Pharma, Food, Engineering, Finance, Retail, Media & Telecoms. 

The upside is that we understand it - stakeholders get it, we get it, it’s generally evident what’s happening. 

The downside is that we drive towards what we’re measured on, and strategies which develop often focus on the sourcing and price related elements to the exclusion of all else. 

Stepping back from the immediate procurement issue, it’s useful to reflect that poorly designed measurement driving the wrong behaviour has been the subject of research and alternative proposals for at least 27 years; the original papers by Kaplan and Norton on the concept of Balanced Scorecard were first published in 1990. 

Today’s radical thought is to suggest adopting the balanced scorecard concept more completely across procurement, as a means of reinforcing the concept that excellent procurement transformation will deliver a lot more than just a change in pricing. 

The balance in the scorecard can come from a range of the areas we all talk about: accessing innovation, reduction in inventory, time to market, supplier led innovation, supplier performance and, yes, price elements. Of course, others will contribute to the outcomes here, but we need to see broader measurement anyway. 

If we stick with price as our main measure, it causes a lack of ambition in the solutions we propose, as they will deliver things which are not going to be recognised or, apparently, valued. We should all be aiming to deliver the most we can from our commercial relationships, and that requires a broadness of thought and a degree of ambition which still needs a lot of encouragement. 

Let us know in the comments below how you want to adopt a balanced scorecard and we’ll keep pushing for great examples to share.

Tagged by topic: Business & Stakeholder Engagement , Cost Reduction , Procurement Transformation

  by Allison Ford-Langstaff

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