Is value the same as cost? Are you measuring this crucial KPI?
Let’s face it, businesses love a good KPI. As Peter Drucker’s timeless saying goes, “If you can’t measure it, you can’t manage it!” Indeed, many of the most successful companies in the world have or had good systems in place for measuring many different KPIs. But measurement alone is not enough; you also need to understand what the data is telling you, and then act on it. Corporate history is littered with companies that either failed to see the writing on the wall, or simply responded too slowly to what the data was telling them – the likes of Kodak, BlackBerry, Blockbuster etc. are all common examples of this.
KPIs are therefore important because they should drive your behaviour as an organisation (if they don’t, why are you bothering to measure it?). There is only one thing worse than not acting on what your KPI data is telling you, and that’s measuring the wrong KPIs in the first place – because the wrong KPI will drive the wrong behaviour.
The one KPI that is most often misunderstood is value vs cost. Too often the two are deemed to be one and the same. In procurement departments for example, cost-cutting is often the primary metric. Cost takes precedent over value, so their primary KPI is the amount of money that can be shed from the bottom line.
At face value this seems sensible; saving the organisation money is a good thing, right? But if the by-product of cutting a particular supplier negatively impacts on the organisation’s ability to deliver a good product or service to its customers, then that is clearly the wrong thing to do. Cutting the printer budget looks great on the bottom line, but if it means the business can’t print anything it hasn’t helped anyone. Procurement should therefore focus on the value of the services it purchases, not the cost.
So, how do you measure value? I’ll pick this up in the next post.