Procurement analytics: 8 key metrics for measuring performance
It’s often difficult to quantify source-to-pay activities within healthcare organizations, but a standardized approach can reveal important insights.
If you’ve ever tried to derive an enterprise view of total purchased services or non-clinical spend, you know how difficult it can be. Organizations typically wrestle with multiple procurement systems, different purchasing teams and departments, decentralized sourcing and fragmented spend and lack of purchasing formularies.
These challenges limit access to complete and comprehensive data, which makes it difficult to run meaningful analysis to support cost or quality improvement decisions on purchased services spend.
Spend analytics can be a powerful tool for visibility into a wide range of critical information about an organization’s purchasing that isn’t readily accessible via individual procurement systems. The ability to understand how much you’re spending, when, with whom and how often — across multiple dimensions — can reveal opportunities to improve spend management and deliver savings, business continuity, compliance and risk management value to an organization.
While spend analytics may have been sufficient in the past, you deserve more from your data. With purchased services accounting for as much as 30 percent of a hospital’s nonlabor expense, a focus on data analysis of spend holds great potential for significant savings.
Procurement analytics vs. spend analytics
Procurement analytics provides insight into how your organization is spending, and that’s a key to identifying true areas of opportunity to change internal process and policy, streamline procurement operations and improve the quality of spending.
Procurement analytics considers data across the entire procurement workflow, from sourcing through procurement through payment. Ultimately, a broader perspective on procurement practices provides insightful information to support the core elements of operational excellence across a healthcare organization.
For purchased services and other non-clinical spending, getting access to the data is half the battle. Decentralized sourcing and purchasing practices for non-clinical services and supplies result in fragmented data sources, making it difficult to access and analyze procurement practices and find opportunities for cost savings.
In addition, decentralized purchasing leads to misaligned definitions on the data. A critical, initial step in reviewing procurement analytics is to document and federate common definitions of each data set across the organization so the data can be accurately mapped and analyzed. The concept of procurement analytics depends on total spend, which requires all data from all systems, mapped and in a single view for analysis, to establish and measure against key performance indicators.
Eight procurement analytics metrics
Eight metrics work together to provide a comprehensive view into total purchased service and non-clinical spend, and generally break into two optimization categories: sourcing process improvement opportunities and cost savings opportunities across the procure-to-pay workflow.
Spend under contract. Spend under contract analyzes the percentage of non-clinical spend with suppliers that have negotiated contracts. This enables you to focus on any spend that is not on contract and treat it as a marker for unmanaged or unnegotiated spend, which may reveal opportunities for cost savings.
Spend sourced. This metric analyzes the percentage of fiscal year spend on purchases reviewed in an RFI or RFP exercise to better understand where the sourcing team is actively testing the market for better pricing, different terms and conditions, or evaluating new suppliers. Like other metrics on this list, the focus should be on the exceptions, using the analysis to investigate any spending not sourced in the fiscal year for potential savings opportunities and sourcing process improvement.
Diverse spend. To support adherence to policies set forth by an organization’s supplier diversity initiatives and Diversity, Equity and Inclusion (DEI) programs, the diverse spend metric shows the percentage of spend with diverse suppliers. The definition of “diverse” can differ by organization but is generally defined as small business or businesses owned by women, veterans, LBGTQ+, disadvantaged or disabled people.
Spend under management. Spend under management analyzes whether spending is being actively managed by the sourcing team, revealing the degree of consistency and ongoing engagement by the sourcing team in managing categories and suppliers year over year.
Spend on a PO. The spend on a purchase order metric identifies the percentage of spending that had a purchase order created. The creation of a PO before ordering from a supplier indicates that the spending was planned and approved prior to committing to a supplier. It also makes managing accruals easier for the financial planning and analysis team because committed spending is easily identifiable. Some organizations will institute a “no PO, no pay” policy that requires a PO number to process and pay an invoice. However, a common loophole with that type of policy is known as “After-the-Fact PO Spend” and occurs when a PO is created after the spend was committed to the supplier.
After-the-fact (ATF) PO spend. Relying only on the spend on a PO metric can be misleading without the additional data from after-the-fact PO spend, which flags a PO as being after the fact if the PO creation date is after the invoice date. Together, spend on a PO and ATF PO spend provide a clear view of the percentage of spend that was correctly made using a PO, and illuminates targets to improve PO compliance — those that are ATF and those with no PO at all.
Payment terms variation. This metric will flag any invoice where the payment terms on the actual invoice differ from the payment terms in the contract (for example net 15 or net 30). This can result in the hospital paying an invoice earlier than necessary and not holding on to cash for as long as possible. This metric also helps manage supplier relationships to prevent future problems.
Payment cycle time. Payment cycle time measures the number of days required to pay an invoice, which can be averaged to indicate the scale and impact of any payment issues. For example, it is common to review invoice payment data to make sure your organization is paying invoices on time and avoiding late fees or penalties. But an important nuance to this metric is to make sure the organization is not paying invoices too early — another way to positively impact cashflow and EBITDA if detected and actively managed.
The path of least resistance is the one most taken. Policies tend to drive behavior to the easiest way to buy something, resulting in spending fragmentation and the risk of buying too much from too many different suppliers, and paying too much. Incorporating procurement analytics into data analysis routine helps uncover exceptions that can more easily identify and target for correction.
More importantly, a disciplined approach to leveraging the information from these analytics will drive an organization’s operational excellence model, with a data-driven framework and evidence to support operational strategy, encourage adherence to policies and minimize waste in managed processes.
Mark Flowers is a partner for OneMarket LogicSource Inc.