Savings Metrics, Rat Farms and KPIs Gone Bad

Decades ago, goes the story*,  the French colonialists grew tired of the rat population in Hanoi.  So the French offered a bounty on dead rats.  What happened?  The industrious Vietnamese began raising rats.

Therein lies the trouble with metrics.  Be careful what you measure.  And what metric is more important than savings in the procurement world?

You’d think that such a basic word as savings would have a pretty well-agreed definition – especially when the S word is the focal point of just about every RFP process.  Unfortunately, there are very big differences in how buyers define and measure savings.  Let’s have a look at the slightly satirical implications for travel procurement.

1. Old versus new spend. This is by far the worst metric for gauging procurement’s effectiveness – and yet some companies still use it.  Yes, procurement contributes to the reduction in spend by getting better prices, but since procurement never has control of anybody’s travel budget, they should not be held accountable for this type of metric.

Unintended consequence: negotiate for tiny discounts, on the theory that there will be less overall travel if unit prices are high.

2.  (Old contracted versus new contracted unit price) x volume. A sensible approach for steady-priced categories.  Buyers love to negotiate price, and many sellers have a reptile-brain function that makes them reach for the price-reduction lever as their first defense mechanism.

Unintended consequence: Buyers negotiate big discounts on the highest-priced units (first class fares, 5-star hotels) and are happy to see travelers use these products. Bigger volumes times big unit price reductions add up to a lot of “savings”.

3. (Published versus negotiated unit price) x volume.  Unit prices change too much (think airfares), so let’s make it all about the discount.

Unintended consequence: Buyers favor suppliers with high margins, because they are the only suppliers that can afford to give big discounts. The low-cost, low-margin suppliers get frozen out because they can’t deliver any “savings” to these buyers.

My point is that the way you measure savings is really important.  Is there a perfect definition?  No, but since you’re going to have to use something, just be sure you’ve given some thought to those unintended consequences.

* Courtesy of Peter Sheahan, who told this story as part of his terrific speech at the NBTA/ISM conference yesterday in Tampa.

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5 Responses to Savings Metrics, Rat Farms and KPIs Gone Bad

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