Choosing a second supplier may cost more, but it makes a company less vulnerable to production disruptions. Investing in a relationship with a partner may not generate immediate savings, but it can provide access to new skills and technologies. All this is true, yet when the time comes to evaluate performance and award bonuses, the value of these decisions may go unrecognized because incentives for chief procurement officers (CPOs) and their teams of buyers remain primarily tied to profitability and cost efficiency.
Research conducted as part of SDA Bocconi's Procurement Lab identifies value measurement and incentive systems as critical to making procurement's strategic role a reality.
Across the companies analyzed, procurement and finance executives broadly share an understanding of the factors that create value. However, differences emerge when this shared vision is translated into performance indicators and incentives, particularly when the benefits to the company materialize over the medium to long term. Asking procurement teams to contribute to business continuity, innovation, and growth risks becoming an empty ambition if the results of their efforts go unrecognized.
How much value does a procurement function create?
Procurement departments are typically judged by how much they can reduce spending. That means negotiating better terms, controlling purchasing processes, and protecting margins are essential responsibilities. But when procurement is also expected to manage cost volatility, prevent supply disruptions, and identify innovations, measuring its performance primarily through costs is a limited metric. A decision that benefits the business may appear unsatisfactory when viewed through an overly narrow lens.
The research here grew out of a need expressed by Procurement Lab member companies, which selected the topic as a priority for further investigation. They wanted to understand how to strengthen procurement's position within the organization and make its contribution beyond cost savings more visible. The research questions address three interconnected issues:
- Which dimensions of corporate value can procurement influence?
- Do performance indicators (or KPIs) adequately capture these dimensions, and are they aligned with the finance function's priorities?
- Do incentive systems also reward decisions when the resulting benefits materialize over time?
The weakness of incentive systems
The researchers collected data through two separate questionnaires administered to procurement and finance executives at the same companies. Respondents could not see each other's answers, which made it possible to compare their respective perceptions of procurement's role. This phase was followed by interviews lasting approximately one hour, often involving both the head of procurement and the controller assigned to the function.
Eighteen of the Procurement Lab's 28 member companies participated in the study. These are large organizations operating across various sectors, from manufacturing and energy to services and pharmaceuticals. Given the characteristics of the sample, the objective was to identify different approaches and draw managerial lessons, rather than estimate how widespread each practice is across the broader business population.
The analysis begins by assessing a company's ability to generate cash flows both at present and in the future. Three main dimensions of procurement's contribution emerge: efficiency, innovation and growth, and risk reduction. Sustainability cuts across these dimensions and completes the picture. From this perspective, the knowledge and relationships developed with suppliers also become resources that must be managed to safeguard future competitiveness.
Almost all the companies analyzed have formalized reporting systems and performance indicators. Purchasing cost-efficiency metrics appear in 94% of cases, but measures of supplier reliability, the strength of the supply base, and environmental, social, and governance factors are also present. In other words, indicators extending beyond cost savings are not lacking.
Coverage, however, is uneven. Growth and capital efficiency, which are vital from a financial perspective, receive less attention in procurement performance indicators. Moreover, some existing metrics are not considered priorities for value creation, while others deemed relevant are nevertheless excluded. The challenge, therefore, is to align measurement with recognized priorities rather than simply add more indicators.
The weakness is particularly evident in incentive systems. All responding companies offer short-term bonuses to CPOs, but only 56% also use long-term incentives. Short-term incentives are dominated by profitability and cost efficiency, although sustainability already plays a significant role. Long-term incentives place greater emphasis on capital efficiency and growth. Annual performance evaluations therefore risk overlooking the value of decisions and contracts whose effects extend over several years.
A question of alignment
Companies should therefore assess the consistency between what they expect from procurement, what they measure, and what they reward. If the function is expected to contribute to innovation or risk management, these objectives must be recognized in the systems used to evaluate its performance. Otherwise, even an innovation developed jointly with a supplier may be recorded solely in terms of the savings it generates, leaving part of its contribution invisible.
Such a review requires dialogue among procurement, finance, and senior management to select objectives aligned with corporate strategy and with the areas procurement can actually influence. Long-term incentives must also be calibrated to this practical ability to make an impact, which varies from company to company.
The topics covered in this article are addressed in the Executive Program in Procurement Management (in Italian).
Giuseppe Stabilini, Andrea Dossi, Matteo Giuffrida, Raffaele Grimaldi. Procurement and Value Creation. Report by the Procurement Lab.
