Issue

Currently the performance of buyers is tracked using data entered into the Convergence system. This is then used to calculate the benefit to the business of the global purchasing team, the associated recharges to global divisions and the performance related pay of the procurement teams. Convergence is standalone tool and only covers estimated savings from discounts rather than looking at actual supplier performance.

This document evaluates the opportunities for using other tools and options for improving the tracking of the Buyer Performance.

Recommendation

The project recommends  the organization utilise improved reposting tools to add other factors beyond simple contract price reduction into the Buyer Performance Calculations. 

Background & Context

There is a Purchasing Team in Belgium that provides Procurement services across the rest the company. Their performance is currently measured on how much discount they have achieved on their contracts that will be active for the coming year.

This performance calculation is used to do two things

• The reduction is used to prove the business value that the Procurement Team are bringing to the global divisions and calculate a value to charge the divisions for the provisions of this service. This charge therefor has tax implications and may have to be justified to tax authorities.
• To calculate the Buyer Performance related pay to be paid to Buyer teams.

This data is stored in Convergence which has some weaknesses

• Its a standalone tool where the data has to be entered manually 
• It only estimates the value of the discounts by projecting the estimated savings from the new contracts rather than the actual savings achieved.
• Its does not take into account supplier performance (on time deliveries, correct quantities, quality adherence
• It cannot extend its coverage and track future supplier performance on things like sustainability.

Source of data and validity

The data that is entered into Convergence based on the contracts that they have setup for the coming year – looking forward for the expected discount, it does not look at the lowered prices on the POs created against the contract.

The data is entered manually by Procurement Staff but is verified by Finance staff checking the expected discounts.

The current approach evaluates supplier performance on a single metric - how much they were able to save on the contracts they negotiated in the current year.

Options to widen the information used on the performance evaluation

There is other data available that could be used to widen the criteria of the performance measuring adding in factors such as 

• The SAP system holds data on actual Supplier Performance - on time deliveries, correct quantities, quality of materials
• The SAP system holds data on actual prices paid
• The wider market can be used to provide benchmark data on inflation and other factors that may cause price decreases 
• Future requirements - sustainability ratings of suppliers, adherence to EHS standards 

Assumptions

• The Recharge Calculation to the Divisions will continue to be required and will have a tax impact and so will need to be justifiable if questioned by tax Authorities.
• The Recharge Calculation to the Divisions will continue to be used to drive performance related pay
• Other reporting tools (eg tools like the Procurement Overview Fiori App) can replace the data used in the Convergence tool using live data from the S4 HANA system
• We can adjust the calculation used to provide a more holistic view – including supplier performance (eg quality & reliability of deliveries, accuracy of Invoicing etc.

Constraints

The Performance related pay calculation is made on the year the contract is agreed – so they cannot/do not wait for the contract to actually be used, ie have lower prices paid on the POs and so with this approach cannot factor in supplier performance that will only happen in the future – unless we can significantly change the approach we use.

Impacts

Process Changes

We aim to replace the manual calculation and entry of discounts achieved in an non-integrated system with actual data coming from SAP Reports/KPIs.

Ideally we would like to be able to use the supplier performance as well as simple discounts to work out the Buyer Performance.

This would necessitate a change away from the current project model.

Change Management

Changing the mechanics of performance related pay could result in change management effort required within the organisation to change this approach to performance related pay .

Business Rules

Options considered

SAP can provide this information based on transaction data – including wider supplier performance. Should we use this information to expand the remit of the report/process?

Option 1: Maintain the current process on Convergence

Maintain this As Is process on the current system – as its manually entered data that does not get integrated anywhere else it could have no impact on the S4 HANA implementation..

Advantages:

• No disruption to current operations or need for process changes.
• No potential conflict with staff re performance related pay changes.
• Consistent data approach for Tax Authorities with questions.

Disadvantages:

• Have to continue to maintain Convergence system.
• The performance data is not system driven - so can be inaccurate.
• The potential to monitor performance against real performance data from actual transactions in the business is lost.
• Continued effort of manual entry and validation

Option 2: Use a multi-metric approach giving wider coverage include actual performance data rather than just expected discounts

Examples of metrics to include based on industry best practices could be

• Prices actually paid as per the transactional data in the backend ERP system
• OTIF (In Time, In Full)
• % of deliveries failing quality checks
• Price changes against wider market conditions - eg inflation rates faced by benchmark competitors
• Adherence to EHS Requirements
• Sustainability factors - eg amount of waste/packaging recycled, CO2 emissions targets, traceability of recycling/waste

Advantages:

• Links Buyer performance and value of buyers to the company to company goals, suppler effectiveness and real pricing achieved not predicted
• Allows for expansion of factors for Buyer performance into new areas in the future (eg  supplier policies for DEI, reduction in master data errors, performance in cost reduction against industry benchmarks)
• Could leverage better reporting tools in and integration with S/4 HANA  to drive business benefits
• No need for manual entry and validation of data

Disadvantages:

• Some disruption to current operations or need for process changes.
• Potential need for change management input with staff re performance related pay changes.
• Change of approach/calculation for Tax Authorities with questions.

Evaluation

Based on the evaluation of the options, it is recommended that the organization utilise improved reporting tools that integrate with the ERP system to add actual transaction data and other factors beyond simple contract price reduction into the Buyer Performance Calculations. 

The change and effort will be in the change management area as this has the capacity to affect Buyers performance related pay – particularly the change from a forwarding looking approach running on Predicted Savings from Contract engagement to a backward looking approach looking at Actual Savings and real-world performance.

Next Steps

• Work with the business to assess impact and buy-in needed to gat acceptance on change to performance related pay
• Review standard reporting options in S/4 HANA and other areas then share with business to identify the need for enhancement.

See also

There are other KDDs related to the use of the Convergence tool and the possible options to improve the processes using other tools

• Contract Lifecycle Management in Ariba Contracts vs Convergence
• Category Management in Ariba Category Management vs Convergence

Change log

Workflow history