14 Jun 2017 Don’t confuse purchase to pay efficiency with purchase to pay effectiveness
Have you ever been put on the spot? You have an audience that trusts you to know the answer and you have to hold your hand up and say – I should know, but I don’t.
In this case, the audience was an international audience. We were discussing how to optimise Purchase to Pay processes and we had received a challenge to not only show how we could improve efficiency but how we could also improve effectiveness. “You are the native speaker. What is the difference between efficiency and effectiveness?” I was asked.
I was stumped. Obviously, I know the difference in terms of dictionary definition and to be fair, I just needed a little time to think how the difference between efficiency and effectiveness could be explained in the P2P context. It’s confusing because P2P is very much about process and when we optimise a process we usually mean we are making it more efficient. But being challenged to explain the difference between efficiency and effectiveness was interesting because working out how to answer the question helped me articulate a few points about Purchase to Pay that are often under appreciated.
To be effective is to produce a desired outcome. For example, an e-procurement application, amongst other things, aims to ensure that preferred suppliers are used more often. If after implementation, preferred suppliers are used more of the time, the application is effective. Levels of maverick spend (use of non- preferred suppliers) is an effectiveness metric.
To be efficient is to perform a task quickly or at low cost. An e-procurement tool that allows a requisition to be approved and delivered to a supplier in minutes rather than days is delivering efficiency. Fewer people involved in the process, lower cost goods and services, fewer process steps or automated processes – these are all examples of efficiency.
Now you could say that a desired outcome of implementing P2P is fewer people involved in the process – in other words efficiency is a desired outcome. If you achieved that then you have been effective. Effective at being efficient? This is correct but it is confusing and to say this is to misunderstand why the two are independently important.
You could be forgiven for thinking this is a semantic discussion. Why make the distinction? Efficiency and effectiveness just mean doing things better. But it is not as simply as this. Although it is good to be effective and it is good to be efficient, they are absolutely not the same thing. You can be highly efficient and not be effective. For example, to source the cheapest raw materials is highly efficient but if they do not meet the specification then that is highly ineffective. In other words, it is perfectly possible to be good at doing the wrong things. Similarly, you can be highly effective at getting things right but if you make a song and dance about it, you could be really bad at doing the right things.
If you think that this is all a bit basic then think how often businesses get this wrong. Consider for example how often efficiency savings alone are used as a success metric for procurement. Cost savings and price reductions are so often seen as the measure of a procurement department’s contribution.
But we all know the phrase “buy cheap, buy twice”. I’m reminded of a rather rude but unfortunately often accurate description of accountants who “understand the cost of everything and the value of nothing”. Cost is efficiency. Value is effectiveness. It’s no good getting something cheap if it doesn’t work. And in the P2P context it is the same. Being efficient at the wrong things is worse than doing the right things inefficiently. And this is why the distinction between efficiency and effectiveness in a P2P context is important.
It’s a well understood principle that before you begin to automate processes, you make sure that the processes being followed are the right ones. Specifying a new P2P solution is not about ensuring it automates the status quo, it is about specifying how to automate the right ways to do things.
Effectiveness always comes first. Re-evaluating business process given the possibility of what the technology offers is always a first step in implementing P2P. Effectiveness if about doing the right things. After that and once you know what the right things to do are, you can consider how best to do them – efficiently.
Pete Loughlin can be found on twitter @peteloughlin