Procurement ROI & Other Executive Terms
PurchTips - Edition # 172 February 24, 2009
By Charles Dominick, SPSM
Is Procurement Speaking Management's Language?
One of the challenges of aligning Procurement with corporate strategy is understanding the jargon used by senior management. So we've defined for you three of the most important terms used by senior management.
Earnings Per Share (EPS) - Achieving an EPS target is perhaps the most visible goal of the management of a publicly-held company. Financial market analysts publicize EPS expectations and company shareholders evaluate senior management based on the variation of actual EPS vs. expectations. EPS is calculated by dividing the company's profits by the number of shares of stock issued to investors. Procurement can positively contribute to EPS by achieving savings that clearly contribute to profits. Leading procurement departments report savings in EPS. For example, if Procurement saved $2 million and the company had 100 million outstanding shares, Procurement could say that it contributed $0.02 to the company's EPS.
EBITDA - Executives often pronounce this acronym like a word. EBITDA stands for the accounting term "Earnings Before Interest, Taxes, Depreciation and Amortization." It's a measure of operational profitability that omits the effect of certain accounting and financial decisions. Because of this, EBITDA hones in on the impact of operational expenses that Procurement can affect. Some procurement departments report cost savings by saying that their actions added a certain amount of money to EBITDA.
Return on Investment (ROI) - When senior management spends a certain amount of money, they like to see a larger amount of money return to the organization in the form of increased revenue or decreased costs. This concept is called return on investment or ROI. ROI is often discussed in terms of the amount of time necessary to recoup the expenditure. Most executives like to see ROI in the same fiscal year. Some procurement departments are measured on their ROI. They determine how much it costs the organization to have an internal procurement department - considering salaries, benefits, office space, etc. - and then measure the amount of savings that the procurement department generates, with the goal for the savings to far exceed the cost of staffing and running the department.
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