WHITE PAPER 10 TIPS TO GET THE MOST FROM YOUR SPEND ANALYSIS SOLUTION

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1 10 TIPS TO GET THE MOST FROM YOUR

2 : : 2 INTRODUCTION A FEW YEARS AGO WE PARTICIPATED IN A SPEND ANALYSIS KICKOFF MEETING FOR A GLOBAL HOLDING COMPANY. THIS WAS THE FIRST TIME THIS COMPANY HAD ATTEMPTED TO CONSOLIDATE AND LEVERAGE SPEND ACROSS ITS GLOBAL PORTFOLIO OF COMPANIES, SO THE PROJECT HAD THE HIGHEST LEVEL OF VISIBILITY. A few years ago we participated in a spend analysis kickoff meeting for a global holding company. This was the first time this company had attempted to consolidate and leverage spend across its global portfolio of companies, so the project had the highest level of visibility. As their COO was addressing the room of more than 50 attendees, he described the challenges of the executive management team with one simple phrase: We are tired of speaking from the tower of babble. The primary challenge was a lack of credible spend information from which the company could make better purchasing and sourcing decisions. Organizations across every industry recognize the need to have complete and reliable data from which they can make key business decisions, yet many organizations are still not following best practices when it comes to analyzing their spend and supplier data. Additionally, most organizations acknowledge that technology is a key component in the spend analysis process. As with any technology deployment, however, there may be some bumps and bruises along the way when implementing a spend analysis plan and solution. More importantly, there will also be some valuable lessons learned. The following is a high level list of lessons learned from experience in deploying numerous spend analysis programs. The information presented spans multiple industries and organization best practices to provide a view of key success factors. These points will help shape your spend analysis approach so it is successful to your organization. Rather than provide a list of theoretical possibilities, this list focuses on practical approaches from a practitioner s point of view. 1. AVOID THE BLACK-BOX SYNDROME The goal of a spend analysis deployment is to transform data into actionable information and ultimately that information is transformed into fact-based knowledge for making key business decisions. The so-called black box syndrome employs rigid rules and templates that do not take into consideration your organization s unique business requirements. In short, it can be thought of as a one size fits all approach. Because every organization has different needs and requirements in collecting and classifying data, it s easy to see why rigid and inflexible methods of processing data would fall short. The black- box syndrome is made up of two components technology and resources and results in three key issues.

3 : : 3 These rigid, hardcoded algorithms used by many software applications to process data produce the first key issue: the results are not consistent with your expectations. When this occurs, there is no way to adjust the algorithms to make them behave differently. As a result, a large percentage of the data transactions will have to be treated as exceptions or errors. This leads to the second key issue resources. All exceptions or errors in the transaction data are then processed manually outside of the system typically by off-shore resources. Generally, the exceptions are divided into manageable pieces and worked on by various teams teams without knowledge or context of your business. These exceptions, and the resulting rules written to handle them, then lead to the third key issue any rules the teams create are not able to be incorporated back into the black box. Thus, future refreshes of your data are a mix of automated processing and mostly manual exception handling, which leads to extremely long refresh cycles. Employing this technique will make it extremely difficult to continue improving your data over time. It is extremely important the solution provider offer full transparency into the data-cleansing process through the use of a flexible application. Business data contains subjectivity and business-specific details that generally require customer feedback so that the classifications align with the organization s strategic sourcing. This process should be highly automated to facilitate future refreshes and eliminate manual intervention, creating longerterm efficiency. 2. COLLECT ALL DATA FOR UNFETTERED ANALYSIS Deeper spend analysis begins with collecting transactional data from every source system. This data is spread across accounts payable, purchase order, supplier master, finance, pcard and travel and expense systems from every location. By no means is this the definitive list of sources. Organizations leveraging a fullyautomated system for spend analysis experience an average savings of 11 percent from sourcing efforts. Source: Aberdeen Group

4 : : 4 What should you do if your organization is lacking detailed spend information in a particular category? Consider obtaining line-item data directly from your key suppliers. Does your organization purchase exchange-traded commodities? If so, try layering commodity price information on top of your spend data. These are just a few examples that have become quite common in the market today. A solution should enable your organization to blend additional unstructured data into the data mix to drive value for other areas of your business. Advanced spend intelligence involves looking at everything related to spend to get the most visibility and leverage possible. The key is to economically collect all spend and supplier-related data a difficult challenge without the right tools in hand. 3. ONE SIZE DOES NOT FIT ALL While organizations in the same industry may appear to be very similar from the outside, the reality is that internal differences abound. For example, two industrial manufacturing companies might be running the same supply chain and procurement systems, combined with similar lean manufacturing disciplines. Taking a closer look, however, the differences will be evident in philosophy, methodology, and (relative to this discussion) how vastly different the internal systems have been implemented. Why would you choose a spend analysis technology that treats your business like every other business in the world? The following points should be considered when evaluating spend management systems. DOES THIS SYSTEM FORCE-FIT YOU INTO AN INDUSTRY STANDARD TAXONOMY THAT YOUR BUSINESS DOES NOT UNDERSTAND? Organizations that attempt to adopt a new category taxonomy often face a significant change-management issue. For example, during a global spend deployment for a European CPG company, the CPO decided to adopt UNSPSC as the new standard (unbeknownst to the rest of the organization). After the initial process was complete, we presented the analysis to the executive team with the spend neatly organized into UNSPSC segments/families/ classes/commodities. Within five minutes, the Global CTO asked, Can you show me the I/T category? We quickly pulled up Segment 43, Information Technology Broadcasting and Telecommunications and presented a view of this spend. His immediate reply was, That is not my budget I do not spend that much every year. Where was the disconnect in this real-world example? The answer was quite simple the UNSPSC I/T categories did not align with the CTO s internal category structure. This organization should have used a taxonomy (or multiple taxonomies) that made sense for its business or business segments. UNSPSC provides a good unifying standard (if none exists), but may prove to be too generic for many organizations specific business sourcing needs. Business sourcing is usually based on target categories, so UNSPSC should be rolled up to business sourcing categories as defined by the sourcing project scope.

5 : : 5 DOES THE TECHNOLOGY ADAPT TO YOUR BUSINESS REQUIREMENTS? It is critical that the business context is preserved to drive accuracy. If an industry standard taxonomy has been leveraged, an organization will most likely require the ability to roll up industry codes into sourcing categories. As mentioned previously, industry standard taxonomies can provide a solid unifying standard if none exists internally. However, they were not designed with strategic sourcing in mind. Consider one scenario in UNSPSC software. A quick search for software in UNSPSC results in more than 200 codes. Segment 43 contains numerous codes for various software products while Segment 81 contains the codes for services related to software. If you are looking to strategically source a procurement software application, you would want to know how much has historically been spent for the software, maintenance and any consulting services. This would require consolidating numerous codes across two segments. A better approach would be to roll up these UNSPSC codes into sourcing groups for a clean, consolidated view. IS THE CLASSIFICATION PROCESS GOOGLE AND GUESS? If your organization is committed to implementing a spend analysis project in order to identify better sourcing and procurement opportunities, you want to feel confident in the integrity of your data.the ability to analyze and report on your spend and supplier data is only valuable if the data is accurate and complete. Understanding the process behind how your organization s data is classified is critical in ensuring the success of your spend analysis program. If you do not have transparency and visibility into the process, the output will most likely not meet your expectations. A recent discussion with a manufacturing company provided a good example of this. The organization s first attempt at spend analysis involved the process described above a data dump sent to off-shore resources for classification. A few months later the data was returned and the customer was informed the project was complete. As the customer was reviewing the results, they immediately zeroed in on a particular area of interest electrical components used in Polaris Heart Rate Monitors. They immediately discovered that these transactions the ones with Polaris in the descriptive text were either classified as a snowmobile, a missile or a heart rate monitor. Polaris is in fact a manufacturer of snowmobiles, but a Polaris is also a type of missile as well as a type of heart rate monitor. In this instance, these transactions were for heart rate monitors exclusively. What happened? The off-shore resources had no idea what the company did and even less of an idea of any business context, so they Googled and Guessed. The more you know, the better the outcome.

6 : : 6 4. MINIMIZE THE BURDEN One of the greatest obstacles for many spend analysis projects is the burden of extracting the data out of the source systems. Many spend analysis systems require I/T to not only extract the data, but also format the output to very exacting standards. This can be difficult when I/T resources in most companies are stretched thin. Given the number of systems that can exist across an organization, the data extraction piece alone can ultimately shut down a project. What can you do to minimize the burden and give your project a greater chance of success? No matter what spend analysis system is used the data still needs to be extracted, and we recommend some initial involvement from I/T to help validate the totals (as they generally know the internals of the systems better than anyone). After that, I/T can return back to the rest of their workload. What is important is that the system provides the upmost flexibility in accepting a wide variety of file types and file formats. Not only will your colleagues in I/T thank you, but you will be well on your way toward deployment. 5. VIEW SPEND ANALYSIS AS A BUSINESS SOLUTION Spend analysis is a business solution that requires internal planning and resources from the applicable business departments. Although we have seen some very good deployments led by project managers, these individuals had sourcing knowledge as well as experience with business systems. Finding one individual with this experience is not always easy, so consider adding an additional resource or two to round out the team. From our experience, having these skills available will enable your internal team to: Effectively communicate and coordinate with I/T during the data extraction process. Confirm and validate control totals with members in the Accounting and Finance departments. Successfully lead category audit workshops with the sourcing teams Organizations using spend analysis on average captured 24 percent more spend under management than those not using it. Source: Aberdeen Group

7 : : 7 6. QUICKLY MINE THE MOUNTAIN One of the best approaches for building momentum and buy-in around a spend analysis system is to generate quick wins, specifically if there are skeptics in the organization. We witnessed a great example of this in the healthcare industry. A company had previously attempted to aggregate spend using internal resources, but the project never got off the ground. By quickly deploying a commercial spend platform rather than conducting a thorough wave analysis, they sought to identify quick savings. The organization set out to first collect and analyze its pcard spend only. The initial savings generated just by looking at its pcard spend were five times the investment. This was more than enough to turn the skeptics into believers. It s sufficient to say this organization s spend management program has never looked back. A $5B organization with spend analysis will spend $16.5M on procurement activities; the same organization without spend analysis will spend $18.5M. 7. DISCOVER MORE OPPORTUNITIES WHEN YOU DIG DEEPER How do you define spend intelligence? The best-in-class organizations view this as an ongoing process used to measure and manage spend across a wide range of sourcing and savings programs rather than a one-time snapshot. There are many spend and supplier management programs that can be addressed including: Opportunity identification (leverage and supplier rationalization) and basic strategic sourcing. Compliance analysis to ensure the right suppliers are used, with the right terms and price. Supplier risk analysis. 4.3 fewer vendors per $1M in purchases. This initial list of programs covers the basics, but what about for those organizations that are ready for more? When your organization is ready to dig deeper into spend analysis and the benefits it can bring, consider these core components of a spend analysis platform: DATA THE FOUNDATION It all starts with the data. It should be as comprehensive and accurate as possible to ensure fact-based business decisions. What s more, data should extend beyond just what is inside your organization; it should also be able to take into consideration key factors outside your organization including market trends, contracts, forecasts, KPIs, real-time commodity indexes, and any number of other different data points outside.

8 : : 8 ANALYTICS POWERFUL AND EASY TO USE The analysis gives you the power to visualize your information and ultimately make better decisions for your business. The latest technological advances in this arena break away from the traditional OLAP (Online Analytical Processing) cubes and give you the power to navigate quickly and easily through the information. 8. UNDERSTAND YESTERDAY, TODAY AND TOMORROW A majority of the spend analysis approaches in use today do a good job of providing a historical view of your spending. And that s the problem it s a historical view only. It s like driving your car while looking in the rear-view mirror. If you re really good you may be able to successfully navigate the car down the road, assuming the road is fairly straight. But what happens when you come up to the curves? Most likely the car veers into the ditch. The capabilities of your spend management platforms need to evolve as your business evolves. To illustrate this point, we have developed a basic maturity curve based on our years of real-world experience.

9 : : 9 The maturity curve highlights the general path most organizations seek to follow advancing from basic opportunity identification to aligning with enterprise strategic initiatives. As organizations progress along the curve, their eyes begin to shift from the rearview mirror to the front windshield. The real question is, how do we advance along this path? The answer lies in higher refresh cycles (to track compliance) that are used to integrate external data combined with cross-departmental information. 9. PEOPLE, PROCESSES AND TECHNOLOGY How many times have you heard someone say, What s in it for me? There is an acronym for this WIFM that is thrown around in corporate meetings rooms constantly. As technologists responsible for deploying global systems, it is imperative that we understand the WIFM Effect. In a recent lecture at Northwestern University, former Baxter CEO Harry Kraemer discussed Values Based Leadership. One of his points clearly spoke to the matter at hand seek to understand before being understood. As in any project, it comes down to people, their personal/organizational goals, and their drive to succeed and help their organization. There are different user groups with different needs and responsibilities: executives, strategic sourcing, commodity category managers, general purchasing and administration. It is critical for us to understand their individual and collective needs and responsibilities and ensure the analytics focus on the business impact versus simple information. When done correctly, people will contribute, and spend analysis will generate significant savings for the organization. Additionally, the spend management/spend intelligence will grow with your organization.

10 : : DON T GET BLINDED BY THE LIGHTS There are many glitzy reporting tools on the market today which are used to influence your purchasing decision. In many cases the so-called sizzle and flash are there to cause a blinding effect, preventing you from seeing there is nothing underneath. This is equivalent to finding the perfect home and after move-in day realizing the house doesn t have plumbing. We recommend companies understand the foundation on which the system is built, and in the case of spend analysis this foundation starts with the source data. The best reporting tool out there is useless without credible and complete data. Taking a bottoms-up approach to systems evaluation will ultimately lead you to the solution that will deliver meaningful, measureable results on an ongoing basis. THE BOTTOM LINE SPEND ANALYSIS PRODUCES LARGE ROI There are many ways you can put together a project to gain valuable information and act upon it, one step at a time. Whether it be starting with a services-based approach, or acquiring the many available software tools on the market to have a comprehensive solution, the savings and ROI are dramatic. We recommend starting with spend visibility. Identify quick-win opportunities to get the momentum going and let the spend intelligence/ spend management grow within your organization as another very valuable application to enhance your company s efficiency and effectiveness. ABOUT SCIQUEST SciQuest (Nasdaq: SQI) is the leading public provider of spend management solutions delivering value beyond savings. Through the continued release of key innovative technology and a fanatical drive toward making our customers successful, we deliver exceptional value in user experience, productivity and operational efficiency. Our cloud-based, mobile-enabled, source-to-settle platform addresses all stages of procurement from the automation of core processes to enabling sophisticated, strategic and multifaceted sourcing solutions. We specialize in handling simple procurement needs to the most advanced supplier and supply chain requirements. SciQuest serves a wide range of industries and organizations including many of the Global Fortune 500. FOR MORE INFORMATION, visit TO JOIN THE CONVERSATION, please visit our blog at or follow us on : : sciquest.com