CRACKING THE SPEND MANAGEMENT ROI CODE: INTEGRATED SUPPLIER MANAGEMENT FOR BEST-IN-CLASS RESULTS

Transcription

1 CRACKING THE SPEND MANAGEMENT ROI CODE: INTEGRATED SUPPLIER MANAGEMENT FOR BEST-IN-CLASS RESULTS

2 INTRODUCTION EXECUTIVE SUMMARY THE QUESTION Spend Management has many definitions in today s world in fact, too many! A fragmented solutions market beset by both monolithic and niche products has not resulted in an abundance of choice for users, but rather an abundance of complexity. As a result, the challenge of deploying a source-to-settle solution that provides fast and simple access to best-practice business process support has been rendered even more difficult to accomplish. Big ERP comes with big costs, and discreet solutions have discreet payback that is often reduced by integration overhead. And regardless of approach, every solution, whether solving a single problem or end-to-end processes, has one single common dependency suppliers! Does this mean that a dependence on suppliers drives even more complexity, or is best-of-breed supplier management part of solving the spend solution ROI riddle? THE ANSWER Best-in-class companies have come to understand that comprehensive supplier management, delivered as part of a thoughtful, integrated spend management architecture, can optimize the value of both. It s not just about individual business process optimization anymore, but rather about starting with a common framework that combines best-in-class technology approaches with deep process automation and flexibility across functions and domains. In this world, understanding the information becomes equally or more important than simply managing it. From advanced sourcing to settlement, and all steps in-between, a single source of truth for spend management information is required for each step. This truth begins with supplier management and collaboration throughout the life cycle from identification to retirement. Effectively managing this entire supplier life cycle can drive new levels of efficiency and payback across the organization. This white paper will explore the role that today s new supplier management approaches and tools play, as well as how they enable best-in-class spend management and drive improved ROI. Examples include: next generation networks, self-service on-boarding, and automated compliance and risk assessment tied to mitigation strategies. As a result, readers should be able to begin to evaluate their own supplier management performance. This evaluation can help uncover opportunities for improvement or complete reengineering, in order to take advantage of the latest best-of-breed technology and business process automation. 02

3 CONTENTS CONTENTS Classical Spend Management & ROI: The Promise... 4 New Demands: What Have You Done For Me Lately?...6 Cracking the Code: Best of Breedsupplier Management...8 Where Should You Start: Evaluating Your Organization Conclusion...13

4 CLASSICAL SPEND MANAGEMENT & ROI: THE PROMISE CLASSICAL SPEND MANAGEMENT & ROI: THE PROMISE SOURCE-TO-PAY: WHAT IS IT & HOW DID WE GET HERE? Spend management, or source-to-settle, is a comprehensive collection of linked business processes that has evolved in scope and capabilities from what was once referred to as procure-to-pay. Procure-to-pay was a way to categorize the functions of creating and managing purchase orders all the way through to the payment of suppliers. Today s source-to-settle solutions are much more robust. Over the past decade, a number of factors have arisen that have helped us map the DNA of our current spend management perspectives. These include: Supply chain complexity: The advent of low-cost country sourcing, outsourced design, assembly and manufacturing, and value-added service delivery from supply chain partners have all contributed to the growth in the length and complexity of supply chains. As a result, there has also been a dramatic reduction in supplier visibility, leading to increased supply chain disruptions and product quality and compliance failures. Best practices: Newer management approaches like six sigma have encouraged companies to take a critical look at their procurement processes and to apply the learnings gained from best-in-class performers. Cost reduction programs: In addition to standard cost management, the combination of increased global competition and challenging economic factors have placed the CPO front and center in terms of finding new opportunities for cost reduction and improved efficiency. As a result of these and other factors, our definition of the business processes to be included and addressed in a modern source-to-settle business framework has expanded both upstream and downstream of traditional procure-to-pay perspectives. We now understand that the process doesn t begin with a PO, or even with sourcing a supplier, but rather with understanding of enterprise spend. And that the process doesn t end with 04

5 CLASSICAL SPEND MANAGEMENT & ROI: THE PROMISE paying a supplier, but rather extends through the life cycle of the relationship, including supplier performance, compliance and risk management. In addition, best practice analysis has helped organizations to identify new capabilities within each process that drive additional savings and operational improvements that cross functional boundaries. Capabilities can be as simple as process automation or as sophisticated as dynamic discounting and predictive analysis. The positive impacts of deploying a comprehensive John Smith spend management strategy are real and provide opportunities Manager, to influence Large both Manufacturer the top and the bottom line. RETURN ON INVESTMENT: HARVESTING THE VALUE Deploying new business processes and the systems to manage them requires investment in people, infrastructure and technology solutions. And like any business investment, we expect a return on those assets. The good news is that the ROI of spend management solution deployment has been well documented with metrics and best-in-class performance examples. The bad news is that even after years of effort, many companies are still not realizing the ROI available to them. Why is this, and what is the missing link? Any comprehensive ROI analysis begins with metrics and the benchmarking that goes into documenting best-in-class versus average versus poor performance. Luckily there are a number of sources for this material, including ISM, CSCMP and AQPC. In addition, we should remember that ROI analysis is not a one-time calculation. In order to truly benefit from an ROI analysis, companies must: Benchmark their current performance before any solution implementation Compare the results against industry performance, to help prioritize improvement efforts Continuously measure progress against the key KPIs in order to not only calculate ROI, but also identify gaps that must be closed with additional management focus and new opportunities to drive additional value. 05

6 NEW DEMANDS: WHAT HAVE YOU DONE FOR ME LATELY? CYCLE TIME METRIC GROUP ID METRIC NAME METRIC FORMULA KPI FLAG PCF ID Average supplier lead time on ü purchased materials Cash-to-cash cycle time in days ü Cycle time to place purchase order in ü hours Days payable Procure-to-pay cycle time in days Companies that have implemented spend management solution elements and measured their ROI have, in fact, realized significant returns in a number of areas including: Sourcing best practices Lower negotiated prices Requisition automation Maverick spend reduction Discount management But the reality is that in most cases, we have ROI miles to go before we sleep. NEW DEMANDS: WHAT HAVE YOU DONE FOR ME LATELY? Of course spend management professionals have become victims of their own early successes. Driving down costs in double-digit increments over multiple years, through the application of technology and best practices, has resulted in an expectation from the CFO and others that the party will continue. In addition, each new solution uncovers new internal process challenges. Add to that the growth in external factors like regulatory compliance and supply chain risk, and there are many calls across the organization for spend management process and solution enhancements that can turn these threats into opportunities. SUPPLIER RISK & COMPLIANCE Bangladesh Factory Collapse: Death Toll Climbs Quake in Japan Broke a Link in Global Supply Chain Former Siemens Execs Get Record Bribery Fines 06

7 NEW DEMANDS: WHAT HAVE YOU DONE FOR ME LATELY? You don t have to look very far to understand the dramatic impact of risk and compliance issues on the supply chain. From product quality to interrupted parts deliveries to record regulatory compliance fines and criminal prosecutions, risk and compliance issues have gained boardroom visibility and resources. In fact, a recent study found that companies that announced a supply chain disruption experienced a share price drop of an average of $9/share. As a result, spend management professionals are finding themselves tasked with not only evaluating a supplier s financial health, but with identifying and tracking a variety of other factors, from ethical and social responsibility concerns, to geopolitical and climate impacts. Traditional transaction-based solutions are not well suited to collecting and managing these types of data, nor can they easily deliver new tools such as predictive analytics to identify potential problems and turn them into opportunities. SUPPLIER COLLABORATION An outgrowth of this demand for more accurate, timely and complete supplier information is the need for true collaboration in supplier relationships. What were once largely one-way demands from buyers to suppliers, followed by exchanges of transaction information like POs and invoices, must now become bidirectional conversations for the joint management of business processes and documents. Visibility into the supplier s suppliers demands a new level of collaboration and the tools to support it. INTEGRATION This growth in new responsibilities and processes is also driving new cross-boundary process and information integration requirements. The old view of large-scale ERP was based on semiconnected independent business process areas like finance, HR, sales and procurement, each of which focused on the transactions and information needed to accomplish their tasks. There was a base level of integration for data elements like account numbers, but true process integration was rare. The new spend management world demands not only cross-functional integration of process elements, like risk management and working capital planning, but also a single repository of the required information. No longer can the AP system have a loosely coupled supplier master while procurement has a vendor master and the compliance system has a third-party master. All of these systems rely on overlapping subsets of the same data, and if there is not a central repository with the structures in place to manage the needed integration, errors and impaired decision-making will grow exponentially. COMPETITIVE ADVANTAGE What is competitive advantage doing in a discussion of spend management? Best-in-class companies are using spend management processes as a competitive weapon in their markets. The ability to respond more quickly, avoid risks, and manage costs more effectively, all contribute to organizational agility and the ability to control rather than react. Some examples include: 07

8 CRACKING THE CODE: BEST OF BREEDSUPPLIER MANAGEMENT Reductions in time-to-market due to best-practice sourcing processes and tools, including understanding the capabilities and capacities of existing suppliers Lower costs, and thus larger margins, which allow more competitive price negotiation based on sourcing/contract management/procurement execution advantages Risk avoidance through predictive analytics and linked trigger-based mitigation plans, resulting in superior customer service and a lower cost of compliance CRACKING THE CODE: BEST OF BREEDSUPPLIER MANAGEMENT Here are the questions: How can I increase source-to-settle ROI? How can I improve supply chain risk and compliance management? How can I drive cross-boundary functional integration? How can I reduce enterprise-wide errors when relying on supplier data? How can I increase competitive advantage? Here is the answer: Best-of-breed supplier management WHAT IS IT? Supplier management supports all of the critical spend management process imperatives we have been discussing. It forms the foundation of a best-in-class spend management strategy. So what s different compared to traditional spend management? Historically we asked basic questions: How can I quickly on-board suppliers? ; Which of my suppliers may go out of business? ; How effective are my suppliers at on-time delivery? But times have changed. It s not just about contract compliance, on-time delivery, and diversity anymore. Quantifiable ROI counts, as does driving hard dollar savings to the bottom line. Success requires multiple perspectives from spend, finance, data quality, compliance and SCM in order to achieve end-to-end impact on the business. Supplier management provides the core to support both the old and new business processes. 08

9 CRACKING THE CODE: BEST OF BREEDSUPPLIER MANAGEMENT With that in mind, we have a new perspective on optimizing both spend management and the cross-boundary business processes it supports. While a series of Venn diagrams might be more evocative, let s take simpler view of how the pieces fit together. 09

10 CRACKING THE CODE: BEST OF BREEDSUPPLIER MANAGEMENT In this perspective, supplier management provides the single source of truth for linked processes across the enterprise. Regardless of where the process begins AP, compliance, sourcing, procurement, etc. a single set of managed workflows ensures that all parties are always using the most accurate and complete supplier data available. DEPTH AND BREADTH It s important to understand that in order to truly be best-of-breed (BOB), a supplier management solution must exhibit not only breadth in solution coverage but also depth of functionality. The stakes are high, and so are the returns. As a result, it s common for vendors to take a single-function solution like sourcing, add a few additional supplier management capabilities and claim BOB! Unfortunately, the balance of their solutions tend to buckle under the demands of end-to-end best-practice business process support. While no vendor can be perfect at everything, leading supplier management vendors will have breadth across their solution suite as well as depth that includes tightly coupled applications, the ability to optimize all processes, and a robust roadmap to demonstrate how they will continue to deliver new capabilities. WHAT TO LOOK FOR IN BEST-OF-BREED If everyone claims BOB, what are the key differentiating supplier management solution elements you should look for, in order to ensure that you can optimize your spend management environment along all of the other vectors we ve been discussing? Cloud-based self-service and collaboration: Cloud, or SaaS, solution capabilities enable walk-up interaction for all of the interested parties. Suppliers need only a browser and a URL in order to collaborate, which means you can collect data at the source. Buyers and other stakeholders can also interact efficiently and easily, and role-based security ensures that everyone has access only to authorized information. Self-service will also enable new collaborative functions such as dynamic discounting in which a buying organization offers early payment in exchange for an additional discount. As a result, buyers and suppliers alike can manage working capital more effectively. Automated workflow management: It sounds simple, but simple will not solve your problems. Best-in-class workflow includes conditional branching, simultaneous parallel execution, and trigger-based processes launched through integration with other systems. In order to drive the complex decision trees and rapid-response capabilities to deliver the highest ROI, workflow must be at the heart of the automation. Risk and compliance management: These are among the newest capabilities for suppler management solutions. It also presents a challenge, in that there are likely elements of risk and compliance in other enterprise solutions, such as finance and corporate strategy. Be sure to look for the collection of not only financial risk data but other types as well. See below. 10

11 CRACKING THE CODE: BEST OF BREEDSUPPLIER MANAGEMENT Third-party data integration: While it has been common in the past to access financial health data such as D&B while qualifying a new supplier, the new concepts of risk demand a much broader information set. Third-party sources should include news stories, commodity trend data, weather forecasts, and geopolitical data. Today, online access to data is nearly limitless for example, you can license international BOL data to evaluate trends that impact risk. Next-generation networks: I know you HATE supplier networks! But those are the old versions. Today supplier networks form the core of the supplier management universe. Best-of-breed networks have moved away from the earlier one-to-many model, in which many suppliers only dealt with a single buyer on a network, and often felt they were no more than a price. Now many-to-many networks provide value to suppliers in terms of new customer opportunities and the ability to sell on value, not just price. Networks are also providing opportunities to explore new B2B capabilities such as crowdsourced supplier ratings and the online purchase of enhanced data feeds or analysis. Predictive analytics: It s no longer enough to look in the rearview mirror. In order to achieve competitive advantage, you have to anticipate markets and events. A predictive analytics capability will allow you to combine supplier, business and market data in ways that allow you to proactively take advantage of new opportunities and avoid unexpected disruptions. THE ROI IMPACT Let s pull this back around to our ROI discussion from earlier. In fact, research has shown us that a great deal of unclaimed spend management ROI is tied up in supplier management processes. For instance, we have seen that automated, network-driven supplier on-boarding can reduce cycle times by over 80 percent, supply chain disruptions due to supplier failures by 65 percent, and the overall cost of managing suppliers by over 70 percent, all of which flows right to the bottom line. And it s not just about costs. Best-in-class supplier management users have also reported improvements in other measures including working capital, with one showing an increase in working capital of 5 percent due simply to improved supplier terms management. As a result, best-of-breed supplier management promises to be the missing link in achieving full spend management ROI. Companies that have embraced supplier management capabilities across the enterprise have found a way to continue to deliver savings and influence overall performance. 11

12 WHERE SHOULD YOU START: EVALUATING YOUR ORGANIZATION WHERE SHOULD YOU START: EVALUATING YOUR ORGANIZATION UNDERSTAND WHAT YOU HAVE TODAY Begin with a rigorous, honest assessment of what you have today in terms of best-in-class processes and solutions. Some companies may have the domain expertise to do this internally, others may need to look to outside experts. Regardless, there are many tools from organizations like ISM, CSCMP and AQPC to help you in your evaluation. Once you understand your current environment, benchmark yourself on the key spend management and supplier management KPIs. This will help you in gap analysis and prioritization. GAP ANALYSIS AND PRIORITIZATION Once you have identified and benchmarked your current processes, you can identify where you have the largest gaps, either between your performance and best-in-class, or where you may be lacking processes or capabilities entirely. Assuming that best-in-class performance is your target, you will then have to estimate the cost associated with closing each gap or related group of gaps. Prioritization of process reengineering and/or solution evaluation will be based upon many factors, only some of which are quantifiable. You may choose to go after the gaps with the biggest financial impact first, or those that allow you to add a completely new set of capabilities. Many companies look for an opportunity for a quick win with which to validate the process and drive future improvements. EVALUATION In today s world, automation through the use of technology solutions is nearly a given. Certainly in your analysis you will find small gaps that can be easily filled with a manual task or report, but the big wins are going to come from deploying or extending technology. The key here is to look to your prioritization strategy to help you define the most important evaluation and selection criteria. Vendors will drive you to see their solution from their perspective, and you may learn from them, but be sure any vendor can satisfy your near-term and long-term requirements, and be sure you are comfortable working with them. IMPLEMENTATION RESULTS There will be lots of structure around your implementation from your solution vendor, so just a couple of points here: start with a quick win. Success will set the stage for more complex phases and will help you to know how effective the vendor s services are. Measure! Be sure to go back to your benchmarks to see if you are on track to deliver the promised value. 12

13 CONCLUSION CONCLUSION Spend management has been around for nearly two decades, but we are only now getting to the necessary levels of maturity in best-practice processes and technology tools to realize the full potential in terms of business agility, competitive advantage and cost reduction that have always been promised. That evolution has helped us to understand that while automating requisitions and POs was exciting and valuable, it lacked the supplier management foundation needed to take spend management performance to the next level. Best-of-breed spend management is delivering on those promises today. If you are not on the road to best-in-class supplier management, then start immediately. You aren t just missing potential savings, you are falling behind in the global competitive race for market share and profitability. 13

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