Ariba Strategy

8/8/2019 Ariba Strategy

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Spend Management

Transformation Through

Ariba Category Strategy

May 2005


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Table of Contents

Execut ive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Business Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Establishing Spend Management Transformation Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Main Challenge to Spend Management is the Functional Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Category Strategy to Spend Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Achieving Combined Benefits of Process Efficiency & Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Organizational Impact of Category Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Spend Management Transformation Savings Opportunity and Levers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Diagnostic Methodology & Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

How Ariba Addresses These Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

How Customers Have Benefited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14


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Spend Management Transformation Through Ariba Category Strategy

Copyright 2005 Ariba, Inc. All rights reserved. 3

Executive SummaryThe Ariba Category Strategy methodology provides the framework to enable a marketing leading approach

to developing and executing a spend management transformation program. It enables the creation,

implementation, and best-in-class execution to end-to-end spend management processes across the

desired amount of spend while minimizing the amount of internal disruption.

The spend management marketplace has evolved over time from a simple reverse auction and transactional

procurement paradigm to an end-to-end, closed-loop spend management paradigm. However, a "one-

size-fits-all" approach to this process works well only for very simple categories and can limit achievable

savings, manageable spend, and business unit adoption. Ariba's Category Strategy approach groups

categories along common market and process characteristics to drive maximum realized savings and

stakeholder adoption through increased speed, sustainability and coverage.

Ariba's Category Strategy approach allows companies to go beyond software and services to develop anintegrated and phased category approach to sourcing and procure-to-pay process enablement of their

strategic spend categories. The category strategy approach combines together historical experience, savings

benchmarks and spend management best practices to deliver both quantitative and qualitative results.

Business Challenges

Today, most companies understand the need to fully manage all of their spend, but they face significant

challenges in trying to do so. First among these is the recognition that effective spend management

requires a comprehensive process to identify savings opportunities across all categories of spend.

Once these opportunities are identified the next step requires their conversion into contract-level

savings through strategic sourcing, procure-to-pay (P2P) processes through contract compliance, and

invoice capture and reconciliation.

The key challenge for any procurement organization is to implement spend management across all of

their unique spend categories while at the same time leveraging common tools and processes to

achieve economies of scale. The figure below shows the process steps involved in the spend

management process and the typical functions involved in each process step.

Identify Opportunity

This step involves analyzing spend within each category, across business units and suppliers and

identifying the areas that offer the best opportunity to realize savings. Opportunity assessment may be

triggered by contract expiration, changes in business or legislation, client needs, supplier relationships,

market price, and similar factors.


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4 Copyright 2005 Ariba, Inc. All rights reserved.

Develop Strategy

This step involves determining the most effective way to handle supplier engagement and negotiation for

each spend category by evaluating various criteria. These criteria are primarily related to the value of

the item being purchased to the businessusually measured by dollar volume or similar metricsas

well as the item's sourcing complexity due to its uniqueness, supply-chain dependencies, price volatility,

or other considerations.

Source and Negotiate

The sourcing negotiation step comprises all the activities required to plan and negotiate agreements with

suppliers who can provide the goods and services companies must utilize. This includes analyzing

relevant information and effectively engaging and managing internal stakeholders before, during, and

after sourcing events.

Contract and Procure

This step involves all the processes needed to procure goods and services, negotiate and create contracts,

and ensure contract compliance. This includes taking the negotiated contract and establishing it in a

form that can be searched, managed, and leveraged in actual procurement with the ability to measure

and sometimes mandate compliance (i.e., permitting certain goods and services to be bought only

through an established contract).

Invoice and Pay

The invoice and pay phase involves all the processes and communication required between the buyer's

accounts payable team, the supplier's accounts receivable team, and the banking institution for fund

transfer. This includes receiving and validating electronic invoices from suppliers based on the buyer's

invoice acceptance rules. Each invoice is then matched to the original purchase order and comparedagainst receivables as well as contract pricing and terms. Finally, invoices are reviewed and approved

for payment.

Monitor and Manage

The monitor phase of the process involves using both quantitative and qualitative measures to discern

whether all spend and performance goals are being met and negotiated savings realized. Companies

must consistently and accurately track their spend, processes, and resources to measure the effectiveness

of their efforts and discern whether negotiated savings are actually being realized.

Spend management is a journey rather than a single event. It requires an ongoing process to effectively

manage all of a company's unique spend categories and to increase realized savings by continuing toincrease the rate and breadth of spend enabled across the business processes.


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Establishing Spend Management Transformation Goals

The role of procurement within a company continues to become more strategic than ever before. A

recent survey reported that 70 percent of procurement directors now report to a company's managementcommittee. This is up 20 percent over 2004. Companies are increasingly mandating that procurement

lead in bringing spend under control.

In order to reach their spend management goals, these new procurement leaders must go beyond

simply managing sourcing and procurement functions in a traditional sense. They must also take on a

holistic and comprehensive management of their company's external cost and supplier base.

A company's successful spend management transformation requires the transformation of the traditional

company operational paradigm into one that focuses on spend management. Successful spend management

leaders understand that such a transformation cannot occur solely through use of the latest software or

through process reengineering and change management.

Spend management transformation goals are strengthened when they are linked to corporate goals toretain a strategic focus and visibility within the company. The figure below shows the linkage between

corporate goals and transformation goals:

Main Challenge to Spend Management is the Functional Approach

Companies can be successful in measuring the effectiveness of their spend management efforts by two

primary metrics; 1) scope of spend under management, and 2) the savings and benefits achieved.

Company procurement organizations typically adopt a functional strategy towards their spend

management activities. They solve each spend category process step in a silo and adopt a fragmented

solution set for each process step. As an example, it is quite common for companies to use a reverse

auction solution for sourcing, a separate solution for procurement, use an ERP system for invoicing

and payment and use back-end controls for enforcing policies for every spend category.


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The functional strategy approach to spend management results in a number of problems. First, the

functional silos are not linked together either from a process perspective or from an organization

perspective. For example a reverse auctions approach to sourcing only effectively supports a small

portion of spend, possibly 20 to 30 percent in a typical company and is not suited for complexcategories of spend that necessitate strategic sourcing, knowledge sharing and process standardization.

Company procurement organizations typically adopt a one-size-fits-all catalog-based approach to their

purchasing process. Yet for most companies this meets the needs of only about four to five percent of

their spend. The remaining ~95 percent of spend within a typical company is complex and does not

lend itself to the catalog approach. As a result, many companies procurement organizations continue

to manage very little of their spend using automated catalog-enabled processes.

Most ERP-like invoicing and payment solutions execute invoice-PO reconciliation at the aggregate invoice

level and very rarely enforce contracts which are at the line item level. Further, this allows collecting data

only at Level 1 (aggregate invoice level) and not at Level 3 (i.e. line item level). Back-end controls are

usually not effective in enforcing best-practice purchasing policies, especially if data is collected at Level1 as described above.

The figure below illustrates the example of the standard functional approach that companies typically

practice in their spend management. Each process step in managing each of their strategic spend

categories is in a silo and a one-size-fits-all approach is utilized.

The problems described above typically result in very little spend being managed by procurement

organizations from sourcing to procurement through put. As a result most companies obtained very little

in savings from their functional approach to spend management. The savings can be as low as three to

four percent of the total spend amount being managed.


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In conclusion, the typical functional approach to spend management is easy for companies to introduce

and is seemingly efficient, given that procurement organizations adopt one process independent of

spend category, but it is not effective in achieving Spend Management transformation goals as

exemplified in the figure below.

Category Strategy to Spend Management

The Ariba Category Strategy approach takes an end-to-end category approach to spend management.

This methodology specifically focuses on establishing strong links between each process step in

procuring all of a company's strategic spend categories.

The Ariba Category Strategy implements a best-practices approach to a spend management process

step by step and category by category. This includes the following:

Identify OpportunityBenchmark and continuously improve contracts using insights culled from Level 3 data line item level

data specific to each category.

Develop Strategy

Develop an effective way to handle supplier engagement and negotiation for each spend category by

evaluating various criteria.

Source and Negotiate

Implement a strategic sourcing process that encompasses all categories of spend, and facilitates

knowledge sharing and process standardization across the company.

Implement Contract and Execute

For every purchasing transaction, enforce contracts and purchasing policies, collaborate with suppliers

in specification and price definition if need be.

Invoice and Pay

Reconcile invoices with POs and contracts at the line item level rather than just as the aggregate level.


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Monitor and Manage

Collect Level 3 data and measure qualitative and quantitative supplier performance.

The Ariba Category Strategy approach facilitates the effective management of ~100% of spend fromsourcing to procurement through put and also provides much higher savings ~12-15%, as shown

below. The approach analysis significantly enhances spend management effectiveness. The successful

implementation includes the development of strong links between each process step, i.e. a common tool

set or complex integrations between disparate tool sets as well as the incorporation of category-specific

requirements at each process step as depicted below:

The typical company functional approach to spend management uses a one-size-fits-all process tospend management across all spend categories. This is simple and easy, but it only works for three to

four percent savings on a small portion of spend; i.e. it is efficient but not effective. On the other hand,

the category strategy approach can effectively manage a company's strategic spend, but it seems to

render spend management too complex; especially given that a typical enterprise has 100-150

categories; i.e. it is effective but not efficient as exemplified below:

This dilemma generates a significant question of how to adopt the category strategy approach to spend

management and make it efficient, simple and scalable, as well as effective at the same time.


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Achieving Combined Benefits of Process Efficiency and Effectiveness

The resolution to achieving the combined benefits of process efficiency and effectiveness through the

category strategy approach to spend management is to group categories along common characteristics.This is enabled through finding the middle ground between a one-size-fits-all functional and fragmented

process on the one hand, and the 100-150 unique end-to-end processes as a result of the ideal category

strategy approach on the other.

This middle ground enable companies to adopt category-specific best practices that are effective while

at the same time reducing the number of unique processes to be scaleable for each category in order

to be efficient.

In order to reach to middle ground, categories need to align along three main dimensions:

Category Market Groups

Category market groups are comprised of Electronics, IT, Metals, Paper & Packaging, Plastics, Raw

Materials, Services and Transportation; with sub-groups under each of these main groups. All categorieswithin a given market group could be accommodated with a common strategic sourcing/reverse auction

strategy with minor variations at a category level. Salient characteristics that drive market groups are

common supply bases, supply bases, business impacts, benchmarks and savings history, sourcing

experience and spend characteristics.

Category P2P Process Groups

Category P2P process groups, on the other hand, are comprised of SKU-based categories, Travel,

Labor-Based categories, Customized/Complex Specs, Logistics and 3rd Party Services; with sub-groups

under each of these main groups. All categories within a given P2P process group could be accommodated

with a single common P2P process with minor variations at a category level.

Stakeholders

These groups within a procurement organization need to be aligned along the stakeholders (business

units, category owners) they serve to facilitate best-in-class customer service and gather non-procurement

related business requirements imposed by the stakeholders. However, these groups do not facilitate

operational scale since they do not look for common process characteristics across stakeholder groups

to facilitate efficiency and effectiveness. This is the reason why typically procurement organizations have

the right intent, but struggle in execution.

The alignment of these three groups facilitates the following as illustrated below:


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Organizational Impact of Category Strategy

A company's procurement organization is typically set up for day-to-day operations and not for spend

management transformation. Best-in-class procurement organizations focus on shifting resources fromtactical operational types to those more suited for spend management transformation, including the

following main groups:

Sourcing Operations: Responsible for sourcing categories and negotiating contracts

P2P Process Operations: Responsible for managing the procure-to-pay process for all

categories to ensure compliance with contracts and purchasing policies

Stakeholder Relationship Management: Responsible for providing customer care to spend owners

Technical Operations: Responsible for tool development and implementation, customer support

and supplier relationship management

Strategic Consulting: Responsible for strategic planning and change management (which is key

for promoting stakeholder adoption)

Organizational efficiency and effectiveness necessitate alignment of sourcing operations, P2P process

operations and stakeholder relationship management groups along common market dynamics, P2P

processes and stakeholders respectively. The category strategy approach to spend management will

have a big positive impact on organizational design. The figure below shows the key skill sets needed in

sourcing operations, P2P process operations, stakeholder relationship management, technical operations

and strategic consulting groups. Spend managers are critical to bringing all the three groups together.

They would be responsible for pushing specific categories through various operational groups to ensure

continuous throughput.


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Spend Management Transformation Savings Opportunity and Levers

A spend management transformation initiative leveraging Ariba's Category Strategy methodology

capabilities can provide 12 to 15 percent spend-related savings and 30 to 40 percent procurement cost-related savings across entire spend and cost bases respectively; the actual value varying by category

and state of current customer performance. These savings are achievable and also need to be

measured at the "realized" transaction level that hits the bottom line, and not savings identified

during a sourcing initiative. Savings can be achieved through the following main components:

Better Contract Pricing

An eight to ten percent reduction can be achieved on contracted unit prices through more effective

sourcing through category-specific sourcing strategies along category market groups, (i.e. sourcing

strategies, price and spec schema, benchmarks and market knowledge (pre-qualified supplier bases),

proven online reverse auction technology to increase market liquidity, a standardized strategic sourcing

process encompassing RFP document collaboration, reverse auctions, competitive bid analysis,knowledge sharing and savings tracking. This can be deployed across all category negotiations managers

both at the CPO and business unit levels.

Sustainable Contract Savings

Companies have difficulty capturing all their contracted savings throughout the purchasing transaction

due to contract non-compliance, with typical erosion levels at 20 to 40 percent of sourced savings. But,

close to 100 percent contract compliance can be achieved (i.e. 4-6% savings at the transactional

level) through the implementation of an end-to-end procure-to-pay platform to handle each step of the

P2P process: budgeting, requisitioning, supplier-buyer collaboration, contract enforcement, invoicing and

invoice-PO-fulfillment reconciliation.

The deployment of P2P processes aligned along category P2P process groups that promote contract

term enforcement and reconciliation to minimize rate non-compliance, enforce spec-related business

rules and facilitation of supplier-buyer collaboration on scope definition, and minimize spec non-compliance

and user adoption through tailored processes, to minimize vendor non-compliance all help to enable

contract savings.

Improvement on Contract Savings

Contracted savings can be improved by around four to five percent at the purchasing transaction level

through the deployment of P2P processes aligned along category P2P process groups that facilitate

automated spot buying wherever feasible (e.g. bulk buys, spot buy for every consulting purchase, one-

offs). The implementation of category-specific business rules for demand management (e.g. travel, PCs)

and the availability of superior information to ensure better management of customer demand andidentifying opportunities to optimize purchasing patterns.

Reduction in Procurement Costs

Operational costs can be reduced by 30 to 40 percent through the automation of P2P processes across

all categories to facilitate reduction of personnel involved in buying, requisitioning and disbursement; and

also reduce intangible "non-people" related paper transaction costs. The setting a standardized strategic

sourcing process can also reduce staffing levels needed in category negotiations operations resulting in

reduction in procurement costs.


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Continuous Improved Savings

One to two percent savings could be achieved in the "out" years on an annual basis by continuously

re-sourcing categories to exploit dynamic markets and match contracts with changing internal purchasingpatterns. The monitoring of category-specific Level 3 transaction data (price and quantities), the development

of an information backbone to drive sourcing decisions, and the ongoing measurement of supplier

performance can all be used as levers for further sourcing negotiations.

Extend Savings to Wider Spend Base

Given the vast number of categories that make up a typical spend base, companies have difficulty in

extending the savings methodologies and processes to all categories. This can be accomplished as

described above by grouping categories along common spend management methodologies and processes,

having dedicated resources on staff for each category group, and building tools and processes aligned

along these category P2P process groups.

Diagnostic Methodology & Process

Ariba's Category Strategy methodology enables companies to develop a strategic plan around category

strategies and guide the ensuing delivery cycle. The category strategy contains the following primary

steps as illustrated below.

Ariba has developed a proprietary diagnostic methodology and associated Excel-based model to help

clients develop a strategic plan around. The model leverages and incorporates our sourcing and procurement-

related benchmarks, spend management best practices around category strategy, and our past client

experience. The diagnostics and associated model is executed around a combination and quantitative

and qualitative assessments. It has the following main steps as illustrated in the diagram below:


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How Ariba Addresses These Challenges

The Ariba Category Strategy diagnostic methodology helps identify process and organizational gaps

needed to execute a spend management transformation. Ariba can help fill these gaps through; 1)Enterprise and integrated services; 2) Strategic consulting services; and 3) Best-in-class software tools.

Enterprise and Integrated Services

Our enterprise and integrated services across all skill sets fill a company's gaps both in terms of

resources and competencies. This forms our ability for execute spend management transformation

for all any company.

Strategic Consulting Services

Our strategic consulting organization can provide consulting services for developing a detailed

strategic/operations plan continuing from where the diagnostics leaves off and effectuating change

management in your organization.Best-in-Class Software Tools

Our software tools provide best-in-class functionalities that accommodate requirements of all market

groups and P2P process groups (i.e. ~100% of your spend) on a single end-to-end integrated platform.

These software tools fill the process gaps identified by our diagnostics and help your organization to

achieve self-sufficiency over time through process automation


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How Customers Have Benefited

Ariba's Category Strategy methodology to spend management is unique in the marketplace, providing

opportunities for companies to successfully begin the journey for Spend Management transformation.

This approach has had increasing success over the last 12 months. It has been successfully applied in

full range of companies from large multinationals, major airlines, oil and gas, and retailers.

Providing customer care for companies who have had limited success with a traditional "one-

size-fits-all" approach to spend management

Structuring creative savings-based strategic partnerships with customers that extend into a

spend management lifecycle

Developing plans for successfully executing spend management transformation programs

Helping customers plan for a major spend management initiative through strategic planning,

process design and change management

Developing a bottom-up business case to facilitate internal customer funding, especially when it

is predicated on demonstration of a strong ROI

Documents

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