SPEND ANALYSIS AS WE KNOW IS DEAD!!JOHN GREER

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Preface – Coming fresh from a conference of procurement practitioners, I

couldn’t stop but deeply reflect upon my own experience of spend analysis - a critical capability for procurement functions - the mis-

conceptions and the hype around it. The application of spend anal-ysis and how / why practitioners use it has evolved during past few

years but unfortunately the way it is sold - has not!

Well, I say this- because after spending more than three decades in corporate procurement working with one of the largest and global

leader in technology and media business, having personally sourced and led full lifecycle management of spend in excess of 50 billion

USD across the full spectrum of Indirect spend and commodities - I have come to realize that the way spend analysis is sold even today is so out of context to what the sourcing and procurement practi-

tioners really need!

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LET US EXAMINE WHAT DOES IT MEAN….

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#1: SPEND ANALYSIS IS SPEND REPORTS ABOUT YOUR TOP VENDORS, TOP CATEGORIES ETC

Spend analysis is spend reports about your top ven-dors, top categories etc – This is not entirely true…spend reporting is different from analysis - analysis by definition means critical examination of facts / data presented with a hypothesis and a conclusion. I am surprised that after so many years of talking about spend analysis as a capability discipline and using it, when the topic of spend analysis comes, both service providers and customers often give exam-ple of knowing the top suppliers and a lot of slicing and dicing on those dimensions. Well any strategic sourcing leader or category director needs to know the top / key suppliers in his portfolio of spend categories anyway, this is basic! In-fact, even when many fancier (as avail-

able today) tools for analyzing spend were not available, smart sourcing managers will often know their top suppliers, what products and services they supply, how much do they spend with top suppliers etc through their own tools – spreadsheets, diary notes, files and folders etc. There is nothing wrong in it. In-fact, if a company needs significantly sophisticated tools just to know their top suppliers in a category or area – then there is some-thing fundamentally wrong with the upstream processes – demand management, sourcing, contracting process-es and compliance of procure to pay. The problem lies somewhere else not with the tools available with sourc-ing and procurement team.

The problem lies somewhere else

not with the tools available

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IT IS THE CLASSIC A,B,C RULE. If a company finds supplier spend not correctly mapped to what would form their top tier suppliers or A and B class suppliers then it is reflective of a highly broken

and fragmented upstream process of – high spend not on contracts or POs; significant demand management issues and most importantly how the sourcing team in that company is engaged across the company for large spend dollars.

IF THE UPSTREAM PROCESS – and I am not talking here data classification, it is another often used tactics by solution pro-viders - of demand management and procurement / sourcing team engagement by business is fixed , having a handle on spend analysis of your top vendors can easily be accomplished by any reporting tool and even one of the greatest reporting tool we have ever known – Microsoft Excel. Yes, it may take some effort to get pretty charts and data visualization but with today’s advancement on design and UX, that is a problem which can easily be addressed.

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#2: WHY SUPPLIERS WITH LOW DOLLAR SPEND HAPPEN

Ok, so if spend analysis is not just about getting to know top spend suppliers are or what is the money spent with or on what then spend analysis has got to be about re-ports on low spend suppliers, right - isn’t it?

Businesses incur some spend-ing on their own (the thresholds vary for some companies it may be less than 5K, for others it may be less than 50K etc)

Sorry, that is not correct either!Yes, agreed that any procurement team should know details of the last dollar spent with any supplier. This is a very nice to have situation but the question is – is it really essential.

Let us first understand why suppliers with low dollar spend happen. In most companies –• Businesses incur some spending on their own (the

thresholds vary for some companies it may be less than 5K, for others it may be less than 50K etc)

• There is often the case of spend on specialized items / services which may not be big dollars but is needed

• There is often emergency spend or one time es-sential spend, etc

Now to what extent any or more of the above is justi-fied can be debated endlessly but the larger question is that these are the realities of any living and breathing enterprise and while there are tactics, processes and tools to control or minimize spend due to the above, there will always be some tail spend and tail suppliers (the extent and length of such a tail can be proactively managed and reduced…but there will always be some and I will go to the extent of saying a bit of such tail spend is healthy)

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Hence the larger question is where should a company spend more efforts in correctly classifying its spend records or suppliers, to anyhow get closer to an accurate spend report of this low dollar spend, or should they spend more efforts on understanding the cause of such low dollar spend / suppliers and how such spend is oc-curring - processes and underlying systems. I am often amused with how smart solution providers use a number of tactics by showing wrong classification / assignment / mapping of all kinds of dimensions (suppli-ers, categories, cost centers, G/L, SIC code etc) and exam-ples of spend generally from this segment – in order to prove the need for spend analysis.

But the fact remains that –• If there is a supplier providing really specialized

service or product – not high on spend but applica-tion / usage – you as a sourcing professional need to know it and you shouldn’t be made to depend on

spend reporting tools which always give you a trail-ing view based on when the last data refresh cycle in your spend tool happened.

• If there are instances of one time spend – they are one time spend for a reason , it can be reduced – for sure but very rarely could it be eliminated or really clubbed with other spend categories etc

• If there are instances of discretionary spend, emer-gency spend etc then something else in the process upstream needs to be fixed and analyzed then just pouring precious man-hours in trying to find incor-rect spend assignment and fixing it in the report.

Where should a company spend more efforts?

The process upstream needs to be fixed and analyzed than just pouring precious man-hours in trying to find incorrect spend

assignment and fixing it in the report.

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#3: SPEND ANALYSIS IS NOT ABOUT JUST DATA CLASSIFICATION

Classifying spend data is good and is one of the first steps of good practices in maintaining and enabling many other processes such as the correct routing and approval workflow for requisitions, right procurement channel etc But it is not the be all and end all of spend analysis. In-fact I would argue that there are many ways of fixing the data upstream. Having a data classification engine downstream and trying to get correct spend reports by correctly classifying wrong and poor data; inaccurate purchasing and payment infor-mation – that has already occurred - only helps in identifying and penalizing the buyers or users. This information could be used and should be used to fix the ‘pro-cesses’ upstream in source-to-settle value chain.

In-fact I would argue that there are many ways of fixing the data upstream.

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THERE ARE MANY AREAS WHERE THE CURRENT APPROACH AND SOLUTIONS FOR SPEND ANALYSIS FAIL TO HELP CATEGORY EXPERTS AND BUYERS –

#4:

Many In-direct spend categories have complex under-lying variables determining the source to pay process. For example, let us take the case of one such category of Facilities Spend. Facilities spend is one classic case where how it is sourced and consumed in an enterprise determines the form of available spend data. For exam-ple If you have a fully integrated model with a facilities management service provider visibility into spend data is

4.1 THE CURIOUS CASE OF COMPLEX SPEND CATEGORIES

highly determined by the access to 2nd and 3rd tier pass through spend. Even some of the best run procurement departments do not have the desired visibility into this spend. If it is a partially integrated or hybrid model, then the spend data visibility is highly linked to the source-to-settle process as well as the KPIs for performance with 2nd and 3rd tier suppliers.

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It is important to understand that the spend data that an enterprise generates is an outcome of the source to settle process. It is how this process is set-up and man-aged is what determines the quality of spend data that is generated, spend analysis process and its effectiveness in driving procurement transformation. For example – very few companies have the visibility into spend man-agement KPIs like –

• 4.2.1 How much time is spent by its sourcing team in managing the spend requests of different thresholds for example less than 100K, 250K, 1Mn, 5Mn, 50 Mn. Etc and how many of those.

4.2 PROCUREMENT PROCESS KPIS

4.2.2 Is the work load efficiently balanced with respect to – volume, skills, number of head count with respect to categories and SLA’s agreed with business. 4.2.3 If such data could slice and diced – not once but at will, benchmark with peer companies - it opens up the possibilities of improving procure-ment effectiveness to a whole new set of discussion.

I am surprised that how difficult even today is to get some basic data about low dollar transactions across companies for example it not easy to answer – how many unique suppliers do I have with whom I spend less than 50K or 100K every year, do I have one transactions with them or a few transactions, do any of these sup-

4.3 LOW DOLLAR SPEND pliers provide item / service that is critical for business, how much time is spent by my internal teams managing these suppliers (supplier engagement lifecycle – cre-ation, transacting, maintaining and hopefully at some point in time sun setting) etc

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We all know that spend analysis underpins not just strategic sourcing but what I would call the full lifecycle management of spend – essentially the greatest lever for improv-

ing the bottom line or how far the sales or revenue dollar of an enterprise could go.

Automating or fixing with a tool a complex, inefficient process will only create more pain as it will create wrong data even

faster and from there it is only a downward spiral!!

This is also the reason - how spend analysis solutions and services are brought or sold – needs to undergo a fundamental change. There is a blue ocean opportunity for solution providers / service providers alike but most importantly it is the user base that has to start asking the right (and some-

times even tough) questions in order to evaluate the investment made (how to leverage existing investment) or to evaluate the effectiveness of a new system. There are a many horror stories of companies having invested in tools and platforms and then hiring teams to manage those tools which

promised automation in the first place.

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