How often have you heard the phrase what you don’t know is what costs you? This phrase has never been truer than when companies are trying to assess who and what they are spending their money on. Take this classic example of what happens when a corporation waits to long to see the light that shines when a strong and accurate spend analysis project is executed on their data.
“In 2000, a Fortune 200 Health Care Manufacturing Company decided to have an internal IT resource consolidate a few databases reflecting the primary US spend within the organization. Accounts payable data was added (few line item details) along with some supplier enrichment data that had been captured for a small subset of the suppliers. Because the organization was at the beginning of a large SAP implementation, they deemed this level of information to be adequate in the short term. Some small savings were achieved as the consolidated database was analyzed but, after 6 years of implementing SAP, spend details were still not available as needed for deeper sourcing needs. They still did not understand their spend at the level of detail required for sourcing purposes; data was collected at levels that were too high and was not useful to drive meaningful leverage and savings. Deciding to invest in a new round of professional and more comprehensive Spend Analysis and incorporating Global Spend enabled them to discover millions of dollars in hidden opportunities that they could have been saving every year.”
Now these results are not typical of every spend analysis project. The size of hidden opportunities varies widely depending on the size of a company and the number of finance systems they house. However, the downside to not establishing a spend analysis initiative into a corporations sourcing lifecycle is very clear. Here are just a few points that continue to show why Spend Analysis is so vital to any corporation.
This savings generally represents 10x and, in some cases, up to 100x ROI on the Spend Analysis project.
Companies NOT doing Spend Analysis fore-go millions of dollars that would go straight to the bottom-line of the company’s profitability.
On average companies save .25-1% on total spend dollars. For a company with $1 billion in spend, this equates to $2.5 – $10 million in new cost savings on an annual basis (that’s every year, not just a one-time savings opportunity).
—These facts represent results from over 100 customer engagements from companies across various industries.
Imagine for a second that you are a global company with at least 10-15 finance systems. How many opportunities are you missing in double payments, fraudulent payments, missed volume discounts, or even off-contract spend although you have preferred suppliers? This is the type of information that you can expect to become visible and take action on during a spend analysis project. With that said there are a lot of ways to get to that point. My next post will explain how the tools in Spend Analysis have changed over the years and what new technology exist to help you get to the end point faster, with more accuracy and visibility.
Last week, I got the heads up from my colleague, Andrew Bartolini, that he was going to leave the Aberdeen family to pursue other opportunities. To me, this seems like a very newsworthy event, as Andrew was the face of Supply Management for Aberdeen and will not be easily replaced. I also do not think that Abderdeen was expecting this, so there will likely be some large gaps they need to fill quickly. Knowing Andrew, I am sure he will be involved in some type of cordial transition.
From a personal perspective, I could not be more happy for him. I have to believe that he is making this move to redefine his role in the supply management industry. He is not going to a vendor, so I would put the money down that he will be launching his own vision of how analyst content should be generated and distributed. It would be a bold move, and one that I think the market would embrace.
From a professional perspective, I think it could usher a new era in analyst coverage for sourcing and procurement. Andrew has a deep network and strong knowledge base. By creating his own model, it might generate interest in a new way for analysts, vendors and practitioners to collaborate and improve. With the recent market consolidation around Gartner/AMR, there is certainly an opportunity for a start up to succeed in this area.
I truly look forward to seeing what Andrew ends up doing. It might end up being a big win for everyone.
The Administration has proposed a set of new rules to increase regulation of the banking industry. While we don’t know what the final outcome will look like, we do know that changes will be focused on lending, bank structure, and the separation of investment banking from retail banking. None of these changes will minimize the need to reduce expenses.
In the spirit of proposed changes, banks are already taking a hard look at their businesses and looking to redefine what is core as a recent article from American Banker explains. The key for companies will be to find the right outsourcing partner to help them address whatever regulations do emerge. We believe that banks of all sizes will look to both domestic and offshore outsourcing solutions such as Knowledge Processing Outsourcing (KPO) to help them deal with new reporting requirements.
Essentially banks will further lean on sourcing solutions to manage these changes and keep their expenses in line.
Supply & Demand Chain Executive Magazine, the executive’s user manual for successful supply and demand chain transformation, this week announced the tenth annual listing of Pros to Know in the Supply Chain Industry.
The Pros to Know is a listing of individuals from a software firm or service provider, consultancy, or analyst or research firm who have personally helped clients address the challenges of the recession and prepare for the recovery ahead. This year’s list included more than 130 Provider Pros to Know.
Four “Pros to Know” from Iasta were honored for 2010 including David Bush (CEO), a fifth year honoree, Jason Treida (COO), a third year honoree, Sean Delaney (Managing Director – UK), a second year honoree and Mireia Brancos (Managing Director – Northeast US), first year honoree. Iasta would also like to congratulate Juan Molina (VP Supply Chain Management of Westinghouse Electric Company), an Iasta customer, for his well-deserved inclusion as a first year “Pro to Know” Practitioner.
“What a great honor it is to be named among the ‘Pros to Know,’ especially with the tough year our customers faced,” says Delaney. As a Managing Director and second time “Pro to Know” honoree, Delaney has contributed to Iasta’s record growth, including the expansion of Iasta’s presence in Europe to serve the sourcing and related needs of procurement organizations. “Not only have we been extremely successful in helping our customers improve their bottom-line with our SmartSource SRM® technology, but we also recognized and responded to their emergent need for a spend analysis and visibility solution using SmartAnalytics®.”
Beginning in January, the magazine’s editorial selection committee culled through more than 400 submissions to find the applicants that best fit the criteria. Selection criteria Pros to Know included the programs/initiatives the Provider work on with their clients last year address the challenges of the recession, and what were the benefits of those projects/initiatives and lessons learned from the recession.
“This year’s Provider Pros to Know have shown themselves to be thought-leaders in the Supply Chain industry,” said Reese. “Highlighting the learning’s that the Provider ‘Pros to Know’ have taken out of the Great Recession provides our readers with a wealth of best practices that they can apply in their own supply chains, as well as insights into how leading organizations are positioning themselves for competitive advantage in the Great Recovery ahead.”
The full listing of the 2010 Pros to Know will be available in the February/March 2010 issue of Supply & Demand Chain Executive magazine and e-book beginning in the third week of March and on the Supply & Demand Chain Executive Web site at SDCExec.com/2010Prostoknow.
Iasta, a leading provider of eSourcing software and solutions, today announced that Gartner, Inc., a leading independent provider of research and analysis on the global information technology industry, has positioned Iasta in the “Challengers” quadrant of the “Strategic Sourcing Application Suites.” (i) The report assesses the top software providers by a list of criteria that comprise their “Ability to Execute” and “Completeness of Vision.” Iasta’s suite of products which cover the sourcing lifecycle from spend analysis, vendor management, sourcing, optimization and contract management perspectives have gained significant global traction, and now recognition, with this analyst announcement.
“We are proud to be included in the Magic Quadrant report,” says David Bush, CEO of Iasta. “It validates the immense value and that our SmartSource SRM suite has brought to our customers for the past decade, proven year-after-year by our vast worldwide growth and continuous innovation in eSourcing technology.”
The Gartner Report, “Magic Quadrant for Strategic Sourcing Application Suites,” gives Iasta high reference marks for technical support, ease of use, and overall cost of ownership and return on investment. Iasta is also noted as having “strong supply base management support in self-registration, RFI and supplier credential management” and “very good marks on system performance.”
In the services category, Iasta received “very high reference marks for business consulting services and training.” Deborah Wilson, Research Director with Gartner, notes in the report that “Business services play an important role in an organization’s ability to drive adoption of strategic sourcing technology. Full adoption requires procurement professionals to think in new ways and to make decisions that they never had to consider before when using manual sourcing methods.”
About Iasta
Iasta® is a proven leader of Enterprise Spend Management through SRM Best Practices. Founded in 2000, Iasta helps organizations solve traditional business problems in new ways by providing its customers with cutting-edge tools for making strategic decisions on how to save and spend their valuable resources. Iasta’s flagship products, SmartAnalytics® and SmartSource SRM®, are cornerstones to any effective supplier relationship management strategy as they enable companies to analyze, source and optimize business decisions. SmartAnalytics provides users with comprehensive and detailed access to the entire organization’s purchasing data while SmartSource SRM combines best-of-breed functionality that includes sourcing (auction, RFx), award analysis, contract management and supplier management.
About the Magic Quadrant
The Magic Quadrant is copyrighted 2010 by Gartner, Inc. and is reused with permission. The Magic Quadrant is a graphical representation of a marketplace at and for a specific time period. It depicts Gartner’s analysis of how certain vendors measure against criteria for that marketplace, as defined by Gartner. Gartner does not endorse any vendor, product or service depicted in the Magic Quadrant, and does not advise technology users to select only those vendors placed in the “Leaders” quadrant. The Magic Quadrant is intended solely as a research tool, and is not meant to be a specific guide to action. Gartner disclaims all warranties, express or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.
i) “Magic Quadrant for Strategic Sourcing Application Suites” by Debbie Wilson, February 23, 2010
ERP systems have been historically good at processing and recording transactions, but mining data for spend visibility was not one of them. Spend Analysis started in the early 1990’s at progressive companies like GE and at consulting firms like McKinsey. The idea was to mine existing spend data to identify areas where sourcing effort would be most profitable.
The idea in theory in the early days was cutting edge; however the methods to mine the data in an ERP system came with numerous problems including:
• ERP data is usually incomplete
• Contained duplicate vendors
• Poor commodity information
• Data is unchanging
Let’s dig deeper into these problems to better understand them.
ERP Data is Generally Incomplete: ERP systems record transactions which they are designed to do. However, they only record transactions that are made in that system and do not account for other systems that process transactions including P-cards. ERP’s also do not contain important SA information about supplier diversity, risk and scorecard metrics.
ERP Systems Contain Duplicate Vendors: An ERP system records the data that is entered in the transaction. It doesn’t consolidate their transactions into one supplier entity. For example, you could have 16 different transactions, with 16 different versions of Federal Express. Your transactions are just with FedEx, but it looks like you have 16 different suppliers. So you really have no idea how much you are spending with FedEx as a whole unless the transactions are entered identically by different people.
ERP Systems Don’t Contain Good Commodity Information: A good ERP system provides the ability to assign category codes to transactions, but the practitioner who is entering in the transactions usually is not well versed in the coding structure. In many, cases people don’t take the time to find the correct code, because they don’t understand the importance of it.
ERP Data is Unchanging: ERP systems are financial accounting systems by nature and because of that are designed to be rigid and make changing information about vendors or category codes very difficult. It can take weeks or months to modify the information.
All of these issues cause a very cloudy view of Spend Analysis. The problem multiplies itself with large global corporations, or with mergers and acquisitions, where you have numerous disparate ERP systems that don’t talk to each other. With incomplete, bad data, enormous savings opportunities are missed. This is where the data ends and the role of spend analysis begins. Stay tuned for Part 2: What is the value of Spend Analysis?
For more information about this topic and Spend Analysis click here for our White Paper.
Category management is very valuable to organizations that conduct sourcing initiatives and want to capture key knowledge around that specific sourcing category, integrated with the corresponding organizational Spend. This allows for ongoing category-specific measurements, such as rebate programs, Diversity Spend relative to specific items, and managing the overall status of the sourcing program to continually capture the intended cost savings. This can now be done category by category, which are typically managed by different personnel in the organization. Having Category management integrated with your Spend Analysis provides your organization with more than Spend Visibility and Spend Analysis. It truly provides ongoing and comprehensive “Spend Management”.
Spend Category Management requires 3 basic Spend Analysis related capabilities:
1) The ability to classify your Spend data to company sourcing categories, with flexibility for ongoing changes and sourcing breakouts.
2) The ability to isolate Sourcing categories as separate knowledge bases unto themselves, incorporating additional supplier, item, and market data.
3) The ability to channel and refresh organizational Spend data to the specific sourcing category on a regular basis, to drive ongoing measurements and Spend Management capabilities.
Until now, the above has been difficult. Spend data has typically been classified to UNSPSC codes and other classification schemes, but not specifically to the organizational Sourcing categories. Sometimes the data is rolled up into sourcing categories, but it has been difficult to maintain the relationships over time, especially as sourcing categories evolve with the organizations Sourcing programs and initiatives.
The graphs below summarize how Spend Analysis directly feeds into Category management, and the type of information that can be structured for ongoing measurements, dashboards, and management:
Organizations require Category management capabilities integrated with Spend Analysis as they mature and begin tracking specific Spend by Sourcing category. Category Management ensures that expected savings are managed and realized over the longer haul.
One of the big cost and “choke” points in Spend Analysis has been the difficulty in collecting the many different sources of Spend related data. Spend data typically resides in disparate systems, including ERP, AP, PO, Pcard, Suppliers, Supplier enrichment, Expenses, Invoices, Freight Bills, financial systems, sales systems, and more. Spend data can also be spread across many different company locations and systems, as well as available only in foreign languages, thereby making “all” Spend data very difficult to collect. Comprehensive Spend data is needed to achieve more in-depth Spend visibility and to uncover larger cost savings for the company. Typically in the past, vendors required companies to format the data, so it could be put into a fixed database, so it could be rendered to fixed reporting and analytics capabilities. Now that has all changed.
No, data cannot be collected in 10-15 seconds, aka Star Trek “Transporter” capabilities. But today’s data collection capabilities are not far off either. With newer data management applications having underlying dynamic database “data driven” technologies applied, company data can now be collected, audited, and cleansed easily, and in a short amount of time (in hours, vs. days and weeks). All that is needed is a header row defining the file’s data fields, a related template defined, and data validation and integration points applied. This is now done within the vendor data management system, so no IT burden is placed on the organization, except to forward month-end or year-end Spend related files as appropriate, which is an easy thing to do. No more data extraction templates forcing IT people to do field mapping and hard-code their own fields to fields that are predetermined. No data formatting to prescribed translation maps finding places for extraneous or custom data within a fixed database. Simply forward a Spend-related file to a vendor FTP site, and they take it from there.
This new data collection capability may be hard to initially comprehend, but now you can enjoy the ability to easily collect more expansive Spend related data, and drive new analysis and management capabilities. The more complex your organizational disparate data is, the more that “data driven” capabilities apply.
The available selection choices are not truly relevant to new “data driven” Spend Analysis applications. Dynamic database technology saves IT departments’ hours, if not days and weeks of work, and shortens the time to deployment or refresh. Essentially, translation maps are obsolete and a rigid element of the past.
The current political debate about Health care made me think about how this debate is relevant to Cost Reduction and Cost Avoidance. To provide a baseline of how I am defining my terminology I will use these definitions:
Cost reduction unquestionably creates value for an organization, by lowering costs compared to prior-period actual costs.
Cost avoidance means that actual costs continue to increase year over year, though perhaps “less fast” compared to some expectations.
I want to take a close look at the proposed solutions and comments made about this topic to identify how what method politicians are using in qualifying their savings.
Example 1: June 2009 AP article that states “Health industry leaders told [President] Obama they would slow rate increases by 1.5 percentage points a year by improving coordination, focusing on efficiency and embracing better technology and regulatory reform.”
This is a classic example of cost avoidance that truly provides no “real” savings. The costs will continue to go up, but it will simply be at slower rate than previous years.
Example 2: Implementing Electronic Medical Records
This could provide “real” cost reduction and savings on the amount spent in materials, time and coordination in the health care arena. It’s a standardized practice within Veteran Affairs Agency.
Example 3: Credits available for low income persons to obtain health insurance.
This is cost reduction. If an uninsured person is sick or seriously ill and needs medical care they go the emergency room. This cost the person enormous amounts of money and sometimes they don’t pay. The cost is then pushed onto other patients in the form of increased fees. If the uninsured are now insured it will reduce cost across the board.
Example 4: Allowing people to purchase health insurance across state lines
The natural ability of free markets and increased competition would drive the prices down thus creating cost reduction from previous years.
Example 5: Tort Reform
This is a huge area of cost reduction in Health care. The reason number one reason why it is so expensive to go to see a doctor is because they have to pay for very expensive malpractice insurance to help them in case someone sues them. With modifications in the law to limit their exposure and liability would require them to recoup less in their fees to their patients.
Now I am not a financial expert but it’s clear that out government is years behind in looking at ways for cost reduction. If we listen carefully to any proposal we can become more educated on whether the savings are realized or a smoke screen that slows rising costs. I think there are some good ideas in government, but any reform should always have a goal of cost reduction. As one CPO stated “You can literally go out of business while reporting great cost avoidance results.”
2010 should bring a flurry of new acquisitions with many established companies looking to expand product lines and increase growth within the organization.
Of these companies looking to expand through acquisition, raising capital expense to fund the newly acquired business unit will be a challenging experience in ramping-up operations with manufacturing and warehousing distribution.
Many companies will be looking to outside warehousing and distribution ( 3PL’s ) assistance in order to compensate the need to either add-on to a existing building or to reorganize a current floor plan.
It makes perfect sense when acquiring a new business unit to have the flexibility of outside warehousing and distribution. With all the challenges the current organization has with product line simplification, product integrity, customer retention and merging of operations and customer service the 3PL can add much value to the company but lending it’s expertise in distribution challenges.
Having the flexibility and an open working communication with the outside warehouse and distribution facility allows valuable time to evaluate and streamline the newly acquired business unit or product line.
The organization can now grow and nurture the new product line or reduce the number of SKU and not have it interfere with the current core business.
In the world of Spend Data Management and Spend Analytics, not much new technology has come forth over the past 5 years, until now. We have been stuck with ETL’s requiring structured data templates, fixed databases, reporting cubes, and manual data classification to name a few. Each of these technologies had less-than-desired automation and difficulties, or “choke” points, along the Spend Analysis process of collecting data, integrating it, cleansing it, classifying it, and analyzing/reporting on it for company Spend insights and cost savings opportunities. The new technology is known as “Dynamic Database” technology, and it is an advanced data processing capability perfect for Spend Analysis, Spend Management, and Category Management.
Dynamic database technology can quickly become a very technical discussion, and although it is revolutionary, it is not widely known beyond database guru’s, such as Oracle engineers. It is not like you start out with an existing car with no motor and customize the engine (an existing technology and tailor it). Everything about a dynamic database is setup for a specific purpose… you guessed it… “dynamically”. Applying it to the world of Spend Analysis, with real world examples, can help explain how it has opened up new capabilities in Spend Analysis not previously available with older technologies:
Examples and expanded capabilities of dynamic database technology across the Spend Analysis process:
Data Collection. Each companies specific data and business of sourcing, and we mean everything, can be accommodated, including global data in foreign languages. The data capture process is dynamic, meaning any data can be collected in any format easily. No formatted extracts are required.
Data Validation, Integration, and Cleansing. How data is validated…is dynamic, as data can now be integrated in ways it has never been integrated before, and cleansed more thoroughly across the additional relationships that are created.
Data Classification. How that data is classified…is dynamic, so multiple taxonomies can be supported independently AND related to each other. The rules that operate on the data are dynamic, and can be applied leveraging years of project and industry experience, as well as specific company business anomalies.
Analysis and Reporting. How data is reported…is dynamic, as all data is in memory and many core views and metrics across the customer data can now be rendered. Virtually any data collected can be reported. Strategic Sourcing and Category Management programs can be mirrored and monitored over time (with easy data refresh). Any change in business requirements and analysis needs can be accommodated by quickly collecting pertinent data and making simple reporting adjustments.
Application Interface. What really advances dynamic database technology is controlling all data and the related QA processes through a Spend Analysis application interface, making it flexible and easy to use.
Dynamic database technology, combined with a robust application interface for data collection, cleansing, classification, and reporting, is very unique and very powerful for Spend Analysis. It is a huge differentiation and advancement from previous methods and technologies. It truly raises the bar regarding what companies can now do to enhance Spend visibility, find new cost savings, and manage those savings.
Effectiveness, is key to competing in today’s business environment. Logistics is a process, a supply pipeline which connects you with your vendor/supplier and your customer.
Whether you compete domestically or globally competitors, vendors, suppliers and customers are worldwide.
The significant cost of logistic/distribution effects the entire supply chain. Logistics importance integrates and develops long-lasting alliance is between the vendors/suppliers and customers. Logistics contributes to a competitive advantage, viewed as a comprehensive process objective, making your product more competitive in the global marketplace.
Ask yourself how does your business unit measure up? Is your logistic/distribution network competitive? Does your current logistics/distribution network meet the requirements of your customer? Most importantly is it currently effective?
To summarize, a formal logistic program will create a competitive advantage for your business unit.
Service and cost benefits can distinguish you from your competitors.
A formal logistic network program will enhance your status as a supplier domestically and more importantly in the global network.
To approve Spend Analysis projects, project Sponsors often need to justify to their management why they need to utilize Spend Analysis providers to do the project, as opposed to internal IT resources. Some companies may not have this problem in that they don’t have IT resources available, so it is obvious they need to use outside help. But sometimes there may be conflicts internally. The simple answer is that internal IT resources usually do not have the focused experience and knowledge regarding the unique data cleansing and classification needed for Spend Analysis.
Internal IT resources typically have…
Familiarity with the corporate data sets and applications
Familiarity with the Corporate IT environment
Familiarity with a Corporate Reporting tool
Internal IT resources likely do not have (and Spend analysis providers have in spades)…
Related to (1) above…. IT resources can easily provide data files, but Vendors are more experienced to integrate and reconcile organizational data to specific Spend fields needed to properly drive meaningful Spend Analysis. Significant relationships exist between Spend data, and vendors know what to look for. They also have structured tools to process the data effectively.
Related to (3) above – IT resources can help with getting cleansed and classified data back into the company reporting environment, if a company reporting tool exists. Companies can also utilize vendor “Smart” Reporting, which is tailored for detailed Spend visibility and opportunity assessment.
Experience with cleansing data – for example, we have over 50,000 cleansing rules built over 12 years across over 200 projects and customers in many industries, already defined.
Experience with Supplier Grouping.
Experience optimizing Supplier data enrichment from vendors such as CVM Solutions or D&B.
Experience with data classification, handling numerous taxonomies for analysis, and grouping Spend data into meaningful sourcing categories. For example, we have a master library of over 100,000 master rules for items and categories we have seen across all those projects mentioned above.
Experience with structured data “refresh” and handling the nuances of combining, re-cleansing, re-grouping, and reclassifying data with rigor to all the taxonomies in use.
Experience in foreign languages and associated data processing and translation.
Experience in mining and reporting in-depth level s of “savings opportunity assessment and identification” versus basic pivot tables and cubes.
Internal IT resources usually do not have authority across divisions and countries to get data, so a vendor can help to make the integration and change happen.
Spend Analysis vendors provide focused tools and resources to implement advanced Spend Analysis within your organization, and can be utilized effectively in place of internal IT resource. And the cost is usually less than 1 or 2 full time equivalent headcount, which is a bargain as you discover savings opportunities.
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