Sourcing professionals and researchers advocating spend analytics often say, “You need to be able to predict future spending based on past spending behavior.” However, as for AOL and the industry we are in, I personally believe this statement isn’t always accurate, so I’d like to offer a different perspective – from my closet.
We’ve all been there…
We grab a pair of pants from our closet, put them on, and realize they do not fit the way they did last year. Using this simple example, below are three tactics to consider and how their spending impacts the budget.
- Buy more pants (increase clothing spending)
- Change eating habits (decrease eating out budget and increase grocery budget)
- Lose weight (add new budgetary item for the gym and forecast clothing cost avoidance)
Approaching any of these tactics as isolated procurement decisions could result in the following:
1- Increase clothing spending – Using spend analytics, you could uncover trends based on X% increase on clothing spend year over year. In addition, Procurement could tackle the problem by selling clothes that don’t fit to a remarketer (e.g. yard sale, consignment). Another result could be to evaluate the tax implications of donating or negotiating discounts/coupons with retailers for the new purchases.
All of these solutions are tactical approaches to tackling the increase of spend in the narrow clothing category. However, these approaches have strategically missed the bigger picture of why spend is going up and do not focus on the bigger opportunity.
2- Decrease eating out budget and increase grocery budget – Using spend analytics, you could uncover the shifting of the similar expenses across related budget categories and could:
- Interpret a sum zero result and ignore it for now with close monitoring
- Categorically approach the two spend line items with volume pricing and cost escalators, which increase/decrease the cost impact as the need goes up and down. However, even a category approach has missed the root cause for why spend is shifting.
3- New budgetary item for the gym and forecast clothing cost avoidance – Using spend analytics, you could miss a new investment because analytics is historical and this spend is new. Procurement may get wind of this new investment and have the opportunity to do a full RFP on the gym spend (complete with performance measurements). Procurement may even deliver savings to the clothing line item because it reduced the amount of new purchases needed while in transition. However, Procurement’s efforts are undermined because finance has not planned transition spending. On the contrary, finance forecasted cost avoidance and Procurement was not aware. Even Procurement’s involvement on the new investment and transition costs has missed the strategic picture and focused on a tactical result.
Instead of letting spend analytics dictate projects for future spending, spend analysis solutions should be used as an instrument to gauge spending trends and what factors has caused those changes. In this example, spend changed because of a temporary environmental condition (an increase in our weight) and the holistic budget was impacted. To solve this problem, we needed to investigate further in order to plan how to procure goods and services. We may chose the same procurement projects, but the approach, execution, and results will be focused on achieving a strategic solution to the bigger picture – getting back into last winter’s pants!