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.
An article in the Wallstreet Journal provides a wonderful example of how implemented best practices and process improvement programs like Six Sigma can go astray after experts move to other projects, Managers relax accountability and excitement fades. The cartoon depicted below by Leif Parsons, gives the perfect illustration of what happens in the progression of these engagements.
The article reveals how at one aerospace company this implementation was executed then returned to the old poor practices.
The first step, as with any improvement program like AA or Six Sigma, is admitting and identify that you have a problem.
In the Aerospace company example, the second step was to bring in help by utilizing an expert in Six Sigma that energized the staff and helped them to understand where they needed to improve. They provided accountability in assigning tasks to these improvements. Employees embraced the new processes and implemented them. At first it slowed productivity, but quickly, as they became more accustomed to the new methods, productivity returned to normal levels. Once the goals of a department were reached, they were communicated with the company as a whole. This empowered the employees and gave them ownership of the project and their achievements. They are also rewarded with other rewards such as, restaurant gift cards, bonuses and exposure through notices in corporate newsletters.
After goals of improvement had been reached in one department, the expert and Managers would move their attention to another project or department assuming the success would sustain itself without continued support. This is where accountability loosens and enthusiasm for the process starts to revert to old practices. You can see this progression in the cartoon.
If you are one of these companies struggling to understand why these programs aren’t continuing to demonstrate results, ask yourself a simple question….What accountability and continued support am I providing my teams so they don’t revert? Think outside the box. You don’t need an expert to solve this problem. You need an expert to identify and fix it originally. The same goes for eSourcing technology deployments. Vendors can diagnose the opportunity and implement the technology properly, but sustainability needs to constantly be addressed with either internal or external resources.
Purchasing Magazine ran a listing of vendors that offer spend analysis solutions, available via this link. It must be a tall order for companies to accurately assess and evaluate this technology solution, as I would only consider 11 of the 17 to be spend analysis tools. Some of those 11, I gave the benefit of the doubt because I do not know of a single time we have competed against them, nor do I know of any companies using the technology for spend visibility needs (eg, US Bank).
In fact, there only 7 on the list that I know we have competed against. Hence, to me this list just further validates that quality Spend Management vendor information simply does not exist, and is the reason why practitioners often are forced to rely on Analysts. Unfortunately, this method of qualification is hardly better, as I have previously proclaimed (accurately, I might add).
Personally, I think this excerpt of definition from Wikipedia, hits it on the head: A disadvantage of dead reckoning is that since new positions are calculated solely from previous positions, the errors of the process are cumulative, so the error in the position fix grows with time. In a nutshell, unless you really know what you are doing and have a lot of time, the informational errors will compound and your decision will be made without modern day navigational equipment that keeps you on course.
So, if there are no resources that can accurately maintain an unbiased vendor ranking system, what is a buyer to do?
For starters, do your research from at least 3, preferably 5 resources. This would include reading some analyst market reports, but NEVER just one. You should also thoroughly digest vendor websites and document features and benefits, to make sure they are each saying enough of the right things for consistency. Next, speak to your colleagues that have used SA tools, or been on evaluation teams at other companies. They can help you really reduce the noise. Lastly, be ready to concentrate during a minimum of 5 product demos, maybe more. If you are truly committed to choosing a partner and awarding the business, it is likely the finalists will give you access to their tool with a custom data set from your side.
Choosing the right tool for spend visibility is hard enough, be sure Garmin is turned on.
Last month we had a major release for our clients, with the long awaited functionality for supplier information management, or whatever terminology kids use these days for vendor data management. As you can read in the press release, our COO was quite pleased. In fact, we had to edit his exact quote to be less enthusiastic.
Then again, why wouldn’t we be excited? Our integrated application can now give users the ability the design custom supplier portals with supplier type profiles and n-tier level classification. In the first month, a large number of clients have already begun tracking supplier data for reporting and risk assessments. Our next release will build in scorecarding data to enhance the supplier data content with the official release of a stand alone product – SmartSupplier.
Simple usages, such as maintaining supplier diversity information and sharing that information across the enterprise, are now part of our standard deployment. The maturation of the eSourcing solution marketplace continues to evolve and deliver value to practitioners.
A client asked me today if it is more usual for customer payments to be in advance or in arrears in Software-as-a-Service (SaaS) license agreements. It is a great question as this is a common point raised in licensing agreement negotiations.
The nature of a SaaS law license is that it is a subscription transaction. There is a guaranteed term with a right to some use of the technology. What makes SaaS transactions unique is the collaborative support services that support the license. Some attorneys want to treat these transactions as service engagements rather than software licensing – but true to the heart of any SaaS transaction, it is a license to use the technology. There is scope of use, restrictions on use, user seats, types of seats, IP restrictions and other common licensing terms.
This is key when chosing a pricing model as it should be priced as a software license (which requires the water to be turned on) rather than a services engagement (which requires delivery and acceptance). Regarding the guaranteed term, most SaaS licenses are either on-demand (client pays as they use) or term subscriptions (e.g., monthly or annual rates regardless of amount of use). For the on-demand licenses, payment terms are easy – they pay as they go.
For the installment payments, payment terms should be set based on the nature of the SaaS tool itself. If the payment is based on some variable component, such as a savings level acheived through the technology, it should be in arrears. If it is a structured payment schedule, it might as well be in advance.
Lawson, CEO Harry Debes was recently interviewed by ZDNet and had some fun things to say about the SaaS industry. Of course, this is Lawson, the ERP provider with no SaaS offering. Some of the highlights were quoted as:
“People will realize the hype about SaaS companies has been overblown within the next two years,” he said. “An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse.”
Also, of note:
Won’t people avoid the mistakes of “previous” SaaS incarnations, as you mentioned?
People are stupid. History has shown it repeats itself, and people make the same mistakes.
“Collapse” and “stupid” are pretty big words that could easily boomerang on him, especially in an interview where he basically says that the installed model is great because it traps the customer with high switching costs. Further, the assumption that Salesforce will miss an earnings call, which is then the trigger for a cataclysmic chain reaction, is laughable. Even if some of the biggest SaaS application providers do implode, there are thousands of companies doing well and proving the business case, day after day.
This interview was non sense, inconsistent, contradictory and baseless. I think I can pretty much leave it, at that.
Everyone who lays the smack down on the SaaS industry appears to be burned investors, installed application vendors, or hyperactive IT departments. I read this CIO article, which brings on frequently quoted crabass, Larry Ellison, about the industry. However, the vendors providing these solutions, the organizations that use them, and the budgets that fund them, all seem pretty happy.
Most of those consulted agreed that we’re at the beginning of something that’s going to be a lot bigger in coming years, so ride out the low profits now. “The [SaaS] shift is compelling to the customer and the vendors are forced to streamline and sell greater volume,” Pombriant noted. “That’s the way of markets. If you wait around until a new paradigm is profitable I guarantee you will miss the market.”
Part of it is just structural, the nature of the beast. “Given the way revenue is recognized by SaaS firms versus traditional perpetual license firms, over the life of the contract versus all up front, SaaS firms will not generate lots of profit until these fast growth opportunities slow,” Gianforte pointed out. “This is due to the way the revenue flywheel spins up in a SaaS firm… I believe you will see margins continue to expand across the entire SaaS industry in well-run firms.”
Of course, as also stated in the article, the Oracle founder has made a nice bit of money from investments like Netsuite and is a major shareholder in Salesforce, widely considered the largest SaaS company. The summary of this article is clear: SaaS is here to stay, it has too many benefits. Some of the most aggressive companies in the space are still running in the red, but that is most by design with an exit strategy in view. Profitability in SaaS is achievable, if that is what is desired.
Sometimes, I run across articles that are filled with so much common sense and guidance, that is refreshing to know you can get so much advice from one small article. This happened recently when I read How to Kill Your Software Selection Project in 10 Very Easy Steps. In this story were ten very real issues that happen during eSourcing software selections.
Fail to get user buy-in
Fail to get executive buy-in
Automate the wrong business processes (AKA “Look Ma, I’m doing the wrong thing, much, MUCH faster!”)
Over-express your requirements
Succumb to undue influence
Let software vendors set the pace in software demonstrations
Look for the magic bullet
Set unrealistic deadlines
Compare apples to oranges
Overlook the fatal flaws
You should read the entire article if there is even a possibility of a procurement application being reviewed. Additionally, I would map them out to make sure each one is being addressed by the team or individual tasked with the effort. Just treating this like a check list, can help create the right environment and expectations without getting lost in minutia or scope creep.
(Personally, I liked #6, as we encourage dynamic product demos that are driven by practitioner involvement or scripts. Any application demo that cannot do this should be instantly unplugged.)
One of the issues that I am very curious to watch in 2009, in regards to the procurement applications market, is how the current economic climate effects growth of procurement solutions providers.
Many of my non-industry friends make the assumption that a crappy economy is good for business because, “every one really needs to save money now, right?” Of course, I agree with that in principle, but the reality can be far from it. In truth, purchasing is always trying to save money but is often constrained by the limitations of budgets, which are generally set for good business reasons. However, future planning (and even immediate savings) can suffer when the short term benefits of budget and hiring freezes take effect in a company.
Many companies I speak to, client and non, are going through drastic cuts in staffing, hiring, consulting, travel, marketing and IT. This era we are in, is no different than what cash rich individuals can take advantage of now – go on an investment buying spree. Cash is King, and if you’ve got it, you should be throwing it in to every discounted opportunity there is out there. Just ask Warren Buffet.
I believe many companies, with progressive leadership that are aiming beyond the next quarter, will realize this and invest in procurement transformation and excellence. However, I fear that too many will not take the challenge and withdraw from opportunity to quickly become best in class. The eSourcing vendors will not lose their abilities and will more likely, be motivated to do more to help companies.
It reminds me of when I took Ballroom Dancing in college with my roommates. We were out numbered 4:1 by eager college girls that were queued up waiting for us to become available for the next dance. I felt like a genius every Tuesday and Thursday for 12 weeks for investing in an under utilized market that had extra capacity.
Supply Chain Brain recently republished findings from a study on SaaS fundamentals from Saugatuck Technology. In it, were some less than glowing prognostications about the immediate stability of the entire SaaS industry. I think you can already figure out where I will take this – would I really want to call attention to impending doom at Iasta?
However, they bring up some interesting points that are worth noting for vendors and practitioners of HR, CRM or SCM on-demand technologies. The authors begin by out lining the challenges that global companies are experiencing in the current economic recession. They point out that things will be rough but they disclose that many companies have cash on hand, in contrast to 2001, which could spur on spending for software and services.
Small / Emerging SaaS Providers Bear the Brunt. Those most vulnerable in this economic scenario are the small up-and-coming SaaS providers that have yet to establish a significant enough customer base that will allow them to ride out the storm. Given the “build it, they will come” nature of SaaS, with a predominately pay-as-you-go subscription framework, a large number of recently funded SaaS start-ups no doubt will struggle.
I am going to assume they are referring mostly to early stage start ups, here. When things slow down and business gets harder to close, the companies without annuity streams and established business models are in great danger of falling short. This would be a very scary time to not have everything well defined and repeatable in software companies.
The final summary concludes: The Bottom Line: The good news is that established SaaS companies have deferred -revenue-based business models that provide great revenue visibility–and which therefore allows them to better plan and match expenses to projected cash flows (vs. traditional enterprise software companies). So even in a tough economic climate, those firms that have already emerged will likely only grow stronger, as they can both better manage the downturn while potentially leveraging attractive acquisition candidates to their advantage.
For users, it is important to continually monitor the deferred revenues of public companies that they are evaluating–as even some of the SaaS giants like Salesforce are starting to show a flattening out of deferred revenue over the past two quarters, even though the top-line continues to grow nicely.
Well done, Saugatuck, you knocked it out of the park in the 9th inning. There are all kinds of important statements embedded in that closing. “Established”, “deferred revenue”, “better plan”, “projected cash flows”, are the exact reasons they go on to state that these companies that have already emerged will grow stronger as they bridge the gap over a downturn.
This is exactly where we stand right now, fortunately. All signs point to the weaker companies being severely exposed to risk via credit, sales or immature business execution. I think in the next 12 months, there will be a spike in acquisitions (publicly discussed as mergers) and some outright shutdowns. One has already occurred to the best of my knowledge, which I will discuss later.
I was recently reading through the Financial Times, which was running a special section on digital business. In it were a number of interesting articles about IT procurement and the current state of investments, architecture, homogeny and best practices.
Via a study by PwC partner, Bob Zukis, some conclusions are being drawn to the productivity (or lack) of organizations which has traditionally benefited from heavy IT investments. However, the tide is changing due in large part to the growing complexity of large implemented systems.
As consumption of IT increases, and as technologies change and advance, businesses have been left to cobble together disparate software and hardware systems and tools.
Instead of supporting innovation, the bulk of spending ends up propping up existing systems.
Of course, these findings are describing the endless quagmire that results from a major system implementation with huge customizations needed and multiple modules. Usually, the breadth of these applications has been developed through a combination of acquisitions and changing priorities which fly the banner of a single, unified logo, but in reality are never truly the same.
As one could assume while reading, these are issues that SaaS solutions generally do not have. FT even calls out this as an example of changing philosophies “to significantly reduce the capital wasted in supporting unused software and hardware”. In fact, many vendors in this space are currently repositioning their legacy business models to be more SaaS friendly, or in some cases, shutting down product lines with the intention of being SaaS only.
Some companies will always defer to the added complexity of installed software for sensitive data, such CLM. But in many cases, even this does not warrant the upfront and ongoing expense which is also tied to long delays waiting for the technology to go live.
The most common request from IT buyers is for software or hardware that works the first time, followed closely by fewer releases and updates. Both factors can dramatically affect the cost of running an IT system and, he says, rank ahead of both price and features for most CIOs.
One of the most common misconceptions since “eggs are bad for you” or “England can win the next World Cup” is that, when it comes to selecting an automated purchasing system, an organization must choose between ERP and e-Procurement. A large number of Fortune 500 companies that have implemented best-of-breed e-Procurement systems over the last 5-7 years have shelved or are considering shelving their software due to problems pushing enough spend through the system. On the flip side, a considerable number of mid-sized companies (and state governments, who often track the mid-market sector in technology adoption) are, like their Fortune 500 counterparts did in the late 90s/early 2000s, considering the switch to e-Procurement due to its perceived functionality superiority over ERP purchasing applications.
What many Fortune 500 enterprises, mid-market companies and state governments fail to realize (with the exception of a few progressive organizations that I will case study in the weeks ahead) is that your e-Procurement system can peacefully (nay, productively!) co-exist with your ERP purchasing module. The secret lies in what each player brings to the table. Your ERP purchasing application brings purchasing transaction workflow that is, by definition, integrated seamlessly with your accounts payable, general ledger, and inventory systems. Your e-Procurement system on the other hand delivers the best-in-breed catalog and content management capability that ultimately represents the secret sauce for driving maximum potential spend through your preferred supplier contracts.
After making a presentation at my local ISM chapter last week I was talking to a VP of Procurement of a local Fortune 500 company who was relating their use of a “hybrid” e-Procurement/ERP approach (let’s call it e-PERP, shall we?) that they had been using successfully for nearly a year. In this company’s model, users select the products and services they need from multiple online catalogs all hosted in one consolidated “common look and feel” environment by a best-in-breed e-Procurement provider (at least a provider you would think of as an e-Procurement provider although in this model it is their catalog functionality, not their workflow functionality, that is being taken advantage of). But what is key is that once they have made their selection, the complete requisition through payment workflow is conducted within the ERP application. Sounds a bit like the old e-Procurement punch-out, right? Well it does a bit but with e-PERP there are two critical differences, these being:
Punch-out (or “round trip” for those of us who remember CommerceOne!) has historically has been a method for bringing catalog item data from a supplier’s web site into e-Procurement for PO creation purposes. An organization would then need e-Procurement/ERP integration to bring the item data into ERP for reconciliation, payment, posting and inventory purposes. The e-PERP model brings item data directly into ERP, bypassing e-Procurement workflow which is not being utilized. This accomplished by the best-of-breed e-Procurement/catalog provider implementing XML integration directly with the ERP application (Oracle/PeopleSoft and SciQuest do this today as part of their partnership).
Whereas punch-out only worked (effectively) for the larger vendors like Grainger and Corporate Express who had the resources to build punch-out compatible web sites, the e-PERP model works even for “Mom and Pop” vendors. This is because the best-in-breed catalog providers have built core competencies for creating and maintaining web catalogs for any supplier (even small local vendors that have never had a web presence before). This means that by using e-PERP an organization – with the help of its best-in-breed provider – can upload all of its preferred supplier contract content to the web catalogs in as little as 2-3 weeks, leading to rapid and effective utilization of its agreements by users and very high levels of contract compliance. This is in contrast to the ERP-only approach where an organization would have to build and maintain supplier catalogs behind its firewall, a far more lengthy and costly endeavor. And the e-Procurement-only approach? Well here you have the integration issue and the need to explain to your CEO why you are not using the ERP system you spent millions of dollars implementing!
Over the next few weeks I will be researching additional case studies of e-PERP in practice. I will be reaching out to companies, public sector entities, e-Procurement and ERP vendors to validate that I am not “smoking something” in thinking that such historically fierce adversaries can co-exist in value-added harmony. I will be looking for further examples of organizations who have realized that you really can have your ERP Purchasing cake, eat it, and enjoy lashings of e-Procurement ROI for dessert.
Oh, and England’s chances in the 2010 World Cup? Not a hope.
(Note: the names, client details and even spend categories in this post have been changed to protect the “not so innocent”!)
Following on the heels of my last posting “Can a Spend Analysis Have an ROI?” I feel obligated to provide a living breathing example of a situation where someone – in this case a consulting firm – decided NOT to do a spend analysis but plow ahead with sourcing. Okay, it wasn’t just any consulting firm – it was the firm that yours truly was working for at the time (but I’ve worked for so many you’ll never guess which one). And okay, it wasn’t just any project at this consulting firm but it was the project that I was working on at the time. Shame on you, Mark. But hey – I was young and I definitely needed the money!
Anyway here’s the back-story. Our firm had just won a major strategic sourcing project for a $5B consumer products company. Big – about $1.5M in total fees for sourcing of seven spend categories including office supplies, MRO, temps, janitorial services, PCs, corrugated packaging, and travel. How do you think we picked the Magnificent Seven? They sound the typical band of villains, right? Well, it was a very scientific process that unfolded late one Thursday afternoon in the middle of a mid-west summer. I know it was a Thursday afternoon because we would fly in to the client on Monday mornings and fly home Thursday night, and I remember the meeting where the Seven were picked took place just before we all grabbed our taxis for the airport. My Partner and I were sitting with the client’s VP Procurement and a snippet of the conversation went something like this:
CONSULTING FIRM PARTNER: Well Chris, looking at the GL numbers from Charlie (Charlie was a Financial Analyst in Accounting) I’d say we have seven candidates that look perfect for strategic sourcing.
CLIENT VP OF PROCUREMENT: What’s the rationale, Brian?
CONSULTING FIRM PARTNER: Well we usually find that the best categories to pursue are the ones with reasonable spend that haven’t been sourced – that means higher savings – and ones that also don’t present too much of a challenge from a complexity or stakeholder resistance point of view. That way you stand the best chance of capturing some decent benefits while also building the skills and confidence in your organization for taking on more challenging categories later.
CLIENT VP OF PROCUREMENT: Makes sense. So these are the categories? (Looks at the list of the Magnificent Seven). Total spend about $100 million…….that would net us about $10-15 million savings from your estimates, right? I like it. What’s next? Your team will create the detailed work plan?
CONSULTING FIRM PARTNER: Mark’s on it.
What happened next? Well it turned out that three of the categories proved to be massive disappointments after we found that the spend available for sourcing in each of these categories was much less than what had originally been thought. Embarrassingly less, in fact. The reason for this was very simple – the accounting data used to make the sourcing decisions (spend by general ledger code with a few cuts of spend by supplier) had failed to provide the necessary detail and accuracy to make an informed decision. What should have happened? We should have conducted a spend analysis to cleanse the accounting data and classify it into commodity groups based on all the clues available such as vendor name, GL code and cost center. Where we didn’t have enough clues in the data to break out a commodity we should have asked the using departments to help clarify what had been spent with whom. Oh, and we should also have asked whether there were any planned reductions in usage in any of the categories. If we’d done that we would never have picked three of the Magnificent Seven, would never have wasted months of our time and the client’s time chasing minuscule benefits (one category was canned early on, but the other two were continued largely to save face) and – most important – would not have disappointed our client.
What really happened in this case? We believed Charlie from Accounting! Now Charlie is a good guy and does good work. His accounting data works fine for financial reporting and budget planning. But in its raw form it just doesn’t cut it for making effective major resource deployment decisions during the planning of a strategic sourcing program. To accomplish this you need to invest in a spend analysis to transform Charlie’s numbers into meaningful purchasing intelligence. Ignore this advice while recruiting your next “Magnificent Seven” and you may find yourself riding into Sourcingville firing blanks with Charlie watching safely from the saloon.
Would a private equity firm ever think about investing in a company without conducting a comprehensive analysis of its ability to generate an attractive future return? Of course not! A friend of mine in private equity once told me that for every one hundred million dollars a PE firm invests it has spent a million dollars in internal salaries and due diligence consulting fees analyzing the deal prior to pulling the trigger.
In a somewhat similar vein, would you ever think about buying a new or used car without carrying out at least a rudimentary analysis of the comparative reliability and performance of the various models? I didn’t think so. If you’re like me, in addition to burying yourself in Consumer Reports you also spend all the weekends between February and July test driving every vehicle under the sun until your significant other finally explodes “enough already – make up your mind!”
What about hiring someone for your company? You wouldn’t make an offer to a person without a rigorous evaluation of their capability to perform the job would you? You pick apart resumes, fly candidates in for interviews, give them case studies, call their references, and conduct drug screens and background checks before extending an offer.
What’s the common theme in each of the above examples? It’s that in each case someone is making an investment of money (the due diligence consulting fees, the job candidate travel expenses) or time (lost family time at weekends doing test drives, lost work time interviewing candidates) to gather information critical to a particular decision making process. The return on the investment is an increased probability of a favorable outcome from the decision – a higher profit when the PE firm sells the company three years later, a pleasurable ownership experience for the car buyer, and a high performing employee for the hiring company.
So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? Quite simply, numerous companies of all sizes across many industries are making high dollar resource deployment decisions in procurement while having little or no access to a piece of information that is critical to the procurement decision making process. That piece of information would be about SPEND. Information providing answers to massively important questions such as: What is total spend? What is spend by commodity, supplier, and department? How much spend is currently under contract, in total and within each commodity? How many suppliers account for the top 80% of spend in each commodity? With how many different departments are your highest spend suppliers doing business? How much spend in each commodity is with non-approved suppliers? Which departments are responsible for the non-approved spend? Only by having answers to these type of questions will an organization be able to identify those commodities, suppliers and departments where the application of scarce procurement resources will yield the highest return.
How does an organization get these answers? By conducting a SPEND ANALYSIS, a process for producing a consolidated and accurate view of an organization’s purchasing expenditures by commodity, supplier and department. I won’t go into the intricate details of the spend analysis process here or the various tools available in the market to conduct one but, yes, to perform a spend analysis you will need to….make an investment! Depending on the approach you take the investment will take the form of people cost to conduct an internal analysis, software license fees for a tool, consultant fees, or a combination of all of these. The key is to perform an effective spend analysis that allows your procurement organization to focus its people, processes and technologies in the areas that will yield the greatest benefits. Examples of such areas are commodities with the highest total spend across the enterprise, commodities with too many suppliers, suppliers doing high volumes of business with different departments, and departments spending large amounts with non-approved vendors. One of my clients with $500M of total spend recently conducted a spend analysis that identified just over $100M of spend with opportunities for sourcing, incumbent renegotiation and maverick spend reduction. Following the spend analysis this company focused its best and brightest commodity managers exclusively on this $100M and realized $28M of annualized cost savings. Without the spend analysis the same talent would have been wandering blind amongst the $500M and would have been very lucky to have found half of the $28M. Let’s say they were very lucky and found over half, say $18M. That would still mean that conducting the spend analysis had led to an additional $10M of savings. And what did the spend analysis cost? Less than $100K in software and services. Guess what, there’s a spend analysis ROI. And an attractive one at that.
You would be surprised (unless you get to see as many procurement departments as I do) just how many companies today are not able to identify the opportunity areas described above, and by inference are not able to prioritize the deployment of their procurement resources. Many of these companies will tell you they know where the cost savings are. They’ll tell you they know their business and that they know where to look. But they don’t really. They guess where to focus their people. They roll the dice on where to conduct a reverse auction. And they come up with dry holes again and again. Why? Because they haven’t invested. They haven’t done the due diligence. They haven’t test driven the commodities. They haven’t fully evaluated the candidates. They haven’t done a spend analysis.
I was perusing an old article on CIO.com, which was prognosticating the future of 2008 in enterprise applications, over the weekend. This is not exactly the market that eSourcing tools are classified, but we do have significant crossing of streams, since “Blue” and “Red” exist.
There was a lot of the typical, re-hashed information about vendor consolidation, and even something about wireless security issues of RFID in the supply chain technology. However, what I found most interesting, was the first comment by an anonymous reader. They found the article “weak” and offered up their own take:
Anonymous Tue, 2007-12-18 14:55
This article is at least weak and maybe even suspect for being the laziest of 2007. Six App Trends to Watch? Try this on for size:
1) Enterprise application vendors call “no joy” on big deployments going forward. Have to adjust to the small business market. Afraid to alienate big customers… It is as if they are retooling a manufacturing process while they are manufacturing… What a mess they’ve created…
2) Software As A Service takes a leap forward for all. SAAS consumption goes through the roof. This is REAL!!!
3) Microsoft’s SQL imploding in the ERP arena. Now what are you going to do?
4) Business Process Modeling in the ERP (SAP, ORACLE, others)space taking baby steps now but the trend is toward more, faster.
5) A very questionable trend toward yearly “licenses” as opposed to maintenance agreements are one way Enterprise software vendors will make up for lack-luster sales in 08 and beyond.
6) “Who’s your daddy” syndrome as companies swallow each other whole and struggle to make a sales pitch to new and existing customers that they are not in Kansas anymore and “there is value now” as a result of the acquisition.
Okay, I’m done.
I do not know who “Anonymous” is, but this comment has more quality information than the entire article.
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