Originally posted on on the e-Sourcing Forum [WayBackMachine] on Tuesday, 11 September 2007
Spend analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of gaining visibility into cost reduction, performance improvement, and contract compliance opportunities. It is part of an overall spend management and visibility process that includes the analysis, award, and monitoring of corporate spend. Additionally, it is the first and last step of the strategic sourcing process that drives total value. But it’s more than determining (i) who is buying (ii) what (iii) from whom (iv) when (v) and where (vi) and at what price. It’s about finding opportunities for savings across your organization, as obvious and non-obvious as they may be.
For example, here are five applications of spend analysis:
- Commodity Analysis
Build a separate, commodity specific dataset to determine how much of a commodity an organization is buying, if it’s being charged consistently, if the charges correspond to any contracts in place, and if there are any opportunities for spend consolidation. - Rebate and Refund Collection
Did you know that you’re probably paying too much for your office supplies and high-tech equipment? Some of the more innovative consultancies have found that many office supply and high-tech companies overcharge across the board, even when contracts are in place. For example, many large organizations sign “best price” agreements with a high-tech supplier for all computer purchases over the next year, but in reality, if they don’t watch prices, most often end up paying the same amount throughout the length of the contract term for the exact same configuration even though prices tend to decline a few percentage points every month for a given hardware configuration. Also, if office supply agreements are for fixed quantities, such as a 10-pack laser printer toner cartridges, it’s often the case that an organization will end up paying (significantly) more per unit if they order less or more. And then there’s the rebate – which you only get if you order a certain volume and, in many cases, prove it and ask for it. I’m not saying these overcharges are the product of willful malicious intent on the supplier, but that such inconsistencies can slip through both parties if proper systems are not in place to properly process invoices and analyze spend. - Maverick Spend Identification
$10M in negotiated savings is simply that – $10M in negotiated savings. For the savings to hit the bottom line, the contract, and all its terms, have to be adhered to. If your buyers still buy off contract, you could lose out on all of the savings, and more. Spend Analysis can not only detect how much spend is off contract, but if proper data is kept, it can identify which supplier is getting the bulk of the maverick spend, what department is causing it, and, in some cases even the individual behind the problem. - Fraud Reduction
Most employees are decent, hard working people. In fact, most are more honest than the employers they work for. (And if you don’t believe me, read the Freakonomics book or blog which chronicled Paul F. and his honor system bagel operation where he found, with 20 years of data to back it up, that executives are often less likely to pay on an honor system.) But if your company is large enough, chances are you have one or two bad apples trying to defraud you. And even though they might not be trying to ring up $241,000 at a strip club or charging you 998,787 to ship two 19-cent washers, chances are, if they are of the right persuasion, they are bilking you out of thousands of dollars a year. Without a good spend analysis tool, how will you ever find out that your salesperson is submitting the same 378.65 receipt for customer entertainment 6 times, or that your new executive is not only paying for customer entertainment on his new corporate credit card but his own golfing excursions as well, or that the 378.65 charge from a generic entertainment company is not for a meal for 4 client representatives but for your new executive’s lap dances at his favorite strip club? Don’t laugh and don’t say that never happens – it does – and sometimes all too often at big companies that have transactions that is an order of magnitude more than their accounts payable department can process and review manually. - Opportunity Assessment
Not only can it tell you who is buying what from whom, when, where, and at what price, it can tell you whether or not there are large variances in the spend for the same commodity, whether spending conforms to appropriate market indices (assuming you have access to such data), and whether there are opportunities for supplier consolidation or rationalization. The limits of a good spend analysis tool are only those imposed by your own imagination.
For considerably more information on the Spend Analysis process, it’s benefits and associated best practices, see the “Spend Analysis and Opportunity Assessment” wiki-paper (because there’s gold in those hills of data) over on the e-Sourcing Wiki [WayBackMachine]. In addition to a thorough overview on the spend analysis process, technology requirements, and technology approaches, it also describes, in detail, what spend analysis really is, why it is necessary, what the various approaches to it are, the challenges associated with a project, and some of the more common applications to which a sourcing professional can apply it.
Additionally, you may elect to download a free copy of the latest Aberdeen research on spend analysis, which was available for a limited time.