This summer, Ariba put out a decent white paper titled Spend Management – A Great ERP Boost that Lowers Costs and Increases Margins that pointed out that Spend Management complements, enhances, and seamlessly integrates with ERP to enable people, processes, and technologies to improve profitability while reducing risk, optimize the management of global resources, and increase overall competitive advantage while achieving significant operational savings.
The paper pointed out that while ERP may provide the tools to manage transaction processing and financial reporting, it lacks the forward-looking visibility needed to manage costs, support business unit decisions, or plan, budget and forecast spend properly. In comparison, Spend Management fills the gaps and extends the practical uses of ERP to make every day a good day for business. Furthermore, Spend Management is strategic, addressing the larger, mission-level issue of how to spend less as an organization in comparison to ERP [which] is more tactical, addressing the more granular issues of making more efficient spending decisions using control tracking mechanisms.
The paper then states that Spend Management and ERP belong together, and for a simple reason that any organization can easily understand and accept – the unequivocal, incontrovertible need to achieve year-over-year cost savings and increased profitability. Spend Management solutions provide spend data to ERP systems, enabling companies to get a clear, consolidated view of all their spend data, which they can leverage to make better business decisions that drive business improvements and enhance financial performance.
Not bad, but there are at least three obvious problems with this paper:
- Spend Management solutions don’t provide spend data to ERP systems, e-Procurement systems and e-Commerce systems do. e-Procurement systems are simply a component of Spend Management.
- Neither Spend Management systems, ERP systems, nor their union guarantee year-over-year cost savings, and thus implying that their union addresses the need to achieve year-over-year cost savings is misleading. Remember, there ain’t no saving in a perfect world, and if you’re already more-or-less getting the best price for a commodity, you’re not going to negotiate a better price, especially when energy and raw material costs are spiking.
- You don’t need ERP at all for proper spend management!
Let’s address each of these in turn:
- Spend Management is the holistic process of managing your spend. It is usually implemented using a set of appropriate supporting technologies, including spend analysis, e-Sourcing, decision optimization, contract management, e-Procurement, etc., but could (theoretically) be accomplished without one or more technological components. Spend data is derived from spend transactions, which are usually accomplished by e-Commerce, e-Procurement systems (also known as P2P or EIPP), or e-Payment systems.
- You’ll only get cost savings where there are savings to be had. This is generally true in any category that has not been strategically sourced before, or any category that has not been strategically sourced recently, but not necessarily true in a category that was just strategically sourced for the second or third time. Once you’ve taken all the fat out of the supplier’s margins, built an accurate should cost model, and leveraged all you can get out of your volume, you might not be able to get a better price. Then Spend Management is all about cost avoidance – avoiding, or at least minimizing, the eventual cost increases due to raw material price increases, energy and production cost increases, and plain old inflation.
- The paper indicates that the role of the ERP is to make more efficient spending decisions, manage transactions, track information, provide aggregate reporting, and enable visibility. However, efficient spending decisions are made by knowledgeable sourcing professionals enabled by the right technologies that give them the right visibility and decision support, transactions can be managed and tracked by your standard relational database engine, aggregate reporting can be provided by any decent business intelligence tool, which can work off a plain ol’ database just as easily as it can off an ERP, and visibility is enabled by having all of your data in one place, which can be accomplished with any database, business intelligence, or spend analysis tool that supports a data warehouse or OLAP cube.
In other words, Spend Management is an ERP boost, but you don’t need an ERP to get the benefits out of spend management and the tools and technologies that support it. You can not only run all of today’s supporting e-Sourcing and e-Procurement tools stand-alone, but you can even run them on-demand. If you have an ERP, great – you’ve already taken a step to centralizing and normalizing your data in a central repository and you can use that – but if you don’t, no problem. Just get a full suite and use the capabilities of the tools to build your data warehouse. The only pre-condition to adopting spend management is that you have a mindset for cost avoidance. If that’s you, you can start today. Have fun!