Chances are that most sourcing professionals have read all of the Aberdeen and AMR reports on spend analysis and spend visibility and are quite impressed at the opportunity for savings they reported — on the order of 10% to 15% on 55% to 75% of untapped spend and 6% of spend in managed categories, and are now itching to bring spend analysis and spend visibility into the organization. But before this step is taken, it is important to realize that these research reports fail to consider the spend analysis value curve, which tends to flatten out within one to three years. That’s right! If an organization embarks on a traditional spend analysis and visibility program, which is tactically oriented, it will find that the savings opportunities quickly dry up and that the 5X to 10X ROI that was initially experienced quickly becomes, if the organization is lucky, a 1.5X to 2X ROI. This is because all the platform does is help the buyers maintain negotiated cost reductions during contract renewals and catch repeated attempts at maverick spending after organizational users think that they are no longer being watched.
Why do the savings disappear so rapidly with a traditional, tactical, spend analysis or spend visibility initiative? Because there is only so much that can be done with Accounts Payable (AP) data. More specifically, all that AP data does is identify the top spend buckets by supplier, category, and commodity, and, correspondingly, the low-hanging fruit savings opportunities which are easily identified as the top categories, commodities, and supplier relationships where the organization doesn’t have contracts and performance management programs in place (and where the typical payment amounts are above the range that defines “market average”). Since this analysis is relatively quick and easy to do (once there is visibility into organizational AP data), and since a good spend visibility solution will decrease sourcing cycle time by 50% to 75%, it’s not long before an average organization exhausts its savings opportunities from a tactical spend visibility project.
But this doesn’t have to be the case! A shift from a tactical view to a strategic view, which includes other types of data, can multiply savings opportunities and, more importantly, find new opportunities year after year. For example, adding invoice data allows for the identification of overpayments and uncollected rebates, which are common in categories like office supplies, electronics, and (offsite) storage and which often represent millions of dollars in instant refunds. It also allows for the improvement of inventory turns, which can quickly shave 10% to 20% off of inventory costs.
And if the data is enriched, a whole plethora of new opportunities open up. Adding diversity data allows an organization to target government MWBE programs. Third-party corporate data can be used in fraud detection. Carbon footprint data enables regulatory compliance. And so on. The opportunities, and savings, become endless. In fact, a strategic program could multiply the organizational savings opportunity by five in the first three years and generate strong returns for years to come! That’s why strategic spend visibility is needed.
And that’s why you should download Sourcing Innovation’s new Illumination, sponsored by Rosslyn Analytics, on Strategic Spend Visibility – Untapped Potential for Cost Reduction (Page Down; Registration Required). It just might change the way you think about spend analysis and spend visibility.