Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.
A common question many organizations have when delving into a spend analysis project is, “which classification taxonomy should I be using?” There are plenty of options on the generic end of the spectrum, UNSPSC being a popular choice. These standards certainly have their advantages, but choosing whether to use one of these standards or something entirely different is ultimately a matter of what will work best for the task at hand.
So, the real question is – What is your primary goal, and which taxonomy will best help you reach it?
Defining Goals
Before we begin, it is important to define what, exactly, our goals are for our spend analysis project. In this case, the spend analysis will be directly supporting the identification of strategic sourcing projects.
Certainly, we want to view our organization-wide supplier base and spend profiles using a commonly understood model so all stakeholders, departments, and C-suite executives are on the same page. One problem many organizations face is that different departments or offices speak different languages when it comes to defining supplier relationships. Add a merger or acquisition to the mix, and chaos can easily ensue.
But this isn’t our end goal – this is just a single, albeit crucial, step in the process. Our true end goal is to provide the ammunition needed to best identify opportunities for cost saving initiatives. No taxonomy, no matter how thoughtful or detailed, can be considered valuable if it can’t help promote change. As such, we should select a taxonomy based on two key parameters:
- The taxonomy must be universally applicable to all company spend.
- The taxonomy must aid in developing actionable information for future cost saving initiatives.
The Benefits of a Standardized Taxonomy
First, let’s discuss the key reasons to choose a standard model, such as UNSPSC. There are a few great aspects to these model that make them a good starting place for your taxonomy development:
- Standards are pre-developed and ready-to-use
- Contain a *good* degree of built-in granularity
- Wide availability of data enrichment options exist
Right off the bat, one of the largest draws of using a standard taxonomy is that the structure is already in place, ready-to-use. UNSPSC has you covered for any spend your organization is likely to see, from office supplies (commodity code “4412”) to graphic design (“8214”) and beyond. Additionally, there is already a level of granularity at your fingertips: The telecommunications media services includes 10 immediate sublevels with greater detail, from local and long distance service, to mobile communications, and more.
You’ll note my asterisks here; while this granularity is great in many cases, it isn’t always up-to-task across the purchasing spectrum – more on that later. In any case, if you’ve been tasked with the herculean job of collecting, cleansing, and ordering a vast set of spend data covering your entire organization, being able to pick up and implement a taxonomy immediately is one less task on your plate to worry about.
What’s more, this hierarchy is both well-known and heavily utilized. There are plenty of organizations you can turn to that, for a fee, can append your spend data with appropriate categorizations. The appeal here is obvious – one of the more time intensive elements of performing a spend analysis is either developing and validating a rules-based system for categorization or slogging through the process manually.
Jump in feet first, hit the ground running … Pick your action-packed metaphor; a standard taxonomy gets your project started faster – and that’s huge.
But is it all sunshine and roses? Stay tuned for Part II!