Today we welcome another guest post from Brian Seipel a Procurement Consultant at Source One Management Services focused on helping corporations understand their spend profile and develop actionable strategies for cost reduction and supplier relationship management. Brian has a lot of real-world project experience in sourcing, and brings some unique insight on the topic.
Organizations that develop an understanding of their spend have an edge when it comes to strategic sourcing: They better understand where money is being spent, with who, and on what than others who enter into the process either blindly or as a knee-jerk reaction to an incumbent price hike. This is particularly important for tail spend in those spend categories on the indirect side that too often fly under the radar.
That edge isn’t a given, however. Building a spend analysis can serve as the foundation for strong opportunity assessments, but doing so won’t automatically lead to better sourcing projects. Organizations who spend time on spend analyses can and do still fail at strategic sourcing for a very big reason. We put too much faith in the front-end process of building this analysis, and forsake the back-end, leaving a critical gap in our understanding of our spend profile.
The Front-End Spend Analysis
The first steps of a spend analysis are akin to cleaning out your basement. What’s the first thing you do? Before sorting into keep-or-toss piles can begin, even before moving and opening boxes – we need to turn on the light and survey the room. “Turning on the light” is really what the front-end of a spend analysis is. Our goal is to shine a light on the spend we have so sourcing project identification can begin. How does a spend analysis accomplish this?
- Cleansing & Consolidation. Take all of the disparate data sources that make up our profile and create a single view of them, cleaning up supplier names and other critical fields along the way. For example, referring to the supplier “Dun and Bradstreet,” with that single name, even when spend from a second set that refers to “D&B.”
- Classification. With all spend in one consolidated set, we will now attach meaningful classifications. The discussion around the best way to do this is worthy of a discussion of its own, so let’s simply say care should be taken here. Choose a system that speaks to your organization’s process, products, and objectives.
Let’s cook up an example. Let’s say we want to look into our IT spend to see where we can cut costs. We conduct a spend analysis covering the points above and learn the following: We have four locations using four different managed IT service providers offering similar services at four different price points.
This is the type of intel that suggests a strategic sourcing initiative may be called for. Pitting these suppliers against each other in a market event will drive down costs and potentially streamline operations if we can establish a single supplier for all four locations. We can estimate these savings by building a baseline spend profile and comparing to our average savings by following this strategy within this category. Simple enough. So why do sourcing initiatives often fail to deliver?
Moving Into Opportunity Assessment
Because we just committed a big mistake: We took our initial view of the spend and jumped right to goal setting without taking the time to properly scope. We went from turning on the basement light to selling boxes, en masse and unopened, directly on Ebay without knowing what was inside.
As we go to market, our sourcing event fails each of our four locations for different reasons:
- The first location is locked into a multi-year contract with a painful termination clause. Without scoping, who didn’t know what our contractual obligations looked like
- The second location isn’t locked into a contract, but is locked in by a lack of competition in the market. Without scoping, we never looked beyond our own buying history into the market landscape
- The third location is free of both of these problems, but this isn’t their first rodeo. They used the providers that locations one and two use in the past, but abandoned them due to severe performance issues. Without scoping, we can’t get a good enough view into the decision making process that led to incumbent relationships.
- Finally, our fourth location. No issues with suppliers, contracts, or market competition. The problem here? When we dig into the spend, we realize the bulk was capex: The purchase of equipment for a new server room buildout. Now that the equipment is purchased, we won’t see this spend come back around for years to come. Without scoping, we assumed spend was annually recurring, and now we have next to nothing.
Better Spend Analysis through Better Scoping
Once our spend analysis is complete, we’ll need to bring additional stakeholders into the fold. Bring in the employees who actually interact with these suppliers and their products and work with them to develop a sourcing history:
- Did we accurately describe how you use this supplier with our chosen classification system?
- What are we specifically buying from this supplier, and are these purchases made regularly or only once every few years?
- How was this supplier selected, and who chose them? Were any competitors engaged at the same time? How did this incumbent beat them out?
- What does this supplier do well? Where are their biggest points of failure?
- Has this category been sourced recently? How was the event conducted, and what was the result?
Beyond this interview, ask these stakeholders to provide copies of any active MSAs, SOWs, SLAs, or any other document that can help define the relationship. Of particular note will be termination clauses. What date does the agreement end, and what are the renewal terms? What steps do we follow to terminate on that date, and by when do they need to be taken? If terminating before that date, are there any penalties?
From Insight to Action
Building a detailed spend analysis takes time, and the commitment of resources that could be doing other things. As such, you need to ensure you get a good ROI out of the exercise.
The best way to do that is to see beyond the front-end of what a spend analysis is (the unification, cleansing, and classification of spend data) and consider what a spend analysis helps Procurement do (identify strategic sourcing initiatives and estimate potential impact). Scoping is a critical part of this process, and properly scoping opportunities that a spend analysis shines a light on is a great way to get that ROI.