Category Archives: Guest Author

Integrating Contract Management and Spend Analysis

Today I’d like to welcome back Eric Strovink of BIQ [acquired by Opera Solutions, rebranded ElectrifAI] to Sourcing Innovation. In this post, Eric tackles the contract management – spend analysis integration issue that the sales and marketing representatives of a number of suite vendors often make a lot of fuss about.

If your company is like most, your contracts are a hodge-podge of dense language resulting from hundreds of negotiations, whether you have a Contract Management (CM) system or not. If you already have a CM system, chances are good that most of your contracts aren’t written with the templates and standard language that some of them offer. In fact, most companies use CM systems simply to organize existing unstructured contracts for better searching, reporting, accessibility, and tracking – with the promise, in some CM systems, of proactive alerts.

So when an e-sourcing vendor claims to “integrate” Contract Management with Spend Analysis, exactly what does this mean? Well, as it turns out, it isn’t even necessary to have a CM system in order to integrate your contracts into your Spend Analysis (SA) system.

Let’s imagine that there’s a stack of contracts on the corner of your desk. The “stack” can be a “virtual” stack that’s held in a CM system, or it can be a physical stack of documents; it’s not important which. Each contract represents an ability to buy a commodity or a group of commodities from a specific vendor, over a specific period of time, perhaps additionally limited to a geographical region or a business unit.

Let’s walk through the process of integrating a contract into the SA system.

1) In the SA system, we create a data dimension called “Contract.” It is a simple list of contract names or other identifying information. An entry is defined for each of the contracts in our stack.

2) Using the SA system’s mapping rules, we map potential spending to each contract in turn. The spending on a contract is typically a function of Supplier, Date Range, and Commodity. For example, if contract C174-KELLY was for temp labor, and it was valid between February 2001 and October 2001, and it was with Kelly Services, then we map the combination of

Commodity

Time

Vendor

to the contract:

Mapping

After applying this rule, if we then filter (“drill”) the SA system on the HR>Recruiting>Temps commodity, we see these amounts in the Contract dimension:

Contract

Does this mean that all of the 95,996 Kelly spending was on contract? Absolutely not, since we cannot know (1) if Kelly charged us the correct contract price, or (2) whether someone used Kelly without realizing that we had a contract, or (3) whether in fact anyone ever used the Kelly contract at all when doing business with Kelly. Which is why talking about “compliance” at this level of analysis is silly. But we do know, if we’ve entered all our contracts this way, that the “Other” spending was definitely not on contract. That’s valuable information, and it’s better than half-measures to find bypass spend, such as a “preferred vendor” dimension.

Now, what was the difficult part of the above? Well, it was figuring out what “Commodity” the contract was for, from the perspective of the SA system. Building the Contract dimension is easy (perhaps a vendor’s “integration” logic performed this few minutes of work for you) – but building the rule that maps the contract into the spend cube requires reading the contract and deciding what SA commodity should be referenced. The final work to add the appropriate rule to the SA system? 20 seconds, tops.

Bottom line: It’s easy to integrate contracts information into your SA system. And, with some SA systems, you can embed an HTML link to the contract document itself, directly from the Contracts dimension, to establish a useful reverse linkage.

All without a CM system at all!

The Future of Spend Analysis

In this post, we welcome back Eric Strovink of BIQ [acquired by Opera Solutions, rebranded ElectrifAI].

At the incessant prodding of Michael Lamoureux, here are some prognostications for Spend Analysis in 2008.

  1. The distinction between data-warehouse-based spend analysis tools and Business Intelligence tools will erode, as it is already doing. The only requirements on the BI side are a mapping engine that can handle spend transactions reasonably, and an improved ability to import data from sources other than the ERP system. A third party may well step up to the plate and offer these (and perhaps other) add-ons for a particular BI platform, creating instant (and possibly fatal) competition for existing spend data warehouse suppliers.The consequences of this erosion will be more decisions in 2008 to use existing BI tools within the enterprise for spend visibility, rather than to acquire procurement-centric tools from an e-sourcing vendor. These decisions may well be made by IT or by Finance, perhaps overruling or ignoring Procurement completely. This erosion will mark the beginning of the end for big-ticket data warehouse spend analysis implementations.
  2. The distinction between spend analysis tools and spend data warehouse tools will widen. It is impossible to perform ad hoc analysis with a fixed-schema data warehouse, especially in a space like Procurement where many different views of the data are required before useful insight can be obtained. BI solutions to spend analysis will suffer from this problem as well.This will mean additional Procurement business in 2008 for data analysis vendors such as SAS. However, the real keys to capturing the spend analysis business will be the flexibility of the analysis tool, its approachability by business users, and its ability to quickly create and manipulate large datasets. Data analysis providers (as well as decision optimization providers) will remain niche players until business users can operate their products without assistance.
  3. OLAP technology is awkward, and presents many limitations for spend analysis. This will become increasingly apparent as more general purpose datasets (datasets which may seem simple, but whose organization is far more complex than mere A/P spend cubes) are considered by spend analysts. Spend analysis providers will need to provide simpler and easier ways to build datasets that overcome (or shield) business users from the limitations of the underlying OLAP data organization.Thus, we will see in 2008 the beginnings of an ability to cross-link loosely-related datasets, to build and control those linkages quickly and easily, and to create cross-dataset analyses and reports from a unified perspective. Although these advanced capabilities are already present from enterprise database vendors (and are featured prominently in their marketing literature), from a spend analysis perspective they are just laboratory curiosities given the huge effort, expertise, and expense required to set them up and maintain them. The breakthrough for spend analysis will come when ordinary business users with no IT skills can build and explore disparate and loosely-coupled datasets just as easily as they can link spreadsheets together.
  4. Invoice analysis and commmodity-specific analysis, such as that being performed by The Buying Triangle and Opera Solutions will dominate the “what’s new” frontier for spend analysis practitioners during 2008. Invoice analysis carries with it the promise of immediate refunds or other consideration from incumbent suppliers, and the consequent ability to fund entire spend management efforts through careful analysis of past contract compliance.Invoice analysis means negotiating with incumbent suppliers from a position of knowledge and strength, while the relationship is good, rather than dismissing the supplier outright, or blind-siding the supplier with an RFP. Even if the ultimate decision is to go to the open market, or to dismiss the supplier at the end of the current contract, there is money on the table to be recovered now. There is no reason not to go after it.

The Future of e-Sourcing – Less is More

Today I’d like to welcome Alan Buxton of Trading Partners.

Anyone remember SAP circa 1998? The way SAP integrated everything was great. Except it was completely unusable. Then along came Ariba’s e-procurement system and it’s whizzy interface. Here was a system that would address SAP’s legendary user-unfriendliness, and drive adoption of improved purchasing processes through organisations. Guess what? While Ariba did solve some of SAP’s problems it raised plenty of new ones: how to ensure catalogs could be easily searchable and contained relevant items; how to ensure users understood what they had to buy through the Ariba platform and what they had to buy through different processes, etc.

A common theme throughout is that software systems, however intuitive they are to their designers and builders, are rarely intuitive enough to their end users. Aside from a small number of glowing successes, many corporations find themselves achieving less than what they expected when implementing new e-sourcing systems. As European Leaders In Procurement put it in July 2007: “E-systems gather dust”.

The relentless consumerisation of business technology is a great opportunity to change all this. I’m not talking about a Web 2.0 phenomenon – the blurring of boundaries between consumer tools and business tools has been going on since Instant Messaging, if not before. However, it is consumer Web 2.0 sites that are now pointing the way to the future of enterprise sourcing software. For example, two web sites that excite and inspire me the most are ones like www.ecourier.co.uk and www.zopa.com. They are easy, friendly and the user can see where the value is. Consumers are not interested in “downstream process improvements” – they are interested in whether a particular tool is good for them now. This is not to say that consumer tools are unsophisticated. Zopa, certainly, needs to do a lot of fancy footwork behind the scenes when it matches borrowers with lenders.

For sure, the e-sourcing industry has come a tremendous way in the past decade, but in all honesty e-sourcing is still in a comparatively early adopter phase, globally. In order to really reach mass adoption of our tools, and to transform the effectiveness of enterprises, e-sourcing tools need to take far more cues from consumer-friendly sites and, dare I say it, less cues from IT departments’ integration requirements. Imagine that: users demanding e-sourcing tools because they are fun and helpful rather than using them because the boss says so. A brave new world indeed.

For those of you expecting Sustainability Sunday, this week will instead feature Thought-Provoking Tuesday.

Aberdeen on Spend Analysis: Lost in the Trees

Today I’d like to welcome back Eric Strovink of BIQ [acquired by Opera Solutions, rebranded ElectrifAI].

Aberdeen’s report on Spend Analysis (“Spend Analysis: Working Too Hard for the Money,” available free from Iasta [acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric] and others) draws useful conclusions about the forest, but then, like many other studies in this space, loses its way in the trees. Consider this reasoning:

  • Wealthy people tend to be successful.
  • Wealthy people typically drive luxury automobiles.
  • Therefore, wealthy people are successful because they drive luxury automobiles.

Aberdeen seems to reason about spend analysis in the same way:

  • Best-in-class purchasing organizations tend to have bought spend analysis systems.
  • Best-in-class organizations typically have bought spend analysis from one of the “Big 3” SA vendors.
  • Therefore, organizations are best-in-class because they bought spend analysis from the “Big 3.”

Thus, when the report uses survey data to uncover the underlying reasons why best-in-class organizations are successful, it loses its way. Using circular reasoning, it offers up precisely what one would expect: the standard “Big 3” marketing messages. Those messages, most of which haven’t changed in years, are these:

  1. Automated spend classification. “Only we can classify your spend, with automated algorithms and Bayesian analysis and special databases and… and… well, the point is, you can’t do it yourself, you have to hire us.”
  2. Standard reports. “Our suite of standard reports is better than anyone’s. Why, you don’t even need a sourcing consultant or a sourcing expert on staff, our reports tell you exactly what to do.”
  3. Integration with RFx. “Buy our suite, because it’s all ‘integrated.’ Just ignore the fact that spend analysis doesn’t ‘integrate’ with RFx, that’s not important now.”
  4. Integration with Contract Management for ‘compliance.’ “Let’s fail to mention that you can create a rules-based Contracts dimension yourself in just a few hours, whether you have a CM system or not.”

I’ve addressed these points at length elsewhere (see, for example, Common Sense Cleansing and What Purchasing.com Got Wrong), so I won’t do it here, except to point out that every SA application worth its salt creates a rules system that automatically classifies and maps spend. That’s the whole point, after all. Aberdeen’s report confuses the process of rules system creation with the results of rules system creation. Once a rules system is built, by whatever methods, the end result is a system that automatically maps and classifies both current and future spending.

The above nothwithstanding, the report contains a fascinating chart that shows survey respondents’ opinions of the “importance” of data analysis, data management, reporting, and supplier content, plotted against those same respondents’ classifications of their “current ability” in those four areas. It appears that “current ability” deeply lags “importance” in all four of them. As Aberdeen says,

While organizations recognize the advantages that can be gained from technology deployment for spend analysis, they have still not bridged the gap between theory and practice. Across the primary steps in the spend analysis process, enterprises are generally unable to fully leverage their spend analysis solutions… [emphasis added]

Aberdeen fails to draw the obvious conclusion from this — namely, that legacy approaches to spend analysis are disappointing their users across the board, despite causing an uptick in procurement efficiency. This result ought to be a key conclusion of the study. Spend analysis is about analysis, after all, not about the mechanics of data preparation. In fact, the four key components of spend analysis are:

  • Powerful analysis and ad hoc reporting tools (“data analysis” and “reporting”)
  • Flexible and ultra-fast dataset creation (“data management” and “supplier content”)
  • Real-time dataset modification (“data management,” “data analysis,” and “reporting”)
  • Flexible deployment (Aberdeen doesn’t address this, but the SA space has changed: powerful spend analysis is now deployable for small dollars, on individual analysts’ desktops, without an organization-wide commitment).

All of these components are interdependent — for example, you can’t perform ad hoc analysis if you can’t quickly change the structure of a dataset. And, you can’t change the structure of a dataset if it’s shared with others, because the other users certainly won’t appreciate you changing things out from under them.

It really should be old news by now: data extraction, transformation, loading, familying, and mapping are processes that are easily automated by in-house personnel using modern tools, or by outsourced resources using those same tools. It’s a shame that Aberdeen chose to focus on the “old think” of cleansing — only the very first step of a spend analysis effort — rather than pursuing the most interesting of its own survey results.

The U.S. Bureau of Labor Stastics is Wrong. Dead Wrong!

Over on Supply Excellence [WayBackMachine], Tim Minihan posted a VERY SERIOUS piece entitled “Purchasing is Dead. (And Other Conspiracies.)” that calls to light the recent injustice of the Bureau of Labor Statistics to supply and spend management professionals everywhere! It’s so devastating, that I asked for kind permission to re-post Tim’s original blog post in its entirety, since I do not have the time to dig into the atrocity contained within today. I encourage you to read this post in its entirety and take the action he suggests. Thank you!

As proof that you can’t believe everything you read, the U.S. Bureau of Labor Statistics reports that overall employment for purchasing and supply managers is expected to “grow slower than the average for all occupations through the year 2014.”

What?

  • Don’t tell that to the VP of Procurement and Operations at a Massachusetts-based manufacturing company I met with last week. He was griping “I can’t find people with the right talent fast enough.”
  • Or the U.K.-based procurement executive that worried that his veteran team lacked the skill set required to compete in today’s global and technology-proficient marketplace: “Many of our [supply management] team have been doing purchasing a certain way for decades. They are uncomfortable with adopting new processes and systems. I am concerned about driving adoption.”
  • And certainly keep it a secret from the hordes of CPOs that have sounded the alarm on talent poaching occurring in their ranks.

In fact, in a recent study of top purchasing and supply management executives, Aberdeen Group outright refutes BLS’ claims, reporting that ” top CPO’s rank recruiting, training, retaining, and aligning their organizations as their #1 goals.” (Download a free copy of the full report for a limited time.)

BLS’ errors don’t stop there. The government agency goes on to wrongly report that “demand for purchasing workers will be limited by improving software.” On the contrary, every recent study on supply management employment trends reports that technical skills and experience implementing, managing, and using procurement and supply management software are among the most in demand. (Listen to Professor Joseph Carter of Arizona State University and the Center for Advanced Purchasing Studies’ views and advice on the supply management talent issue.)

Pulled from 2004 assessments, the overview makes working in a salt mine seem more attractive than joining the purchasing ranks. (Although, BLS is positive about working conditions for purchasing employees, stating that “most work in comfortable offices.”) Case in point: the agency’s stats for purchasing compensation is also way off the mark when compared to recent annual salary surveys from ISM and Purchasing magazine. BLS reports the average purchasing/supply management salary at $72,450 while the Purchasing survey found it to be $83,205 and the ISM survey found it to be $88,380.

BLS’ assessment is not only wrong, it casts the entire purchasing and supply management discipline in a bad light. (And just as the C-suite is beginning to recognize the critical importance of the function.) With the purchasing getting such a bad rap as a career choice, the talent crunch in this sector will only get worse.

What can you do? In addition to improving your recruitment, training, and retention approaches, write or call the Bureau of Labor Statistics and demand they correct this egregious mistake. The agency has a special “hotline” set up to field “complaints concerning information quality.” And, when it comes to their 411 on purchasing there is a serious quality issue.

Lodge your complaint via e-mail: dataqa@bls.gov. Be sure to identify the information quality issue (see above), how it is negatively impacting your organization (ditto), and provide references on how the data can be improved (double ditto).

Your action can help secure the continued growth and enhance the profile of the purchasing and supply management profession!

Thanks Tim for this great piece of investigative work and bringing this injustice to the profession to light!