Category Archives: Sourcing Innovation

Source-to-Pay+ Is Extensive (P11) … What Do You Need For (A) Spend Analysis (Baseline), Installment 2

In our last post (Part 10), after reviewing the spend analysis process which, in short is:

  • Extract the relevant data
  • Load the data into the solution (mapping it to a starting taxonomy)
  • Structure for the types of analyses you need to perform
  • Analyze the data and get useful insights to
  • Act on the insights you get

We identified that the core requirements a spend analysis system needs to support are those that enable:

  • Load
  • Structure
  • Analyze

with a focus on

  • Efficiency

Let’s take these requirements one by one.

Load: The first step is to get the data in. It needs to be easy to ingest large data files and map the data to a starting taxonomy that can be manipulated for the purposes of analysis. Particularly, those data files in classic csv, row, or column formats that are universal. The ingestion needs to be fast and intelligent and learn from everything the user does so that the next time the application sees a similar record, it knows what to do with that record. This allows us to identify our first two core requirements:

  • rules: the application needs to support rules that allow for deterministic based (re)mappings when certain data values (within a tolerance) are identified (and these rules need to be easily editable over time as needed)
  • hybrid AI: that can analyze the data and suggest the rules for the user to select to speed up rule definition and mapping during load

Structure: The next step is to structure the data for analysis. In spend analysis, the core structure is a

  • Cube: the application must be able to build a custom cube for each type of analyses required; one size, and thus one cube, does NOT fit all; the cubes must also support derived dimensions using measures and summaries

Sometimes the cube needs to be explored, which means that the application also needs to support

  • Drill Down: to the data of interest
  • Filters: to define the relevant data subset
  • Views: that can be configured and customized using measures, drill downs, and filters for easy exploration and easy revisiting

Also, while the theory is that you have one record in your ERP, AP, etc. for a supplier, product, and other real-world entity, the reality is that you have multiple (multiple [multiple]) entries, so the application has to also support

  • Familying of like entites: suppliers, products, and even locations
  • Mapping of children organizations to their parent when you can cut master contracts / agreements (such as with hotel chains)

At this point, we’ve built a cube, and we’re ready for:

Analysis: where we analyze our slices of the data to get insight that we can eventually act on; this requires:

  • Measures: that can summarize the data in a meaningful way
  • Benchmarks: that can be compared against
  • Reports: which can be bookmarked views that show the right summary (and can be saved or printed)
  • Data Science Hooks: to external algorithms and libraries for forecast generation, trend analysis, etc.

And at this point, while we don’t necessarily have everything the doctor would want in a modern spend analysis system, we almost have everything that is needed to meet the baseline, with one exception, and that’s the functionality needed to enable

Efficiency which, in spend analysis, equates to the technical requirements that eliminate the need to “reinvent the wheel” every time the analysis effort needs to be repeated. The problem with traditional spend analysis systems is that any time the data changes, all of the work has to be repeated. A good system will remember everything that was done, preserve it, just identify the data changes and new data, and pull them in. Some systems do this okay, but if the underlying data source changes, they fall apart.

However, when there’s more than one user, which is the case in most organizations, the implementation creates a central, “master”, cube and everyone has to work off of that. Usually this involves creating a copy of that cube, and then working off of that central cube. And then, when that cube is updated, create a copy of that cube and start all over.

Better systems will allow the user to pull in “just the new data” if the structure of the core cube hasn’t changed and the data can be mapped by the existing rules. But any time the base cube undergoes even a minor structural change, all of the analysts have to start again, from scratch. But this is mitigated if the system supports

  • Inheritance: which creates every user’s cube as a sub-cube of another system cube or the master cube and, when any parent cube changes, use the relationship to automatically propagate any changes without any effort required on the part of the user

There are, of course, other features and functions that can be added to increase efficiency even more, but this one capability makes a spend analysis system exponentially more efficient than any system that came before.

We should note that, as of today, only one spend analysis system supports full inheritance, but a couple support partial inheritance and are attempting to improve their offering. So keep this in mind when you are comparing solutions, as not all will be equal.

Continue to Part 12.

Source-to-Pay+ Is Extensive (P10) … What Do You Need For (A) Spend Analysis (Baseline), Installment 1

In Part 8 we briefly reviewed the major modules in Source-to-Pay in an attempt to identify which module to work on after e-Procurement, and concluded that you select Spend Analysis, and start using it (even without integration) as soon as possible because. Spend Analysis not only helps your organization identify its best opportunities, but also what module should come next (in terms of implementation and integration).

Then, in Part 9 we elaborated on our comment that spend analysis can help you identify the most important Source-to-Pay modules for your organization based upon the types of opportunities that are identified. We identified situations in which Supplier Management, Contract Management, Risk Management, Source-to-Pay, and even I2P is relevant to capture opportunities. We did this to illustrate the criticality of getting going on spend analysis as soon as possible.

The next step is to identify what you need in a spend analysis solution. But before we can do that, we need to review the basic spend analysis process:

you need to extract the relevant data from the relevant applications
you need to load the data into the spend analysis solution (and map it a starting taxonomy)
you need to structure the data for the various types of analyses you want to perform
you need to perform the analyses and get insight
you need to take action, which involves initiating processes, tracking progress, and getting results

Looking at this process, you need whatever functionality is required to

  • Load,
  • Structure and
  • Analyze the data

Most older platforms don’t support modern API hooks or data transfer standards, so the reality is that you will need to export the data from those platforms, and there will be limited “extraction” in the spend analysis platform beyond support for requesting data through an API in the standard format the spend analysis tool supports and the API calls the spend analysis tool supports. As a result, the “extraction” part of the process is mostly outside the scope of the spend analysis tool.

Similarly, most organizations will have, or want, to use other tools to create projects, assign actions, track progress, and so on. As a result, the “act”ion part of the process is often mostly outside the spend analysis tool with, of course, the ability to push the results out in a standard format through a supported API.

Thus, in order to define a solid spend analysis baseline, we need to define all of the functionality to

  • Load,
  • Structure and
  • Analyze the data

and, most importantly, do it in a manner that

  • supports efficiency.

In other words, the last thing you want to do is have to repeat the entire process every time data is updated or re-classified in the source system. In our next installment, Part 11, we will review the core functionality required for each of these four core requirements.

Don’t Use a Sub-Standard Sourcing Solution for Services!

If you know the Source-to-Pay software market, you know that most of the solutions out there were originally designed for indirect, commodity/finished good purchases, and most of the solutions are still targetted at those types of product-base acquisition today. (When we get to the list of sourcing vendors in our ongoing Source-to-Pay is Extensive series, you will see that this is the case.)

The reasons for this are multifold, but the main reasons [which often aren’t valid] for building, and maintaining, an indirect-focussed sourcing solution usually fall into one or more of the following:

  • for many non-manufacturing organizations and organizations that don’t require highly customized goods, indirect is the greatest percentage of external spend
    [often true, but not always the greatest savings potential]
  • it’s easier to do apples-to-apples with commodities and, thus, find the greatest savings
    [easy to do the comparison, but savings depends on the market and where the organization is overspending the most
  • services are the domain of CWM, right, so those platforms are likely covering it
    [they’re not, they’re focussed on workforce management, not project management, and that’s critical]
  • every organization has different services needs, and sourcing processes, so it would be hard to build a solution that wasn’t extremely specific to an industry and, hence, build a successful business
    [when you get specific, yes, but most organizations go outside for the same services: legal support, marketing support, tech support, facilities support, etc. and the types of work, and thus sourcing processes, are similar, its just the specific needs that differ (leasing vs. insurance vs. IP law, traditional media vs. web media, on-site vs cloud services and specific systems, etc.)]
  • it’s just too complicated and is best done manual
    [it’s certainly more work to design a solution, requires a different workflow, and most certainly the solution will requires customization on a client level, and does take more upfront build time, but services sourcing is not best done manual]

However, it’s likely that you were sold such a solution, and told that you can easily fit services into it with a bit of work, especially if the vendor also adapted it to support (limited) bills of material (BoMs) and direct (which they claimed was harder). The rigging to make it work would either be to create statements of work up front [which you should do] and getting all-in bids [which you probably should not do], or breaking the project done into phases and getting staged bids [which is good, if your stages are appropriate the time cost dwarfs the material cost], or offering it up as a time and materials and getting separate bids where you could optimize the material cost using third party market costs (and contract on behalf of the supplier) and the time cost by optimizing the resource rates against the expected hours/days, and then selecting the combined lowest cost [which isn’t bad, but extremely complicated and still leaves you with apples-to-orange comparisons later if sometimes the supplier did the material procurement and sometimes you did*]. And you can. Sort of. But it’s not a good solution, and you shouldn’t do it.


A whole host of reasons including, but not limited to:

  • force fitting square services into round holes is not a good solution
    [you’ll have to shave off the corners, and they could be important]
  • you’ll never know what part of the service is the most complex or costly if you can’t collect, and compare, the right, granular data
    [and, moreover, which suppliers are marking up the most and extorting high profits across the board because one part of the project is actually costly and complex and you have no way of knowing how big that one part is; that one part could only be 20% with the rest of the project being achievable with low-cost common cookie-cutter services]
  • when the project runs late or over budget, you’ll never really know why (unless there are a lot of change orders);
    [it might be just one of the phases or one task among 20 was considerably under-scoped or there was one part of the project in particular the supplier was just not suited for (even though they were for the rest of the project and were a stellar performer for mostly similar projects in the past, which didn’t have that one new/complex task; e.g. up until now, it was all simply enterprise system integration and installation and you used a different vendor for the security configuration and audits; but this time, the buyer baked it in to the core SoW, the supplier quoted as being able to do it, when they really didn’t have the expertise on hardening the product, configuring your firewalls, or fixing issues found by your third party security auditor)]
  • you won’t be able to build an accurate performance profile on your services providers and identify which ones typically come in on time, on budget, and to spec, while meeting any CSR/ESG or diversity targets set by your organization
    [and this is critical as those are suppliers you should be prioritizing for future projects, and those that aren’t performing as well, if strategic, are the ones that need to be the focus of development projects]
  • you won’t be able to manage, or even track, the project in the platform
    [and you should at least be able to look up where a project is with respect to milestones, whether or not it is on budget, and if the suppliers involved are involved with any other projects, and how much work a supplier has unfinished with you before you give them another award]

In other words, you should not use a sourcing solution that is substandard for services for your services projects — you should use one that is. And while this means you may have two sourcing solutions, this doesn’t necessarily mean you will need to have two data stores, SRM systems, analytics systems, etc. Modern Best-of-Breed solutions these days are being built API-first so they can plug into the solution you used for most of your sourcing and then punch out to them for specific projects, and push the awards back when you’re done. As indicated in our post last month that asked Where’s the Procurement Management Platform, you should be looking for a core solution that can serve as a platform, and then best of breed augmentations where needed, as no one vendor can do it all. And that’s okay. If they meet the majority of your need, and are willing to plug into an ecosystem, that’s where you start, especially since, as per our Source to Pay is Extensive series, you can’t implement it all at once anyway. But if you have significant services spend, you need to get it right.

* the doctor is fully aware you can compare apples to oranges, but the comparison is not very useful!

Source-to-Pay+ Is Extensive (P9) … Time for Spend Analysis

In our last post, we reviewed many of the core modules of S2P that can be successfully argued as “high priority” for implementation and came to the conclusion that the next module you get, and get started on (whether or not you integrate it right away or not) is Spend Analysis. This is because it not only helps an organization identify its biggest short term, near term, and long term opportunities, but also helps an organization identify which solutions its likely to get the most immediate value from.

For example, if the largest opportunities are:

renegotiation and renewal with key strategic suppliers and/or supply base rationalization (NOT REDUCTION, but we’ll save that rant for when we get to Supplier Management)
then you will need to get Supplier Management implemented promptly
payment term and timeframe rationalization and/or standardized warranty and repair cost recovery (from suppliers)
then you will need to get a good Contract Management solution implemented as fast as possible
risk identification and mitigation
then you will need to implement contract management with (third party) risk data integrations to help you address the risks in contracts
tail-spend reductions
then you will need to rapidly integrate catalogs from approved and preferred vendors into your eProcurement system, set rules limiting orders from non-approved suppliers without managerial overrides, and set budgets as well as enforce x-bids-and-a-buy spot-buys through the platform
mid-to-high spend categories off contract
then you will need an appropriate strategic sourcing solution
overspend recovery from contracted suppliers
then you will need an enhanced I2P solution that prevents additional overspend as well as an audit recovery tool that creates detailed overspend reports and tracks recovery from the supplier
etc. etc. etc.

However, without a good spend analysis solution, it’s likely that you won’t identify any of your best opportunities. But with the right spend analysis tool, you will, in time, identify almost all of them.

How will you do that? Using a combination of out of the box reports, analytics, and insights and deep, hunch-based, what-if analysis by your expert sourcers and data analysts. And what capabilities does the tool need to have for you to do this? Keep your eyes peeled for Part 10.

Source-to-Pay+ Is Extensive (P8) … You Have Your eProcurement Baseline, What Comes Next?

So you have your e-Procurement baseline, or you are at least in the process of implementing it and you need to scope out what module / solution to implement next. Where do you start?

The answer here is not as easy, even after careful deliberation and research, because there are very good, sometimes equally good, arguments for four different modules that should be high on your list. (Trust the doctor here. He’s heard them all, especially from vendors that want to be put first.) Plus, some organizations will need all the modules … as soon as possible … and sometimes the needs are almost so equal and businesses cases so good that the only honest response a consultant or expert can give you is “it’s up to you“. These are:

  • Contract Management
  • Supplier Management
  • Strategic Sourcing
  • Spend Analysis

We’ll discuss the rationale and key merits of each, but first let’s talk about why I2P doesn’t appear on this list. First of all, for many companies, basic capabilities will actually be part of the eProcurement platform that they select as many eProcurement players actually do provide at least minimal I2P coverage, just better eProcurement than I2P. Secondly, and most importantly, all I2P does is reduce low-cost tactical overhead (and reduce overspend if there is not enough manpower to review all the invoices, but that really is cheap). In a large company that requires 20 people just to process invoices, that still misses errors on a regular basis as only 10% to 20% of invoices are carefully reviewed, this will allow 99% of all invoices to be carefully reviewed even after 10 of those people are reassigned to more profitable Finance activities. However, that’s still a small, fixed cost savings on headcount and a small percentage of the overspend that goes out the door (as most overspend actually isn’t recoverable unless there’s a contract in place and most I2P solutions won’t detect fraud on their own). So, I2P is important. And there definitely is an ROI. But is there real savings? Real risk reduction? Real supplier / product improvement? Real protection? NO! In other words, implement everything the provider gives you, and focus on custom AP/I2P improvements later in the queue because once you have basic capabilities and m-way match, you really don’t need much else.

So let’s talk about

Contract Management. Why would this be high on the list? It’s mainly for the lawyers, isn’t it? And the lawyers still want to use Word, right? Plus, as long as you get the catalog / prices / rate cards into the PO system, why would you ever need a CLM? Efficiency and Risk. Especially Risk. Lawyers, or their paralegals, waste a lot of time drafting contracts that can be automatically assembled from clause libraries or, with newer platforms, similar contracts for initial review. If you need 30 standard clauses, adjusted for the category and the locale, and 20 specific clauses, that’s probably a 30 page contract before the statement of work and addendums, which is what the lawyer should be focussing most of her time on.

But moreover, you need to ensure that the contract includes clauses that cover not only all issues of relevance to your organization (liability, insurance, governing laws, etc.) but all issues where there are laws and industry regulations in place in each country where you, or your supplier, will be producing goods and services or selling those goods and service. Also, if the products will pass through intermediate jurisdictions, they must transported according to any regulations that must be satisfied, which should also be addressed in the contract. Not addressing any of these issues up front in a contract puts the organization at significant legal and financial risk. In particular, risk that could result in the loss of hundreds of millions of dollar in inventory when customs intercepts the shipment, declares it illegal, and destroys goods that are perfectly useable and saleable in any other country but the one country they were shipped to that recently enacted enhanced “safety” requirements (that the products didn’t meet). (Sony once had 1.3 Million PlayStations seized by the Dutch Government, with a total inventory value of $276 Million in today’s dollar, due to high amounts of cadmium … PlayStations which could have easily been sold in the US.) The best protection against any risk is one captured in a contract. And if the organization is extremely services or supplier dependent, contracts cannot be overlooked. Thus, for some organizations, a good contract management solution is super critical.

But not every organization has super high risks, contract overload, or multiple jurisdictions to worry about. Sometimes, its greatest risks are suppliers not being able to produce the products it needs on time, on cost, and on spec … including the quality and reliability requirements. As a result, it needs to focus more on suppliers. This brings us to our discussion of

Supplier Management [which] is high on the list because if the organization is ultimately dependent on key suppliers to provide required, and strategic, goods on time (and on budget to spec), it needs to track, manage, and develop those suppliers. And if those suppliers are not making the cut, are too expensive, or not in tune with the organization’s diversity and sustainability goals, the organization needs to identify new suppliers.

Also, for fact-based negotiations, an organization needs to know what it is buying from a supplier annually, across all categories, how much spend that constitutes, how much of its total spend that supplier constitutes, and how much of a supplier’s business it constitutes. It should also have stats on the supplier’s carbon footprint, diversity, and publicly available risk ratings, as well as any performance, CSR, or other audits that are available. How are you going to collect all of this information and get it in one place to make good decisions on suppliers to invite, verify, select, onboard, monitor, manage, develop, and so on? Your organization needs a good supplier management system, and you really can’t wait (too long) on it.

But there’s also

Strategic Sourcing which is what you use to identify significant cost savings, or at least avoidance, and what the CFO/CEO is clamouring for (and denying your budget requests unless there is a considerable, believable, ROI attached to those budget requests). (And paying for a full suite for six months before anything is usable and two years before everything is usable is not good ROI.) Strategic sourcing allows you to collect bids, analyze them, optimize them, and negotiate contracts and awards fact-based and can often identify 3% to 15% savings, depending on the category it is applied to. (Well managed direct categories won’t have more than a few points of fat, poorly managed low-end CPG and service spend could contain waste up to 30% in some categories, with 15% on average near, and in, the “tail”.)

And even though the first dollar won’t materialize until the first order is delivered, verified, and paid for at contracted rates, if you put the right e-Procurement platform in place that will help you realize 90%+ of the identified savings (demand projections will always be slightly off, unexpected events will happen and you’ll need to expedite, etc., so 100% of the identified savings never materializes; but without a good eProcurement foundation, you’ll be lucky to see 70% of the negotiated savings, and sometimes lucky to even see 60%), over time the opportunities Sourcing identifies can pay off big time. The opportunity is so large that many organizations mistakenly start here (and then get disillusioned when the identified “savings” don’t materialize because they failed to put a proper e-Procurement platform in place to capture those savings).

It’s all so compelling, but there’s still

Spend Analysis [which] is the best way to identify opportunities for spend, and cost, reductions through better sourcing, better contracts, better supplier management, and better processes. It not only identifies top x opportunities, but it can identify variances, opportunities against benchmarks, overspend, process bottlenecks, unnecessary supply base costs, supply base risks, off-contract spend, etc. etc. etc.

In other words, it’s the tool that helps you maximize the value you get from the other tools in your suite. On its own, its value is limited, combined with other tools that help you capture the opportunities it can identify, spend analysis has a value that is limitless. So where do you start? Do we use the “data first” argument that we used to justify e-Procurement and start with something else to increase the value of the Spend Analysis solution? The answer here is actually “not this time” because eProcurement captures the core data, and spend analysis will help you identify the next module where the organization is likely to get the most immediate value (i.e. Contract Management, Supplier Management, or Strategic Sourcing).

Plus, unlike the other modules, you don’t need a tight integration between spend analysis and the rest of your Source-to-Pay ecosystem to start — you just suck the data out of the enterprise systems, map it, cleanse it, homogenize it, enhance it (and spit back the improved data into the applications the data was sucked in from to the extent that you can do so), and analyze it. You can start with spend analysis as soon as the eProcurement core is selected (as you will likely want to clean up and verify the data before you push anything into the eProcurement system) and use spend analysis to help you plan out the module implementation order and timeline as well as the corresponding Procurement project waves for value generation that will kick off as each module is implemented.

So, while the arguments are good for many of the modules, and the choice is tough, after e-Procurement, it’s Spend Analysis next (and, in fact, right away). Nothing stops you from starting with a standalone BoB tool and then integrating it (or selecting a different ecosystem tool for data management later, and some organizations actually use one tool to manage the warehouse / lake / lake house and serve as the management reporting tool and a lightweight, low cost, BoB analytics tool for the spend analysts to do the deep what-if).

The discussion is continued in Part IX.