Category Archives: Spend Analysis

Why You Should Not Build Your Own e-Sourcing System, Part II Spend Analysis

In Part I, where we noted that Mr. Smith was right in his recent post on “thinking of building your own esourcing system please don’t” over on Spend Matters UK where he pleaded with those organizations, and particularly those organizations in the public sector, who thought they could build their own e-Sourcing system not to, we gave a host of reasons why only those organizations with the core business of software development and delivery specializing in Sourcing or Source-to-Pay should even consider the possibility. We also agreed with Mr. Smith that any other organization that even considered the possibility was

  • going to waste OUR money building it,
  • waste exorbitant amounts of money keeping the system up to date and compliant with ever-shifting legislation, and
  • only feed those dangerous delusions at best (and possibly create an epic disaster worse than the Smug cloud that ruined South Park because, of the 11 greatest supply chain disasters of all time, 8 were caused by technology failures and 6 by software platform failures!)

But we know this isn’t enough to convince the smuggest and most deluded from considering the notion. So we’re going to dive in and address some of the difficulties that will have be conquered, one primary module at a time, starting with spend analysis.

Even though every vendor and their dog thinks they can deliver a spend analysis system these days, the reality is that most vendors, including those with a lot of database and reporting experience, can’t. If vendors with significant experience in data(base) management and reporting can’t build a decent spend analysis system, what makes you think your organization can?

A spend analysis solution must be:

  • Powerful
    and support multiple spend analysis cubes, with derived and range dimensions, stored in public and private work spaces;
  • Flexible
    and support multiple categorization schemes, vendor and offering families, and user defined filters and drill downs;
  • Manageable
    with user defined data mappings and cleansing rules, hierarchical rule priorities, and easy enrichment;
  • Open
    and easy to get data in, out, and mapped; and
  • Informative
    with built-in report libraries, a powerful report builder, and an intuitive report customization feature.

This is not easy. Let’s start with flexibility. Most vendors probably have their goods and services mapped against UNSPSC, which your buyers of domestic goods are familiar with, but globally traded goods are probably mapped against HTS, which your tax division wants, your organization probably has its own GL codings that are required to keep Accounts Payable happy, and none of these categorization schemas are suitable for real spend analysis. As a result, you probably need to maintain at least four separate categorization schemas (for buyers, traders, accounts payable, and real analysts). If you think you can easily achieve this by slapping a report builder on top of an open source relational database, think again.

Let’s move on to power. One cube is never enough. If you’re an organization of reasonable size, doing year over year spend analysis over a reasonable time frame, you’re looking at millions, if not tens of millions of transactions. If you believe that you can dump all of that in one cube, and make sense of it, assuming you can design a system that can even build that cube without crashing (it’s big data, remember), you’re probably living in ImaginationLand (which is a very dangerous place to be).

We cannot forget about openness. The data you need will not live in the Spend Analysis system. It will live in the ERP (Enterprise Resource Planning). It will live in the Accounts Payable System. It will live in the TMS (Transportation Management System). It will live in the WIMS (Warehouse Inventory Management System). It will live in the VMS (Vendor Management System). And so on. Every one of these systems will have a different schema, it’s own data master, and, probably, duplicate vendor and product entries with various spellings of the name, locations, and so on.

Nor can we forget about manageability. It must be easy to map, normalize, clean, and map all of the data that is pushed into the system — by hand. AI doesn’t work. Every organization uses its own classification and shorthand, every department uses its own variations on the theme, and no system can figure out every error a human can make. All AI systems do is pile on rules until there are more collisions than correct exception mappings. That’s why a spend analysis system not only has to support multi-level rules, but help the user define appropriate multi-level rules and understand, when a transaction is mis-mapped, which rule did the mapping, what exception rule is required, and how broad that rule should be.

This leaves us with the need to extract useful information that can be used to identify real saving or value generation opportunities. No canned set of reports can do this. Standard reports can indicate where we can begin to look, but simply knowing a spend is high, or higher than market average, does not indicate why (locked in prices, bundled in services, quality guarantees, maverick spend, supplier overcharges) or what factors, if addressed would decrease spend.

And while this is just a high level overview of the challenges, the hope is that it is sufficient enough to convince you that development is not an easy task and not something that the average organization should remotely entertain.

Spend Analysis Solution Selection: What to Look for in Software and Services

As the author penned in Spend Visibility: An Implementation Guide,

“Almost any attempt by an organization to analyze spending patterns is likely to be fruitful, especially if there hasn’t been a serious prior attempt. It is easy to find thousands of breathless testimonials about a particular product or method — independent of the quality of the product or method — because almost any product or method will find savings if a spend visibility initiative has never been launched before. In the land of the blind, the one-eyed man is king“.

This simple fact has confused end-user organizations and analysts for many years. In fact, it has convinced most spend visibility vendors (and most analysts) that spend visibility is a fundamentally simple process of mapping Accounts Payable spend, and then drilling for dollars.

But Nothing Could Be Further From The Truth!

What is not so obvious is that this initial burst of savings is short-lived; and that many of the “quick saves” that result are unsustainable.

Especially if an organization does not select the right solution in the beginning that will allow it to define, and implement, a strategy that will allow it to identify continued savings year-over-year after the initial burst of savings are captured.

However, there’s no reason for an organization not to select the right software or services, because, it’s easy to select the right solution once you are informed. If you don’t know where to start, the next Next Level Purchasing Association (NLPA) members only webinar on July 28, 2015 @ 8:30 am PDT, 11:30 am EDT, and 16:30 pm BST, will provide you with a starting point as you evaluate software and services providers.

Specifically, this webinar will focus on helping an organization identify:

  1. key features of a spend analysis platform,
  2. critical requirements for successful services, and
  3. what to look for in a full-service solution

so that the organization may achieve spend analysis success. In particular, the kind of success that will generate a year-over-year average savings of 10%+.

Space is limited, and only NLPA members will have the opportunity to attend this webinar hosted by the doctor of Sourcing Innovation, but Basic Membership is Free, so there’s no reason to miss out. Sign up today, and very shortly you’ll receive the notice of the upcoming webinar that will allow you to register for this very informative webinar.

Real World Analytics – It All Depends on the Domain

Another book that was published late last year, and that has been sitting on the doctor‘s stack for review since about then, is Real-World Analytics by Michael Koukounas. the doctor has to admit that he was a bit hesitant to review this (and then lost it in the stack) because, as he just finished explaining to yet another individual before penning this post, Spend Analysis is not the same as Data Analysis, and that’s why so many companies without any understanding of the unique requirements of spend analysis for Sourcing and Procurement (who hire hard-core computer scientists who write trite like Spend Analysis: The Window into Strategic Sourcing (which is about the only book the doctor has ever reviewed that he has completely shredded) that, as it’s title suggests, gives you a cloudy window view that doesn’t give you the full picture (and often causes you to make the wrong assumptions about what is going on in the house).

But the doctor will have to admit that if you take this book as it is — a guide for building the foundation to do analytics (and not a guide for how to do them, which requires a completely different guidebook), it does a decent job. And the author — who is obviously an expert in data analytics in the Finance and Banking industry where a lot of effort goes into loan return models, credit risk prediction, and currency fluctuation models — really knows the core foundations for performing analytics quite well and does a great job discussing them.

As the author describes in various chapters, there can be no successful analytics, data nor spend, without:

  • Good Data Access
    and a Data Management Team
  • Talent
    as analytics cannot be automated
  • Operational Knowledge
    and, in particular, operational knowledge as it relates to the domain
  • Appropriate Trade-Offs Between Efficiency and Creativity
    and fine-tuning to the audience
  • an Analytics Continuity Plan
    in case something happens to top talent
  • the right teams …
    data management, analytics development, and analytics maintenance
  • … and the right team sizes
    since core development will usually only require a small team (because once the up front models are developed / implemented for the organization, new needs won’t be popping up every day), data management will require a team proportional to the number of data sources and their complexity, and maintenance will often require a larger team than you think as new data becomes available, new insights are required, and new reports are requested.

Moreover, at a high-level, the five-step game plan is correct:

  1. Define the Problem (and the end goal)
  2. Identify Touch-Points (where and when the analytics should be run)
  3. Understand the Touch Points (and the restrictions and requirements they place on the analytics)
  4. Select the Right Data (since garbage in means garbage out)
  5. Run the Analytics (and validate the results)

But when you start to descend from the 30,000 foot view, the details are vastly different in the spend analysis domain (and the author even implies this when he says that the analytic needs for engineers are vastly different than the analytic needs for financiers). But Real-World Analytics is a great guide to getting the precursor foundations right.

Maverick Spend is Good. Wait, What?

For years and years and years the doctor, the maverick, and every other thought leader in Procurement have collectively been telling you that maverick spend is bad. It erodes negotiated savings, builds mistrust in the supply base, and underlies your Procurement processes. It encourages rogue behaviour and increases the organization’s exposure to risk and liability. Good Procurement is not accomplished by loner hot-shots, but an integrated, dedicated team that manages the supply chain end-to-end and makes sure the entire chain is strong, not just one link.

But, sometimes, if approached in the proper manner, Maverick spend can be good. Maverick spend can help you identify weak processes, better products and services, preferred suppliers, and even poor definitions of on-contract and off-contract spend. Even though it’s still bad if the buyer is buying off-contract, paying more than needed, risking good supplier relationships, and potentially exposing the organization to compliance and liability issues, maverick spend still presents an opportunity to improve Procurement processes, procured products, and even personnel.

How? Check out the new Spend Matters Pro Piece in the maverick‘s 50 Shades of Pay series that was co-authored by the doctor on “Maverick Spend Analysis: How to Re-Plumb Your Spend and Savings Flow” and find out how you can knock your spend analysis success up a notch, even if you don’t have a spice weasel.

The Boxing Day Blogger’s Lament

Sorrow is my own yard
where the new grass
flames as it has flamed
often before, but not
with the cold fire
that closes round me this year.

For five straight years
On this day we spend rapped.
The web page is white today
no insights from grey beards.
Insights on spending
once filled many pages
put colour in our cheeks.

Yellow and some red,
but the grief in my heart
is stronger than they,
for though they were my joy
formerly, today they are absent
and we do miss old grey beard.

Today a bird told me
that in the meadows,
at the edge of the heavy woods
in the distance, he saw
a glimpse of grey beard.
I feel that I would like
to know that
the old grey beard will return
and bring us a spend rap again.