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.

In Part I, we discussed three reasons for the standardized taxonomy of UNSPSC. But it’s not always all sunshine and roses. Today we will discuss three reasons against.

The Downsides of a Standardizes Taxonomy

Recall I mentioned that standard taxonomies are a great start. However, we will want to move beyond the confines of these models to compensate for a few critical problems you’re likely to face.

• Alignment to organizational needs and strategic sourcing goals may be lacking
• Structural rigidity may not align with organizational profile
• Contain a good degree of built-in granularity (yes, this is both a strength and a weakness)

All three problems above come down to a lack of proper fit – both in terms of organizational usage and an action-oriented focus.

First, let’s return to our overarching goal: to make sense of spend and identify areas of focus for future savings initiatives. Looking at UNSPSC through this lens, you may find that it difficult to source strictly according to this taxonomy. I’ll give an easy example – when organizations bring in commercial printers for promotional materials, they tend to also buy branded tchotchkes from these same vendors. It makes sense; both items are planned for and purchased at the same time to be used at the same events. Suppliers often work in both of these spaces for this reason, but you wouldn’t know it following UNSPSC strictly. We’re in two separate areas of the code. As a harder example, think about your trusted, value-added IT vendor. This supplier may provide hardware and software across a range of departments, integration and engineering support, and handle your maintenance contract after installation. Draft up a list of products and services, and pull a UNSPSC code to cover all aspects of this supplier relationship – go ahead, I’ll wait. If I had to guess, you likely quit halfway through writing up a pretty long list.

Second, these are rigid structures are inherently one-size-fits-most in nature. UNSPSC can be great for some industries, but may not align well to others. I mention earlier that UNSPSC did tend to get detailed in a number of areas and, if you’re primary focus leans toward the machinery or MRO side of procurement, you may never need to venture beyond UNSPSC. However, any company with a more specialty focus may not get the coverage they need. The purchase of specialty chemicals may have a head start by using UNSPSC as a baseline, but the taxonomy won’t have the granularity to truly understand purchases as-is. One way to solve this issue is to blend additional supplementary detail where needed to make up the difference.

I will close this section with a word of caution. Twice now I’ve talked about the power of granularity, either already found in UNSPSC or added as a supplement afterwards. As such, it may seem odd that I’m considering categorical granularity as both a strength and a weakness – which case ends up being true for you will largely depend on what you’re doing with this level of detail. If you can use this granularity for better isolating and targeting savings opportunities, then throw this under the strength column. However, “paralysis by analysis” is a very real threat to a timely spend analysis project. Consider office supply purchases. One could easily adopt a taxonomy to drill down to a very granular level, separating black ink, felt tip pens from blue ink, ball points – but, would you ever really want to? Always ask yourself, “is more granularity truly necessary to get at the heart of this spend? Will this place of lesser detail hinder this project?” If you don’t need more detail, don’t invest the time. In this case, both pens would be purchased by the same internal groups and from the same suppliers. Spending time classifying to this level, or holding meetings on the best way to characterize paperclip groupings, is a waste.

Never Forget your Ultimate Purpose

It can be tempting to opt for a standard taxonomy, as is offered by UNSPSC. The value they provide is especially obvious early in the process when faced with dirty data, particularly if this is your organization’s first foray into spend analysis.

This temptation, however, will always be short-sighted. It is critical to wrangle spend and develop a clear picture of where your organization’s cash is going, true, but doing so without a clear path forward (one that leads to cost savings) is only going to stagnate strategic sourcing initiatives, leading to lost opportunity costs.

Always stay focused on answering this key question, “what is my best path forward to identifying savings opportunities?” and develop a taxonomy that will lead you there. Starting with UNSPSC can be a great foundation, but always consider where the taxonomy falls short for achieving your goals, and fold in more customized categories of spend where appropriate.

Thanks, Brian!

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:

1. The taxonomy must be universally applicable to all company spend.
2. 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!