Category Archives: Spend Analysis

A New Year is Upon Us – Do You Have Your SpendHQ Ready To Go? Part I

As SI outlines in its upcoming white paper on the Top Ten Transitions To Tackle in 2014 to Tame the Tolls, hyper-inflation is just around the corner, logistics capacity is on the rise (just like the cost of transportation), and working capital management is still lagging. If you put it all together, costs could rise out of control while millions of dollars sit tied up unnecessarily. The only way to avert this impending disaster is to take proactive action and get your spend, and spend management, under control.

In order to do this, you need good spend visibility — and, if you are not an expert in spend visibility or spend analysis, you need visibility that you can use and that is graphical, categorized, and relevant to your spend management needs. Furthermore, if you do not have technical skills (in house), you need services that can help you normalize, integrate, categorize, and cleanse your data. And if you don’t know where to start once you have the data categorized, normalized, and cubed for analysis, you need category expertise and consulting services.

If you are in one of these groups, up until recently there were essentially no solution options for you to choose from and even now, there aren’t that many. Furthermore, most of the solutions on the market that are available to you today, with only a handful of notable exceptions that you can count on your fingers (without your thumbs), fall into either the category of solution or service, but not both. However, for those of you that need an option that provides a full-service solution that includes data integration and category expert consulting, an often overlooked solution (that has been under continuous development for almost a decade) is about to make a big splash in the Spend Analysis and Visibility space.

That solution is SpendHQ. What started out as an internally developed tool to help Insight Sourcing Group (ISG) achieve the visibility they needed to help them drive savings for their clients, was transformed into a basic commercial software solution in 2007 for a select group of marquis clients to help those clients track spend and associated savings. Since then, ISG has spun off the product into an independent business unit which recently added new team members with commercial product development expertise from leading sourcing and spend analysis solution companies. This new business unit has been dedicated to improving and extending the tool for the last three years in quarterly product releases.

The solution has grown from a simple spend reporting tool into a fully featured spend visibility tool that tracks all of your spend over time — by category, department, and user; a category management tool that lets you dive into category spend and filter down to the items of interest, see managed vs unmanaged spend, and track compliance; and, as of the next release later this quarter, track contract meta data and do basic contract lifecycle management. In addition, the services component has matured and the organization can quickly import, merge, classify, and cleanse all of the relevant data from whatever ERP, AP, or Procurement systems you happen to be using and refresh this data for you as often as every week, although SpendHQ recommends monthly refreshes (even though, for larger clients, quarterly refreshes often suffice). (Their largest client, with 50 Billion in revenue, chooses to only refresh their data quarterly as real-time isn’t all that relevant where spend analysis is concerned.) Plus, SpendHQ can also integrate supplier data feeds for verification and enrichment and currently integrates with a number of office supplies vendors out-of-the-box.

While not the most powerful (ad-hoc) spend analysis solution on the market, it’s a really great solution for a mid-market company without a (useable) spend analysis or visibility solution that needs to get one up and running quickly, accurately, and usefully (as the solution has more power and capabilities than the average company needs to get great results). Within 4-6 weeks, a company with no spend analysis capability can be up and running 100% and be making useful, informed decisions. In the next two parts, we will dive into the visibility and analysis capabilities of SpendHQ as well as the category management capabilities.

You Need Analytics. You Need Intelligence. But Do You Need Visualization?

Probably not. Especially if all that visualization does is significantly jack up the cost of your analytics solution.

As a Procurement Pro, you need to know who is buying what, from which supplier, at what price, and in what quantity, and you need to present the relevant aggregate summaries to department managers and overall summaries to the CPO and the C-Suite — who will want to see the data graphically. Since even Excel has a plethora of charts and graphs at your disposal, it’s a safe bet that any decent spend analytics platform is going to have just about every standard graph and chart imaginable.

But just because you need charts and graphs, does this mean you also need interactive graphics that form the cornerstone of modern data visualization solutions? Kind of yes but mostly no. Interactive tree-maps, that are already built into leading spend analysis solutions, that allow a user to click on a quadrant that corresponds to a category and drill down into sub-category spend to understand why a certain category represents such a significant percentage of spend are quite useful, but 3-D rotating graphs, hyperbolic category hierarchies, network models, etc. are not that much use when it comes to understanding spend.

SI really likes the straight-forward answer to the question of does your company actually need data visualization given by Bill Shander over on the HBR Blog Network.

Given that data visualization can be expensive, especially if it involves large amounts of data and complex algorithms or deep interactive experiences, you need to decide if it’s worth the investment. If you’re selling straightforward solutions to simple problems, data visualization is probably not worth the money. Consumer packaged goods firms Coca Cola and Nestle don’t need interactive graphics to explain their products, just as Playboy and Playgirl don’t need to educate the opposite sex much about their centerfolds.

If a vendor is trying to convince you of the value of their analytics solution, they shouldn’t need rotating cubes to demonstrate that they can do sophisticated analysis, just like you shouldn’t need 3-D graphs to point out that a certain department’s refusal to adopt the corporate contract is increasing costs 15% and costing the organization 1 Million a year.

Simply put, if the analytic solution at your disposal has some advanced data visualization capability that is useful, use it, but don’t spend a lot of money for fancy graphics that don’t convey any more information than you can package in an Excel bar chart!

iValua: Proving Their Mettle with Source to Settle, Part III

In Parts I and II, we noted that when we last covered iValua in 2010, they were one of the few providers tackling end-to-end sourcing and procurement in a single suite of integrated modules built on one common platform. We noted in Tackling End-to-End Sourcing and Procurement, Part I that this French company had capabilities that, at least to some degree, addressed each of the core phases of the basic sourcing-and-procurement cycle except decision optimization and tax reclamation. Since then, they have added advanced tax tracking capability, and a boatload of other features that include SIM/SPM, Risk Management, Project Management, Enhanced Analytics, and Extensive UI customization. Today, we will continue our coverage of the platform, which includes modules for Supplier Management, Sourcing, Contract Management, and Catalog Management that were covered in Parts I and II; Procurement, Invoice Management, Expense Management, and Reporting that will be covered today; and Administration that will be covered tomorrow in the series finale.

Procurement

Procurement, in the iValua suite, is the process of creating requisitions (and having them approved), managing the resulting orders, managing budgets, managing receipts, and managing services deliverables. Requisition management, order management, and budget management are standard fare for Procurement platforms and work as you would expect, but the ability to create and mange receipts and manage service deliverables is a more unique offering for a Procurement platform. This allows for m-way matching in the platform, which is key to ensuring that not only are negotiated savings realized, but that overpayments, and more importantly, fraudulent payments, are not made.

Invoice Management

Invoice Management revolves around invoice creation, management, and reconciliation to receipts. It all works as you would expect, and there is nothing fancy here. Just a well-designed platform designed to make the process as smooth as possible.

Expense Management

Expense Management is the process of requesting cash advances, managing requests, creating expense reports, reviewing expense reports, rejecting lines or entire reports, and approving lines or entire reports. The expense management process is fully defined, and consists of creation, validation, accountant validation, threshold checking, finance or external department approval, (final) accounting approval, and settlement. As with invoice management, the process, and the application, works as you would expect.

Reporting

Reporting is the process of creating analysis reports, browsing them, creating queries, managing them, and then, as a result of the analyses, creating strategic action plans. The analysis capability is quite good. Users can create their own cross-tabs and pivot tables in the browser by dragging-and-dropping dimensions into chosen row and column positions. The analysis can be on any type of data stored in the system — surveys, questionnaires, RFX bid events, e-auctions, budgets, invoices, etc. But the most unique capability is the ability to create strategic action plans, which can serve as the foundation for future sourcing events. Like improvement plans, they can be quite detailed and are generally setup to support savings initiatives.

Each strategic action plan / savings project has a breakdown that allows a user to quickly access the definition data, the team and associated tasks, the financial overview, and detailed analysis through a sequence of tabs. The definition data will indicate the current status, related sourcing projects, and notes added by the team. The financial overview will capture the budgeted savings when the project was approved, the planned savings at project initiation, the current savings forecast, and the amount of savings captured to date. The actual savings (and forecast) will come from the data gathered during Procurement and be calculated using a user-defined formula (which could be as simple as $1 per unit, based upon negotiated rates).

Come back tomorrow when we’ll cover Administration and wrap-up the series!

Don’t Confuse Centralized Sourcing with a Centralized Sourcing Model

A recent article over in S&DC Executive on “The Four Vs of Fixing a Decentralized Procurement Model” noted that implementing a centralized model from nothing is no mean feat and then presented the Four Vs” as a good starting point to begin their path forward to centralization of selected spend categories. Centralization of spend is a necessary step on the path to a centralized sourcing model, but that’s all it is – a step.

In order to have a centralized sourcing model, you have to centralized:

  • Talent,
    all of the Sourcing and Supply Management Personnel have to be in the same business unit
  • Technology, and
    all of the operations, even if they are decentralized all over the world, need to run on a common base technology platform
  • Transition,
    all of the processes need to be migrated to common sourcing and supply management processes, with local sourcing only taking place on categories that are truly local (otherwise, sourcing should be center led)

Now, when you are transitioning processes, you should start with sourcing and procurement, as this one-two punch will give you the biggest bang for your buck. The application of good advanced sourcing techniques to categories never sourced this way, or to significantly larger spend volumes, will typically identify savings opportunities in the 10% to 12% range. Then, good procurement systems will make sure that the savings are captured by preventing maverick spend (if the spend has to go through the system and appropriate rules are in place) and making sure the invoices match the POs which will need to match the contracted rates.

And the first step in a good sourcing process is spend analysis, which, if you want to get it right, does require:

  • Visibility,
    into all of the spend in the category being sourced
  • Variance,
    on the spend between sites (which will give you a quick estimate of savings potential)
  • Velocity, and
    to savings which results by choosing categories where contracts are expiring or have expired and where there will be little resistance
  • Value.
    generated from the process in a way that can be measured, tracked, and reported to the CFO.

The four V’s covered in the article are indeed a good starting point on your journey to centralized the sourcing process, but that’s just one aspect of transition, and it doesn’t even address technology or talent, two key factors in the centralization of a Supply Management function.

There is a Spend Rule of Three

But the Third Spend Savings may not be for thee.

Backing up, I’m referencing a very interesting article published in SIG’s recent newsletter on “Spend Management’s New Norm: Uncovering Big Third Spend Savings” by Mark Walsh, CEO of FedBid. According to Mark, the best way to slice, dice, and categorize spend is not to get bogged down in category taxonomies, spend thresholds, savings potential, transactional analysis, supply risk, etc. — but to simply categorize spend by the Spend Rule of Three.

Mark defines the “Spend Three” as:

  • Strategic Spend
    the largest category of spend that typically accounts for 80% of organizational spend across 20% of vendors and service providers
  • Catalog Spend
    the smallest category of spend that typically accounts for less than 10% of fixed-price transactions on credit lines, p-cards, and employee expense reports
  • Third Spend
    the middle category of spend that accounts for 10% to 20% of spend that accounts for the bulk of indirect, or tail, spending (in a non-service oriented organization, as indirect and service spend will be much higher in finance and other verticals that don’t produce physical goods)

According to Mark, the greatest savings opportunity will generally be in the Third Spend category as most organizations will have a good grip on strategic spend, where they focus all of their efforts, and catalog spend, where they will have fixed price contracts and where savings opportunities, due to such low volumes, are inconsequential. Specifically, he believes that this category represents an average savings opportunity of 11%, which is not unexpected as it is consistent with recent findings by Aberdeen, AT Kearney, CombineNet, and others over the last few years. But the savings are only there if the spend is not under management, you haven’t spent time strategically negotiating the contract, and the purchase volume is high enough to be attractive to at least one supplier.

The reality is that savings opportunities will not neatly fit into any one category, and will depend on a number of factors. How much you’re paying, the current market price, supply vs. demand, energy prices, requirement flexibility, innovation and creativity, just to name a few factors. For example, that category you’ve strategically sourced five times in the last two years might still be a huge savings opportunity if a new production technology just hit the market that allows a supplier to cut production costs by 20%. You need to do a high level analysis across all categories to identify where the greatest opportunities likely lie, not just focus on the third spend. While there are probably some big savings to be had, the biggest savings lie where you’re spending the most in a manner that’s the most off of optimal. Don’t forget that … and if by some chance you’re not one of the thousands of readers who have already downloaded Spend Visibility: An Implementation Guide a free e-book by Sourcing Innovation and Lexington Analytics that is the definitive book on next level performance, do so today. It’s worth your time.