Category Archives: Spend Analysis

Finance Needs Spend Analysis and e-Procurement

Basware recently released its annual “Cost of Control” study for 2010, which contained, among dozens of other statistics and tables, the top 10 challenges for Finance over the past year. Reviewing them, it immediately struck me how most of them would be addressed with the adoption of good, modern, spend analysis and e-Procurement solutions. For example:

Spend Analysis would solve:

  • Spend VisibilityYou’d instantly see what you are spending, with who, for what, and by whom
  • Difficulties in Realizing Cost Saving OpportunitiesA good spend analysis system instantly presents you with the low-hanging fruit and gives you the power to easily explore over twenty different types of savings opportunities, as discussed in the recent Illumination on Strategic Spend Visibility.
  • More Visibility into Contract ManagementIt’s easy to integrate contract management into a modern spend analysis solution, even if you don’t have a contract management solution! Just create a contract dimension, as per this post on integrating contract management and spend analysis, and you’ll see not only what you are spending on contract, but what’s not being spent on contract. This visibility into contract and non-contract spend gives you an instant read on contract management, and what you need to do to fix it.
  • Difficulties in Realizing Cost Savings Across the BusinessBy integrating AP, Invoice, and Contract data, you can see not only what spending is on contract, but what spending is at contract rates, or, in the case of best-price contracts, where pricing isn’t trending down where it should be. This allows you to go after overpayments to realize the negotiated savings. Also, you can see when you are hitting discount or rebate thresholds, and aggressively go after those as well.
  • Need to Squeeze Suppliers on Payment TermsWhen you are realizing your negotiated savings, there will be less of a need to squeeze suppliers on payment terms. Plus, improved visibility into spend puts you in a better position to take advantage of early payment discounts, which will help you save even more!
  • Increased Supplier RiskMany modern spend analysis systems integrate, or allow for the integration of, third party data feeds from the credit agencies that track financial risk. This will give you a quick insight into the majority of suppliers who are most likely to go bankrupt. While it won’t be perfect, it’s much better than nothing.
  • Environmental Regulations / Compliance Integrate ERP data, and you can calculate carbon output, energy usage, water usage, etc. and automate production of your social responsibility and carbon footprint reports!

E-Procurement would solve:

  • Need to Improve Invoicing and Payment ProcessingE-Invoicing allows for automatic receipt, matching, and, if it meets the defined payment rules, automatic queueing for payment and e-payment systems allow payments to be queued and made automatically.
  • Need to Automate Financial Processes More QuicklyNot only does e-Procurement allow every step of the procurement process to be automated, but it allows your procurement professionals to process POs, invoices, payments, etc. on an exception basis only — which means they only have to get involved when there’s a problem.
  • System Integration / Technology ChallengesMost modern e-Procurement platform providers already integrate into most of the major ERP and relational database systems on the market, and there are scores of specialist shops that can assist with custom integrations.

In other words, if Finance wants to solve it’s greatest challenges, spend analysis and e-Procurement solutions are the answer.

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There’s No Need for CFOs to have Poor Visibility of Key Financial Information

A recent headline on the Supply & Demand Chain Executive site that stated “poor visibility of key financial information [is] undermining CFOs’ confidence in company performance” commanded my attention because there is just no need for this in 2010. The article, which referenced Basware‘s 2nd annual global study on “The Cost of Control”, noted that only 50% of finance executives profess a high level of confidence in the performance of their departments and only 44% maintain this level of confidence when considering the company’s performance overall.

This is, in a word, pathetic. There’s no need for this. This is not 2000 when spend visibility solutions were just hitting the market, when they cost way too much for the average organization to afford (as they started in the 7-figure range, compared to the 5-figure range that many great solutions start at today), and took weeks, if not months, to update the data warehouse when inaccuracies were found. This is 2010 when you can drill around a spend cube of up to 50M transactions on your laptop, in real time, and reclassify transactions, on the fly, in a matter of seconds. Or, if you have a nice enterprise server to play with, you can drill around a spend cube of up to 500M transactions in real-time and reclassify transactions on the fly.

(If you don’t believe me, and are in the market for a modern visibility and data analysis solution, please contact Lexington Analytics* and ask for a demo — and watch what they can do with BIQ in 45 minutes or less. They’ll even do it on your multi-million transaction data set to prove there’s no trickery involved.)

Plus, there are now a number of vendors with good platforms on the visibility front that can handle very large data sets and a few of them, like Rosslyn Analytics, even do it over the web. And while not all of these vendors will be able to rebuild your cubes in real-time if you choose to change dimensions or reclassify a large number of transactions, they all support rapid drilling and custom report creation so that, even in the worst case, you come back tomorrow and you have your answer. In other words, there are a large number of spend visibility solution providers that will more than meet the visibility and reporting needs of the CFO (even if they are a bit lacking when it comes to power analytics, which is what you need for true strategic spend analysis). And if you have a decent, modern, e-Sourcing or e-Procurement solution, if you don’t already have an integrated spend visibility solution, you most likely have easy access to a spend visibility solution (as most suite providers either have one or have a partnership with a best-of-breed provider) and it’s just a matter of licensing the module and connecting the data feeds. Then your CFO is good to go.

So I don’t want to hear that your CFO doesn’t have good visibility, because that just means you haven’t done your job and implemented the spend visibility system you need to take your sourcing and procurement to the next level. A level you want to get to because, as I indicated in Sourcing Innovation’s recent Illumination on Strategic Spend Visibility, the strategic spend analysis program it will enable could multiply your organizational savings by a factor of five in the first three years and generate strong returns for years to come!

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*There are other consultancies, and even other distributors of BIQ for that matter, who can do this as well, but, so far, only Lexington Analytics has indicated to me both their desire to set the market straight and their willingness to do a no-commitment demo for anyone who is serious, so I mentioned them. If any other vendor is willing to do the same (no-commitment demo), please feel free to leave a comment.

Marketing is a Huge Savings Opportunity

Sourcing Innovation’s recent Illumination on Strategic Spend Visibility noted that best-in-class companies that strategically source their marketing spend save an average of 14.7% on five marketing and spend categories compared with a mere 7.8% savings for all other enterprises (as per a recent Aberdeen Group study) and that, across the board, with good visibility, an average marketing organization can easily find 20% to 25% savings with Procurement’s help (as per a recent Ariba report).

Why? Last year’s report from the Marketing Supply Chain Institute on why you need to “Define Where to Streamline” makes it clear. A surprising 62.9% of survey respondents admitted they had never undertaken a comprehensive audit and analysis of costs and process efficiencies in their marketing supply chain. Almost two thirds of companies have never analyzed their costs! (And yet they wonder how most of their supplier reps can afford to drive Beamers, Benzs, and Jags!) Furthermore, only 10.8% are adopting workflow or collaboration systems to reduce costs, only 11.5% have a back-end marketing platform to optimize resources and process, and only 14.2% admit that their marketing is fragmented.

In other words, Marketing is a savings gold mine. Turn your strategic spend analysis system loose and the savings opportunities you discover will be numerous indeed.

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Strategic Spend Visibility: Untapped Potential for Cost Reduction

Chances are that most sourcing professionals have read all of the Aberdeen and AMR reports on spend analysis and spend visibility and are quite impressed at the opportunity for savings they reported — on the order of 10% to 15% on 55% to 75% of untapped spend and 6% of spend in managed categories, and are now itching to bring spend analysis and spend visibility into the organization. But before this step is taken, it is important to realize that these research reports fail to consider the spend analysis value curve, which tends to flatten out within one to three years. That’s right! If an organization embarks on a traditional spend analysis and visibility program, which is tactically oriented, it will find that the savings opportunities quickly dry up and that the 5X to 10X ROI that was initially experienced quickly becomes, if the organization is lucky, a 1.5X to 2X ROI. This is because all the platform does is help the buyers maintain negotiated cost reductions during contract renewals and catch repeated attempts at maverick spending after organizational users think that they are no longer being watched.

Why do the savings disappear so rapidly with a traditional, tactical, spend analysis or spend visibility initiative? Because there is only so much that can be done with Accounts Payable (AP) data. More specifically, all that AP data does is identify the top spend buckets by supplier, category, and commodity, and, correspondingly, the low-hanging fruit savings opportunities which are easily identified as the top categories, commodities, and supplier relationships where the organization doesn’t have contracts and performance management programs in place (and where the typical payment amounts are above the range that defines “market average”). Since this analysis is relatively quick and easy to do (once there is visibility into organizational AP data), and since a good spend visibility solution will decrease sourcing cycle time by 50% to 75%, it’s not long before an average organization exhausts its savings opportunities from a tactical spend visibility project.

But this doesn’t have to be the case! A shift from a tactical view to a strategic view, which includes other types of data, can multiply savings opportunities and, more importantly, find new opportunities year after year. For example, adding invoice data allows for the identification of overpayments and uncollected rebates, which are common in categories like office supplies, electronics, and (offsite) storage and which often represent millions of dollars in instant refunds. It also allows for the improvement of inventory turns, which can quickly shave 10% to 20% off of inventory costs.

And if the data is enriched, a whole plethora of new opportunities open up. Adding diversity data allows an organization to target government MWBE programs. Third-party corporate data can be used in fraud detection. Carbon footprint data enables regulatory compliance. And so on. The opportunities, and savings, become endless. In fact, a strategic program could multiply the organizational savings opportunity by five in the first three years and generate strong returns for years to come! That’s why strategic spend visibility is needed.

And that’s why you should download Sourcing Innovation’s new Illumination, sponsored by Rosslyn Analytics, on Strategic Spend Visibility – Untapped Potential for Cost Reduction (Page Down; Registration Required). It just might change the way you think about spend analysis and spend visibility.

Efficient Sourcing In Marketing, Part II

In our last post we discussed how Marketing Procurement was still a sacred cow at many companies, despite the fact that significant savings, which exceeded 42% at one CPG company, are to be had. Even though CIPS and the IPA tried to highlight the potential three years ago with their report on “Magic and Logic”: Re-defining sustainable business practices for agencies, marketing, and procurement, which was followed by Efficio‘s treatise on “The Creative Challenge: Driving Efficiencies in Marketing Procurement” which laid out an eight-step approach to driving efficiencies in Marketing Procurement.

Then Booz & Co. decided to get in the game with their recent whitepaper on “Efficient Sourcing In Marketing”, which is a good candidate to complete the trilogy. In this paper, which described the all-too-common scenario that represents the sourcing side of marketing at large companies, Booz & Co. outlined some of the many advantages that can result from bringing a disciplined process to Marketing Procurement and laid out their six step process for getting results, which we’ll cover today.

1. Analyze Marketing Spend in Detail

As with any sourcing process, you need to know where and how the money is being spent. Currently, most CMOs have no idea of their marketing expenditures or a comprehensive profile of their supply base as their budgets are divided between “above the line” items, such as advertising and creative services, and “below the line” items, such as promotion and direct mail. Furthermore, most marketers manage against budgets and campaigns rather than vendor compliance to contracted terms.

2. Adopt a More Rigorous Approach to Spend

There are two ways Marketing can be disciplined in cost control. The first way is to rebid and consolidate the vendor base. The second is the through the manipulation of demand and process levers through the requirements placed on suppliers by marketing staff themselves. Procurement can help with both levers using the methodologies identified by Booz and Co. in the white paper.

3. Deploy Decision Support Tools to End Users

These tools can alert marketers when their current suppliers are overly expensive, less experienced, or less capable compared with other suppliers they are spending on (when performance metrics are tracked). These tools can also automate price comparisons, cost trade-offs, and complain analysis — offering tangible metrics that quantify the results of marketing’s efforts.

4. Create a Clear Delineation of Roles and Responsibilities

Cost savings rarely happen where decision rights and lines of responsibilities aren’t clearly delineated in most departments, with Marketing being one of the worst offenders. Categories of spend that span business units should be centrally managed, whereas those that are business unit specific or local should be done according to well defined rules that define vendor selection. Typically, final decision rights will remain with Marketing, while Procurement works to facilitate and continually improve the effectiveness of the strategic sourcing process.

5. Define an Operating Model

The operating model should be governed by the roles and responsibilities define above but be streamlined to support the nature of the company’s marketing activity.

6. Use Change Management to Implement the New Paradigm

Each of the previous steps require a company to change established strategies and practices and implement new ones. As a result, the appropriate application of change management must be anticipated and provided if the initiatives are to succeed.

In other words, if you deploy a good cross-functional strategic sourcing process, you’re already well on the way to Marketing Procurement success.

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