Category Archives: Spend Analysis

When You’ve Got to Cut Costs

You can follow the advice in the HBR article that outlines some things you can do “when you’ve got to cut costs”, but only if you do it very carefully. In short, the practical guide to reducing overhead offers up six tips that will reduce your costs, but only if implemented properly as a couple of them will actually increase costs if implemented incorrectly. This post will discuss the six cost savings ideas offered up by the article and the right way to go about them.

  1. Consolidate IncidentalsBy the time cost-cutting becomes a must, the company has already done away with most discretionary spending and non-critical perks and activities and further cuts would be difficult, if not dangerous. (Such as slashing the training budget when you need highly capable staff.) In this situation, look for further savings through the consolidation of incidental spending. For example, hold training events and trade shows on the same day(s) and cross-schedule the use of outside resources across departments.
  2. Take Overdue Personnel ActionsRestructure the jobs of any individuals who are not fully engaged, confront under-performers, and eliminate the dead-weight or problem personnel. Be careful not to overburden already fully engaged resources, assign responsibilities that the resource isn’t trained for, or eliminate too many positions at once. Not only can each of these actions can cause resentment, but the latter can have those who remain fearing for their job security and looking elsewhere.
  3. Reduce Spending on Department ManagementMany administrative departments will use as much as 20% of their budgets on supervision and coordination. If staff are competent and capable, and if responsibilities haven’t changed much in a year, supervision and coordination is probably costing more than it’s saving. In this case, supervision can be reduced by at least 10%, if not more. Just be careful to appropriately re-assign duties or confusion will set in.
  4. Gain Control of “Miscellaneous” SpendingGiven that even the best organizations tend to max out at 75% to 80% of Spend Under Management, it’s almost always possible to find 15% to 20% of spending that hasn’t been managed closely which is ripe with savings opportunities. It could be supplies, telecom, or electronics devices.
  5. Hold Down Pay IncreasesSpecifically, limit pay increases to top performers and award additional compensation based on performance, giving the top performers the bigger cut. Cutting pay increases across the board or eliminating bonuses will alienate top performers, the 20% of staff who are responsible for 80% of the bottom line contribution.
  6. Repropose Rejected Cost-Savings IdeasChances are that a number of good cost savings ideas were rejected over the past few years because of constraints, other priorities, or required investment. Review them and select those with a short-term ROI.

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Finance Needs Spend Analysis and e-Procurement, Part II

In our last post, we noted that Basware recently released its annual “Cost of Control” study for 2010 and pointed out that Finance’s top 10 challenges could be easily solved with good, modern, spend analysis and e-Procurement solutions. The study also outlined the top 10 strategic finance priorities for 2010 … which can also be addressed by the adoption of good spend analysis and e-Procurement systems. For example:

Spend Analysis would address:

  • Increasing Profits and Top Line PerformanceProfit = Cash In - Cash Out

    Spend analysis reduced cash out.

    Therefore, spend analysis improves profit margins.

  • Maintaining or Improving Profit MarginsSpend analysis allows you to consolidate spend among fewer suppliers and fewer SKUs. This reduces overhead and increases profit margin.
  • Planning, Budgeting, and Revenue ForecastingOnce you know your actual year-over-year spend, volume trends, and market trends, your forecasts and budgets improve greatly.
  • Risk AnalysisAugment the data with (financial) risk information and quality/performance metrics, and you can quickly see which suppliers likely pose the greatest risk to your operations.
  • Regulatory ComplianceYou know what suppliers you’re spending on and how much is going to socially responsible suppliers and how much isn’t. Augment the product data with carbon emissions spending and you know if you’re within limits or not. Etc.

E-Procurement would address:

  • Reduce Overall PurchasingA modern e-Procurement system with approvals, checks, and balances would insure nothing is bought that isn’t approved, on-contract, and within-budget without managerial exception.
  • Cash Flow and Working Capital ManagementYou can see how many purchase orders are outstanding, how many invoices are upaid, what discounts are available to you if you pay early, how much cash is actually free, and even take advantage of receivables financing.
  • Improving Short and Long Term Operational EfficiencyYou can cut DPO and DSO in half, eliminate paper processing, and make your team 80% more efficient. Over the long term, you can reduce the headcount devoted to tactical “paper pushing” and increase the headcount dedicated to strategic spend analysis and sourcing, which increases organizational savings per employee.
  • Environmental PracticesNo paper. Spending to environmentally irresponsible suppliers can be denied. Etc.
  • Accessing CreditIf you know what you have, and you can demonstrate the reliable payment history, even if the banks turn you down, you can get receivables financing.

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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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