Category Archives: Spend Analysis

Making BI Available to Everyone

A recent article in Information Week on “The Road to Making BI Available to Everyone” noted that, on average, only 25% of workers use BI. Considering that we’re in the information age, this is rather pathetic. Why is this?

According to the article, there are five major reasons for this:

  • The tools themselves … as most of them are not very usable
  • Company managers … that promote gut-feel decision making
  • Company cultures … that essentially promote information hoarding
  • Failure to convey the value … to business executives & decision makers
  • Lack of training … which promotes use of all-too-familiar Excel

Which are all-too-true, but I’d also add:

  • Cost … costs per user are often ridiculously high for many of today’s BI tools

So how can we change this? Good question. The author believes that several roads must converge before BI will get widespread adoption. Namely:

  • Businesses need to fully appreciate the data gold-mine
  • Vendors need to provide lower-cost ways to license and deploy BI
  • BI interfaces need to be upgraded to present data in a manner amenable to the user
  • BI tools need to be able to work on relevant data stores

These points are also correct, but what really needs to happen is:

  • The tools need to allow the user to build as many data cubes as they need, on as many data sources as they have available – as a stale data warehouse is not very useful to anyone
  • The tools need to be available on-demand – current tools overload IT resources and limit implementation
  • Users have to think outside-the-cube when it comes to recognizing what a BI tool is and how they can use it
    – and
  • Users have to understand that a few of today’s on-demand spend analysis tools can be used for more than just spend-analysis

For example, tools like BIQ can be used for more than just spend analysis. This post details how the tool was used to detect overspending, find fraudulent claims, determine when failed equipment under warranty is worth reclaiming, and detect questionable resource usage patterns. Plus, compared to traditional behind-the-firewall BI tools, they’re very affordable for massive deployments across your organization.

In other words, even though they’re not perfect, with their built-in ETL, cube generation, and pattern-based rules engine, they’re significantly more powerful than Access and Excel and would allow the vast majority of office workers who need BI to use BI today.

The 6 Days of X-asperation: Day 3 – Questions to ask your Spend Analysis Vendor

Just like we did in the X-emplification series, we’re going to continue with Spend Analysis as we tackle the generic questions that you should be asking every vendor, and the types of answers you should be expecting.

1. What do I have to do to get a good handle on how to make effective use of this technology, and for an organization of my size, how long is it going to take?

You need to be aware of the data that you need and where it is located. You should also have a good handle on how long it’s going to take to get permission to access the data and how long it’s going to take to classify the data. But most importantly, you need executive support to get the various subsidiaries and business units to elevate the priority of your request.

To answer this question, you first need to know how many systems the organization is using, as there are likely multiple accounting systems involved in any reasonably large organizations. The data feed from each system will need to be coerced (or transformed) into a common, all inclusive, record format. At a minimum, you will need supplier, cost center, GL classification, currency, amount, and any relevant dates. You should also include item description, PO number, legal entity, business unit, country, payment method, and any other descriptive fields that are available to you. Finally, also be sure to get any ancillary data that link to the records, such as supplier or GL master, as this data can provide additional information, such as MWBE status, as well as the “names” that go with the non-descriptive “codes” that are commonly used by accounting systems. Note that if you have a good spend analysis tool, it will provide a scriptable translation facility (the “T” in ETL) that will make the transformations required to transform all of your data into a common record format easy to define and repeat.

With cooperation from the business units, and allowing for some corrective feedback, it should only take a few days to acquire the data feeds and derive the transformations necessary as the creation of an initial dump script for each system, once you locate the person who understands the data organization in the system, shouldn’t take more than a day or so. In practice, the actual wall time may be somewhat longer, as there will always be a business unit with “something better to do” than dump data for you, and that’s why you start by getting executive support to insure that the wall time doesn’t drag on unnecessarily.

Once the data is extracted and transformed, it shouldn’t take more than a few hours to load the data into the spend analysis tool, derive the key dimensions such as supplier, cost center, GL code, date, etc, and get your first view of spend. The view will not be a perfect one, because you still need to build the commodity dimension that defines what was actually purchased, but it will still have some value – as you will have a picture of total spend by supplier, cost center, etc.

Fortunately, data mapping, and dimension familying, are well understood exercises. The secret sauce of mapping is “map the GL codes … map the suppliers … map the GL codes and suppliers”, and this can be done by most organizations in just a few days, and quicker still if you start with an 80-20 approach and start by classifying the top 1000 suppliers and top 1000 GL codes. (And you don’t need an “automatic classifier” — which still needs to be checked anyway as “IBM” could be International Business Machines or Iggy’s Beachside Market — to do it!)

But remember, this is just the first A/P spend cube. If you really want to derive maximum value from your spend analysis tool, you’ll want to build a lot of different spend cubes using the data that’s lying around your organization, starting with PxQ invoice data that’s just begging to be analyzed. That’s why you’ll want to develop in-house capability to build cubes, so your analysts can use the spend analysis system to perform dozens of specialty analyses. That’s why it’s important to make sure your spend analysis system is accessible to your analysts, because relying on third parties, or on the spend analysis system vendor, to build cubes for you quickly becomes expensive in a many-cubes scenario.

2a. How much functionality is my organization realistically going to be using in 12 months?

It comes down to the tool and the user. If it’s a real spend analysis tool, versus just a spend reporting tool tacked on to a data warehouse, your power users will be using most of the functionality almost immediately, while regular users just use the cubes (yes, that’s cubes in plural) and reports prepared by the power users. If it’s simply canned reporting on a data warehouse, you won’t be using any of it in a year as you’ll have identified and cleaned up all of the low-hanging fruit within 3 to 6 months.

2b. How much functionality do I really need?

The ability to build your own cubes from arbitrary data sources, to classify and re-classify the data on the fly with a rules engine, to create ranged dimensions, and to slice the data anyway you see fit. Canned reports, data enrichment, and other peripheral features, while nice, are mostly just sales tools and “icing” that you’ll outgrow quickly.

2c. And how does this functionality solve my #1 pain today, which is X?

If you’re looking at spend analysis, and never built an A/P spend cube, your number one pain point is that your spend is probably out of control. Thus, you want a solution that’s going to do more than just build a few canned reports, because otherwise you’ll be in the exact same position a year after implementing the system, where you are still spending with vendors you thought you had terminated, where there is still off-contract spending you don’t know about, and where you are still spending across business units with the same vendor in a non-amalgamated, or non-leveraged, way that was never identified to begin with.

If you already have an A/P spend cube, the number one pain point is likely to be that your vendors are not performing to contract or that your contracts are not returning the savings that were predicted. In order to get to the bottom of these issues, you have to understand both the demand side and the invoice side, which requires the building of cubes with more detailed, commodity-specific data. You may find, for example, that the office supplies contract that was so carefully negotiated has been neatly side-stepped by the vendor, through unreasonable pricing of off-contract items. You may find that your “best price” contract for PC’s shows a 12-month absolutely flat price curve for the same exact SKU, even though you know that PCs always depreciate 25-30% over such a time period. And so on.

Either way, you need a solution that’s going to do more than just identify the low hanging fruit, because otherwise you’ll be in the exact same position a year after implementing the system. You need to know that it has the flexibility to cube, slice, and dice spend any way you can imagine so that you can find savings opportunities above and beyond those that can be identified with canned reports and “just one” cube.

3. How much training is my team going to require to effectively use the software? How long is it going to take them to absorb this training?

Your team needs to be shown how to build a basic spend cube, import data, map data using rules and overlays, create ranged and/or rolled-up dimensions, create reports and graphs and maps, and drill down by multiple dimensions. Not all users will need all of this training, but your up-and-coming sourcing professionals and power users will. This training should take at least a week, and preferably two – where the second week includes guided mapping, cubing, and analysis of your data.

4. How much is this software REALLY going to cost me in the first year and each subsequent year?

Real spend analysis, versus just spend reporting tied to a spend data warehouse, is a relatively new offering. Expect to pay high five to low six figures a year for this functionality alone. If you’re also buying a data warehouse, or buying “automated classification” (if such functionality really exists), then expect to pay more. For on-demand solutions, or installed solutions priced with an on-demand model, maintenance should be (close to) zero; for other solutions, figure a higher maintenance cost than for e-RFx and e-Auction – closer to 20% than to 10%.

If we’re just talking pure analysis functionality, then installation should be free if it is on-demand, or be no more than a day of consulting if we’re talking behind the firewall or hosted ASP. However, if you’re also buying a data warehouse, then, depending on how many systems you have and how many transactions are in each system, and whether you want automated integration, it could be days, or weeks, or even months, to load and classify the data and get the automated integration paths up and running between all of the various systems. If we’re talking (real) enrichment using (real) third party data, add more time still.

If you turn to a third party or to the vendor for services, you should ensure that you can onboard those services in the future. Ideally, you should partner with a services vendor who will do “walk along” training, so that internal resources can become familiar with the system while real work is progressing in parallel. Services vendors should offer “a la carte” pricing, not just fancy promises and a fixed (large) price.

Finally, you shouldn’t be forced to sign a long-term contract with any software vendor, and you shouldn’t do so voluntarily until you’ve had a chance to really use the product. There should be a way (ask them!) to structure the contract such that you can stop using the software at any time. And, you should make sure that there’s a way to dump out and preserve all of the data you’ve organized with the spend analysis system, so that you can easily move that data to another platform, be it another spend analysis system or BI system or just a general-purpose database management system.

5. You say you care about your customers and that you are going to provide great service. Prove it!

Ask for references. Talk to them. If the vendor has an upcoming user meeting or conference, ask to go to it. Ask for examples of results their customers have achieved on the platforms recently, and how they can help you achieve the same. But most importantly, ask them if they’ll help you with your initial pilot project at a reasonable consulting rate and see what kind of results they deliver – with their tool.

6. Can I take it for a test drive or a short term lease?

Considering that this software is usually either web-based or a fat client that runs on your desktop, there shouldn’t be any problem for your provider to set you up with a single instance, or copy, for you to use on a pilot project – which they should be comfortable with you undertaking at a low consulting rate – equal to the cost of the consultant that guides you through the pilot project.

7. Can I buy it or implement it in pieces?

Just like you should buy the entire e-RFx or e-Auction tool functionality up-front, you should buy the entire analysis tool functionality up-front, but if the vendor also offers warehouse and automated classification and integration platforms, you should be able to buy, and add, them in pieces. (You might think that you need a data warehouse upon which to run a spend analysis tool, but just remember that most BI tools come with their own internal, basic, database functionality and that a good tool will allow you to import the relevant data dumps from each of your current databases, integrate them into a single cube, and run the reports you need.)

However, you should write the contract such that you can choose to drop add-on modules, services, or other functionality later, without penalty. Too many software and services contracts contain “poison pills” such as guaranteed services payments or guaranteed maintenance payments. Don’t sign them.

Sustainable Savings

Today I’d like to welcome Eric Strovink of BIQ [acquired by Opera Solutions, rebranded ElectrifAI] who, in his contribution, reminds us not to overlook the importance of verifying we actually achieve the savings we negotiate, because that’s the foundation of a sustainable business. Even though this might not be the definition of sustainability that most of us have in mind, the fact of the matter remains that any business that is not financially stable can not contribute to sustainability from an environmental or social perspective, regardless of where it’s collective heart is. Thus, sometimes its important to be reminded of the basics.

P. J. O’Rourke’s Circumcision Principle states that you can take 10% off the top of anything. That seems to be true for sourcing many categories, true at least if you’ve never sourced the category before. However, it’s irritating to listen to (some) sourcing consultants’ confident claims about “10% savings,” when they clearly have no visibility into what may have been very competent internal initiatives that have already taken place.Can one keep taking 10% off the top, year after year? At some point, no matter how much fat was on the carcass originally, there’s nothing left; and even if there is, 10% of it can’t amount to a hill of beans. Conventional wisdom would seem to mandate that there’s a limit to the savings that can be achieved, and that there is diminishing value to sourcing over time.

Of course, this has not been the case historically — after all, if it were, sourcing consultants would be out of business. What happens in practice is that sourcing initiatives either fail to achieve their objectives, or they erode over time. For example, suppliers know that in order to win business they must compete in auctions and see their margins slashed to zero or even to negative numbers; but they are not foolish. They will find a way to restore those margins, either over time, or almost immediately, by raising prices that aren’t in the negotiated contract, or, in some cases, by ignoring the contract entirely. How many office supplies sourcing endeavors have returned zero actual savings? Answer: a lot of them. Of course, if suppliers are pushed to the wall, they may simply walk away; or worse, if they are a key supplier, go bankrupt and take you down with them.

Furthermore, some sourcing initiatives that appear to generate theoretical savings can’t be implemented in practice. If there’s a management change, and new management are unaware of (or dismissive of) the efforts of the previous regime (human nature means that they usually are), that same initiative is “discovered” all over again, fails once more, and it’s lather-rinse-repeat. Each new group of consultants or sourcing staff that’s brought in has its own ideas and agendas, but the underlying infrastructural problems that prevent the implementation of the initiatives remain.

Even when a sourcing initiative is implemented and a contract signed, there’s still no guarantee that savings have been achieved. As Jack Welch once asked an over-enthusiastic buyer who was claiming huge savings (I wish I could find the original quote, this is a paraphrase from memory): “How do you know you got the price?” Stammers ensued. Buying from an e-procurement system doesn’t mean you’re getting good prices, and negotiating a good contract doesn’t mean anyone’s paying attention to it. I saw a contingent labor invoice analysis a few months ago where not a single contractor — not one — was being billed within the price ranges negotiated.

Wendell Phillips said, “Eternal vigilance is the price of liberty” — and it’s the price of sustainable savings, as well. Economics mandate that suppliers will try for the highest prices possible, and that any means necessary to increase revenue probably be applied, despite all the fancy talk in this blog (and elsewhere) about “supplier collaboration.” Tariq Hassan has said, “Trust, but verify,” which is probably the most accurate summation I’ve seen of the attitude one should have.

the doctor Exposes A Few More Elephants

As the doctor mentioned in his last post, there are a lot of elephants hiding in the sourcing and procurement war room! There are so many, in fact, that the doctor is having problems figuring out how they all fit! However, as the doctor was in-depth scanning and reviewing some vendor web sites (and no, the doctor‘s not going to list names – since he’s sure most of these vendors are still upset with him for the X-emplification series, which is going to be followed by an X-asperation series in the next month or so thanks to some really great questions and suggestions the doctor received in private e-mails), he caught a glimpse of the data enrichment elephant hiding behind the door, spotted the compliance elephant under the boardroom table, and found the performance management elephant hiding in the closet.

The Data Enrichment elephant would have us believe that your data is “enriched” if it’s processed by a spend repository that applies repeatable data cleansing and categorization rules to make sure it is always in a form that can be analyzed by the solution that you have. Although accurate cleansing and categorization is important, and a necessary part of any spend analysis project (whether done by a central data administrator or an analyst on the fly using a real spend analysis tool), it’s not data enrichment. Enrichment, by definition, means that additional data, culled from other third party sources, is added to your data so that you can do analysis above and beyond what you could just with the data in your organization. For example, this could be using Equifax Austin-Tetra to append financial risk and diversity information so that you can determine how much spend is really going to diversity suppliers (versus how much spend you think is going to diversity suppliers) and how many suppliers you are dealing with have a risk of failure in the next 12 months. In other words, what the Data Enrichment elephant is selling you is important, it’s just not enrichment – it’s basically what you should be getting with any tool you buy that promises accurate cleansing and categorization.

The Compliance elephant would have you believe that just because the vendor sells a complete suite that is capable of fully automating your processes and work-flows, storing all information and award decisions in a searchable centralized repository, and managing your contracts with a solution that alerts you whenever a transaction is found off of contract or a contract is coming up for renewal, that you are compliant. the doctor would like to say he’s sorry, but he isn’t, but compliance is much broader than this. Compliance is not just compliance with internal processes, but whether the system is always being used (because automating the processes is irrelevant if the system is not being used), whether it is collecting the data required by your organization to meet the requirements of Sarbanes Oxley and the accounting standards being used, whether or not you are awarding to a company on the denied party list, whether or not the carrier who is bidding is licensed to operate in the countries that you are shipping from or two, whether or not the products you are sourcing comply with regulatory requirements such as REACH, RoHS, and WEEE, and so on. This goes well beyond the offerings of any sourcing or procurement solution on the market. Well beyond. If the vendor is telling you that they enable compliance with respect to SOX, REACH, etc., and being very specific about it – that’s great! Sourcing and procurement solutions can enable compliance. But, considering the breadth of regulations that need to be adhered to in global trade, a sourcing or procurement solution alone, by itself, will not make you compliant. So, in short, this is an elephant that likes to considerably over-promise and under-deliver.

The Performance Management elephant tells you that if you have a sufficiently complete technology platform, than you achieve supplier performance management. One vendor in particular is stating that a combination of project management, collaboration technology, assessment, and monitoring technology is everything you need for supplier performance management. Although this is likely everything you need to monitor and measure your suppliers, and thus a good foundation, there’s a big difference between measuring something and doing something about the result! The nature of performance management is that it can’t be a purely technology solution – because performance comes down to people. Technology is good at tracking tasks and, by way of benchmarks, pointing out where there are inefficiencies or problems – but you need people to identify the root causes and work with suppliers to identify the solutions and insure that they get implemented. Furthermore, for this type of platform to be truly useful, it should have an expert-system module that can be customized to each vertical to help the individual responsible for performance management to diagnose possible errors and resolutions. Without this, then it’s just an open source project management tool combined with an RFX tool for surveys and assessments and a BI tool on an ERP to produce metrics and generate alerts when something falls outside of an acceptable range. In other words, the Performance Management elephant has a really good cause, but is a little confused how to actually go about getting results.

For those of you counting, this brings the total number of elephants we’ve discovered in this room to date to twelve. In addition to the data enrichment, compliance, and performance management elephants, previous posts identified the optimization, e-Procurement/EIPP, and spend analysis elephants; the supplier enablement, contract management, and hidden cost elephants; and the RFX, e-Payment, and technology RFP elephants.

the doctor hopes you enjoyed this post, and the brief return of the blogologues, because this will be the last regular blogologue for a while. There are two reasons for this. The first reason it takes a lot of time to craft and edit a post of meaningful content (versus the first half-formed thought that comes to mind), and given that this blog is generating zero income at the present moment, the doctor, unfortunately, can only afford to dedicate so much time to it. The second reason is that the first cross-blog series of 2008 on Sustainability starts next week, and given the importance of this topic, the doctor does not want to detract from what he hopes will be a very popular, and very prolific, cross-blog series.

How much do you know about your (corporate) spending?

Today I’d like to welcome Bernard Gunther of Lexington Analytics, a specialist consultancy in spend analytics based in Lexington, Massachusetts.

How well do you understand the pricing you actually get from your vendors? Many companies don’t know as much as they should. Think about a typical situation:

Last year you finished a sourcing project and signed a contract with a vendor. The entire team, including purchasing, the business line and finance all believe the new rates will save the company significantly. Since then you have been buying from that vendor. Now, a year later, you want to know, are you getting the pricing you expected to receive?

How much do you really know about the spending? There are seven simple questions that you should consider. If you are managing your vendors properly, these should be easy for you and you should have the analytics to support them. If these are hard to answer, you have to ask yourself, “Do I really know what I’m paying for?”

  1. Contract Pricing
    Does your contract contain a pricing schedule?
    This sounds simple, but surprisingly many contracts don’t have pricing. Sometime the pricing is buried in different statements of work. This can be fine if the pricing is consistent across all statements of work. But you have to ask, why can’t the pricing be transparently put into a single location where it can be referred to by other documents? This should be true if the pricing is contained in a schedule; a formula; a discount from list retail price; or even if it represents a discount from a benchmark.
  2. Invoice detail
    Does your invoice contain enough detail for you to determine which price you are supposed to be getting?
    For each item on the invoice, can you tell the relevant contract terms to calculate the price? If you have fixed hourly rates for different types of electricians, but the invoice just states “Replace 10 power outlets – $1,546.05”, you have no way to confirm the pricing is correct. If your contract states you obtain a discount from a list price, do you have the list price on the invoice or even a separate table of list prices? If you don’t regularly capture these prices, you will find it very hard to reconstruct this data a year later.
  3. Electronic invoice
    Do you get the invoice data electronically?
    If you are ordering electronically, this should be easy. If you only have paper invoices, doing any analysis is going to be difficult. You’ll have to have data entry done on the data before you can do any comparisons. Every vendor should be able to provide you with a spreadsheet with their invoice details along with each invoice.
  4. Contract Coverage
    For what percentage of the spending is there a price which can be calculated from the contract?
    Using your electronic invoice data, you determine the portion of spending for which you can calculate the contract pricing. If this number is 98%, you have good coverage. If it is much less, you have to ask if you are comfortable or if you need to expand the coverage of your contract. For example, shipping rates might not be included in the contract pricing, but if they represent 1% of spending, it may not be an issue to worry about. If shipping costs end up being 25% of your spending, perhaps you should establish pricing (using your contract, their contract or a new contract). You may have a great price for PC hardware, but if 40% of your PC spending is not covered by the contractual rates, you need to understand the pricing on these other items.
  5. Pricing correctness
    For what percentage of spending is the pricing the same as in the contract?
    For items you buy that can be priced from the contract, are you getting the contractual price? This may sound obvious, but errors happen. If you don’t check, you don’t know. Error rates can be significant, sometimes approaching 20% or more of the items purchased. If 20% of the items you purchased are at prices 15% higher than the contractual rates, you have just had a 3% price increase across the board.
  6. Pricing trends
    If the contract pricing allows for pricing variation (for example, if the price is a discount from list price), how does the unit pricing vary?
    Are prices regularly rising where they shouldn’t be? Are prices flat when they should be declining? For example, you might expect general office supply pricing would stay flat; paper products might vary with the price of paper; technology pricing to decline; labor prices to vary based on market pricing; etc. Do prices drop when a new, lower price contract is put in place? Your analysis should be able to make these pricing changes transparent to all interested parties.
  7. Demand mix trends
    Has the demand for different items changed?
    Is the change in the contract coverage a function of users buying new items? If you are measuring, in detail, how a vendor is used, you will understand, in detail, how the user demand is shifting over time.

Some people assert that this is all useful, but it’s too hard to do. If you don’t manage your spend data and do not have detailed contracts, it will take some work to do this the first time. But we’re talking a few days or weeks of effort, not months or years. Once you’ve designed your invoice data and contracts for easy analysis, using the right tools, these reviews can be done in hours. The value delivered can be significant. If you don’t look, you will never know.

Thanks, Bernie.