Category Archives: Spend Analysis

Do You Have A (Cost Reduction) Plan?

Today’s guest post is by Bernard Gunther (bgunther <at> lexingtonanalytics <dot> com) of Lexington Analytics.

Financial Services companies buy almost all “indirect” goods and services. This is exactly the type of procurement that every company does. One might imagine that Financial Services companies would be able to leverage the large amount of work done in all these other companies to become best in class. In turns out that they don’t. Purchasing Organizations at most financial institutions do not historically have the best reputation for delivering results. If you are leading the procurement organization, you need to change this general impression. The easiest way to do this is to deliver results. To deliver results, you need to have a plan.

Your plan needs to describe to people where you plan to start, what you are going to do and how everything is going to be done. The easiest way to create this plan is by reviewing your basic spend cube information. The spend cube takes all your AP spending from one or more systems (cash out the door), groups vendors together (when they appear multiple times) and assigns a commodity code to each transaction (based on a series of rules, generally based on GL code or vendor). From this, you can get reports by commodity on the top vendors, the top organizational units and the total volume of activity.

Using the spend cube data, you can develop an accurate and meaningful plan. A way to start the plan is to take each category and assign it to an action group (below). The action could be to source a category, to do a demand review, to do an Invoice Review or any other type of savings activity your team is capable of delivering. The category could be the full spend in a category or could be a sub-segment (e.g. geography / business unit). For each category, you need to tag spending as:

  • Completed.
    This category was recently done and no further work is required at this time
  • In Process.
    There is a project underway
  • Wave I.
    What you plan to start immediately
  • Wave II.
    What you plan to do after the first wave
  • Wave III.
    Other categories that you know need to get done
  • Further research.

Now that you have a “strawman” plan, you need to see if you have the resources to get this done and if key stakeholders agree with your “strawman”. Gaining stakeholder buy-in will help you understand the true situation “in the field” and will likely get you key resources to address the spending.

Having good spend data will enhance your credibility. Without good data, your first meeting with the Retail group could be “We’re from Procurement and we’d like to help. We think there might be an opportunity to save money. Can we do something for you?”

With good data, your first meeting with this key stakeholder could be “We think there is an opportunity for sourcing PCs. You’re spending $2.3 million with 2 VARS. The rest of the bank is spending $4.5 million and using an additional VAR and buying direct from a manufacturer. Looking at your pricing on your most frequently bought laptops, the Technology group is getting 7.3% better pricing. This means you’re looking at over $150,000 in annual savings. We want your help in doing the following [insert plan here – with details on who should be involved and what it means for them].”

Without a plan, the best you can hope for is another meeting. With a plan and good data, you can get a stakeholder fully bought into your idea, they can give you authorization to proceed and many times, they will give you the support and resources you ask for.

For one bank with about $750 million in spending, we created a plan for savings. This plan targeted savings of $85 million in 3 waves across 113 initiatives. For each of the 10 major department heads, we could tell them how much spending was involved in each initiative, which vendors might be impacted and which budget centers we wanted resources from. Over the next 15 months, we conducted the initiatives and generated $94 million in annual savings on 80% of the baseline. As part of the program, we involved finance to sign off on each of the results so the savings could be measured and tracked. The results were incorporated into the spend cube to support ongoing monitoring of the spending.

Is such a plan hard or expensive to create? The short answer is “no”. New tools have made this process faster and much less expensive to do. For an organization with less than $500 million in spending, a good plan (including building the initial spend cube and conducting the initial syndication) can be put together, with a focused effort, from scratch, in 6 to 8 weeks. And some organizations that have done much of the preliminary work can get it done faster.

A good plan, with good execution can lead to significant results. In the world of procurement, the data you need is there for the taking. All you need to do is to use it.

Thanks Bernard!

The e-Sourcing Handbook (Free e-Book)

The e-book edition of the e-Sourcing Handbook, co-authored and edited by yours truly, and sponsored by Iasta [acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric] (an e-Sourcing solution provider), is now available on request (through e-mail).

The e-Sourcing Handbook is your modern guide to Supply and Spend Management Success which utilizes and enhances strategic sourcing technology and best practices. Covering the full spectrum of the e-Sourcing cycle, the handbook helps you understand not only what spend analysis, e-RFx, e-Auction, decision optimization, and contract management are, but where and when to apply these technologies for maximum benefit.

Building on the resounding success of the e-Sourcing Wiki [WayBackMachine] and the e-Sourcing Forum [WayBackMachine] and Sourcing Innovation blogs, the handbook takes the concept of open access to knowledge and best practices one step further by compiling the best information on e-Sourcing to appear on all three public information sources into one definitive source. Furthermore, by mixing content from factual and informative wiki articles with blog postings that are both controversial and opinionated in an innovative manner, the juxtaposition of the two in the handbook allows the reader to see where the boundary lies between information and advocacy. It is the goal of the authors that, through this ground-breaking effort, the reader will gain a better understanding of e-Sourcing and how to take their supply and spend management efforts to the next level.

And, most importantly, unlike some of the recent e-books to pop-up, this is a real book – not a glorified marketing white paper doubled (or tripled) in size with a fancy (spaced-out) layout that contains dozens of colorful, yet useless, images. An exact mirror of the forthcoming print-book, it’s 220 pages of solid content backed up by a 4 page resource section, 8 page glossary, and 22 page bibliography for those who thirst for knowledge. The full table of contents and index are also included to help the reader quickly find what she is looking for.

But perhaps the foreward by co-author Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI) says it best.

The e-Sourcing space has undergone a major transformation since 2000. Vendors who were once dominant or cutting-edge have failed. Many have undergone asset fire sales, become part of the walking-dead, or been absorbed into larger companies; and still others have been forced by their investors into mergers that make little sense to the outside observer.

 

These consolidations have brought about a dangerous commoditization of ideas, along with a slowdown of innovation. Even worse has been the obscuring – by over-enthusiastic and under-educated vendor marketing departments – of deeply important issues that sourcing practitioners must consider and understand in order to be successful.

In response to this, my co-author, Dr. Michael Lamoureux, launched the Sourcing Innovation blog with the specific purpose of educating practitioners and cutting through the marketing babble that had begun to dominate the discussion. Another co-author, David Bush, started the e-Sourcing Wiki (from which the bulk of this Handbook is taken) in a similar attempt to put fundamental e-Sourcing ideas and concepts into a publicly accessible forum. Over the years, David has also built Iasta’s e-Sourcing Forum blog into a credible and useful resource.

These efforts are laudable, but blogs and wikis are sometimes hard to navigate, and effort is often required to extract related information in a useful way. This Handbook is an effort to draw together the knowledge base of the Wiki, along with relevant blog postings, into a coherent and readable framework. Of course, one might argue that none of the authors are readable or coherent – and that may be a fair criticism – but we’ve made a best effort.

Because Michael is a strong and independent voice in the space, it’s appropriate that he is the editor of this Handbook. He has taken an interesting and unorthodox approach, choosing to mix factual and informative wiki articles with blog postings that are both controversial and opinionated. The juxtaposition of the two allows the reader to see where the boundary lies between information and advocacy. This is perhaps the first effort of its kind where two very different resources are interlinked in a constructive, and hopefully interesting, way.

 

I trust that this edition of the Handbook will be the first of many similar efforts, and that together we can collectively energize our space with accurate information and useful insights. Remember, the e-Sourcing Wiki is a public resource – anyone can contribute – so everyone should consider “sharing the wealth” and do so.

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.