Editor’s Note: The following is a transcript of an interview by Andrew Bartolini with Tom Beaty, CEO of Insight Sourcing Group & SpendHQ. Some of the questions have been edited for brevity and clarity.
Picking up where we left off….
Andrew Bartolini: So how do you work with clients to identify the top categories? And how do you help them establish best practices around the management of those categories?
Tom Beaty: One of the trends that we’ve seen is that the aperture of procurement has widened significantly, although I don’t think this is “new” news. Advertising Age Magazine had a cover that said procurement has arrived for advertising, and that was five or six years ago. We’re certainly seeing a tremendous uptick in activity in categories that historically we didn’t work in. For example, we’re getting into legal services – we’re negotiating advertising agency agreements for Fortune 500 companies. And we recently created a repair program for retailers that sells and repairs electronics. They had a very localized way of addressing repairs, but it was inefficient and wasteful. So we instituted a national program and it removed about 60% of the costs. I think what’s happening is that the companies that fully buy into procurement really open the doors to anything and everything – essentially anywhere price and terms have to be determined.
The second major trend that we’ve seen and that we’re very excited about (and I think where we’re at the forefront of) is to address the question of “What comes after sourcing?” Because we have so much data with SpendHQ (we have about $1.5 trillion worth of historical data), we see a lot of folks doing great sourcing work and building pipelines, but they’re driving low compliance. On average, about 60% of the spend is going to the correct supplier when a preferred supplier has been identified.
For example, we’ve got a multi-billion dollar retailer for which we sourced about 65 categories, which in my experience is a tremendous number of categories. We hit everything. They engaged us to help manage these categories on a multi-year basis, and we’ve been working with them for four or five years. Every month we get the data from the vendors; we ensure the pricing is correct and that people are using the right contracts by leveraging the spend data from SpendHQ. We’ve developed category management analytics to try to identify new opportunities to remove cost through demand management and other areas. One of the things that was stunning was in many of those categories, the vendor didn’t correctly implement the pricing or they later changed the pricing. So we found that very active category management had to be undertaken to successfully capture all the original savings and then of course hopefully capture more.
To take the example further, we found there was about a 15% potential savings leakage through what I would call supplier non-compliance or gamesmanship. So you take this 15% savings leakage and add it to our 40% internal non-compliance savings leakage – that’s pretty significant. I mean, over half the savings isn’t happening. Long ago, we developed technology to address this for certain categories. Our strategy is that you have to get category specific because the way to optimize every category is a little bit different. For example, temp labor categories are very different than a small parcel shipping – there are different things you analyze. So we’ve developed a category management software at SpendHQ for all our GPO categories – for example, MRO and things like that. Now we’re building an entire business unit around category analytics and category management support. It’s not outsourcing, per se, but it’s going to be very innovative and solve a lot of these issues.
For example, we have a private equity firm that hired us to help manage 25 categories that they’d already put in place. We also had a huge company merge with an equal sized company; we did all the sourcing for the integration but then also tracked the savings for the next 12 months. It was very complex because it was in the printing space, where seemingly every job is different. It was an extraordinary amount of analytics, but we were able to do it successfully, and the savings justified it. We believe category analytics is a big part of fulfilling our commitment to bringing excellence to clients. And we don’t think the software vendors are well-positioned to do it because they don’t have the category management expertise, including how you source it and how you structure it. So we feel we are very uniquely positioned to be successful.
AB: One final question: where do you think procurement is going to be in ten years?
TB: I would like to say it’ll have matured and elevated dramatically, but I can’t. I think we may see another cycle where there is tremendous investment in tools but then they won’t fulfill promises. I’ve asked myself a million times “Why is the data so bad continuously?” I think a big part of it is because the P2P systems are designed for a perfect world and the procurement process is incredibly imperfect. It’s essentially a highly error-prone process that they’re trying to inject into a system with a low tolerance for errors. There will continue to be challenges and struggles. I think that there will be companies that ebb and flow in their commitment to procurement. However, if I were to make some predictions, one of them is that companies will get a lot more sophisticated around validating savings and tracking savings. I think that it will be a managed service, although I don’t know that there’ll be a simple technology that solves it just because it’s too complex.
AB: Tom, this has been great – thanks so much.
TB: It’s been my pleasure, Andrew.