Editor’s Note: At this point, many of our readers ought to know not only what spend analysis is, but also its value proposition. Still, it is worthwhile to revisit the subject from a 101-perspective and level set on spend analysis as a process and a business solution. So let us review.
Spend analysis is the name of the process used to (a) collect the spend data from the different enterprise source systems, validate it, and then place it in a standardized and usable format (b) organize the information into a standard classification structure and cleanse the information by eliminating any mistakes, discrepancies, and/or flaws in the data set (c) enrich the spend data with complementary information that can provide greater context around the category, supplier, and usage within the enterprise and (d) analyze (i.e. “slice & dice”) the spend data to identify opportunities and support decisions.
Visibility into enterprise spend is the desired output of spend analysis and helps procurement departments understand what money is being spent with which suppliers and on what categories. Whether it is helping procurement organizations to identify and prioritize sourcing opportunities or monitor and manage compliance or enabling business units to track spend against budgets and plan for the next cycle, spend analysis seeks to provide data in a usable format with context to help stakeholders make better, more-informed decisions. For spend data to drive real value, organizations must take action on it. Unfortunately, 39% of enterprises fail to link the output of their spend analysis efforts to their sourcing processes thereby leaving significant savings on the table.
By contrast, Best-in-Class procurement departments, who are almost 2.5 times more likely to have enterprise-level spend visibility, use this powerful asset to drive strategic planning, refine operational focus, and deliver superior business results. These leaders and their performance serve as tangible proof that spend analysis is the foundation upon which operational excellence within procurement is built. And, as programs evolve, some procurement leaders have also begun using their spend analysis solutions, like those provided by SpendHQ and Tamr, to track and manage departmental performance and make smarter sourcing decisions with predictive logic.
Spend Analysis Delivers
It is basically impossible for a procurement department that lacks enterprise-level spend visibility to make the argument that it is a truly strategic function operating at an optimal level. So, whether current budgets allow for an investment in spend analysis solutions or not, the 62% of procurement organizations that lack full visibility into enterprise spend must begin, in earnest, to solve this problem. Based upon the difference between the average annual savings benefit for enterprises with fully-automated spend analysis solutions and the other enterprises, an investment in these technology solutions appears to be justified.
For example, the procurement department at a Fortune 100 company recently deployed the SAP Spend Performance Management solution to begin the process of gaining visibility into spend and manage its spend more effectively. “Our goal with SAP technology is to make the sourcing process as efficient and automated as possible by creating a one-stop shop for our user community to come in, mine the data, find opportunities and potential suppliers, run sourcing projects, make awards and execute contracts,” says the SPM project lead. With 300 ERP systems, the entire process of capturing all enterprise spend within a single spend analysis application is expected to take a few years; however, the first business units to put the spend analysis system in place have already seen improvements in the volume and quality of their sourcing projects. The Project Lead continues, “This is a very strategic project for us. Already we are using the tools to identify and manage supply risk and track inflation via a three-year price trend analysis. This next year, the system will be very valuable in developing and supporting our strategic plan. In the future we hope to use the spend analysis system to directly track and manage procurement performance and help us better understand and manage category cost structures and the drivers of future savings.”
Ardent Partners’ Research has shown that visibility into enterprise spend is the foundation of procurement excellence. Chief Procurement Officers and other procurement leaders who attempt to manage their operations without visibility into their spend, processes, and supply base cannot claim to be leading a truly strategic function. To be strategic, CPOs and procurement departments ought to develop a standardized approach to spend analysis that is scalable and repeatable.
When possible, CPOs and their teams ought to invest in tools that automate the spend analysis process and enable high quality reporting and analysis. And they need to take action on the spend data to develop, maintain, and execute a sourcing pipeline; to expand the scope of procurement operations by placing more spend under management; to improve price and contract compliance rates and target maverick spenders; and to develop a deeper understanding of historical pricing trends and supplier behaviors to more proactively anticipate market shifts and supplier specific issues.
Post Script: Are you and your procurement team feeling lost on your spend analysis “journey”? We can give you the guideposts to get there. Join us and special guests, SpendHQ, on November 14 at 2 PM ET for a complimentary webinar on How to Navigate Your Spend Analysis Journey: Guideposts for Optimal Solution Selection, sponsored by SpendHQ. Join us!