Ariba Knowledge Nuggets
We welcome the opportunity to further discuss your spend management objectives and challenges and help make you into your organization’s superhero.
Next-Generation Spend Analysis
In today’s economy, CPOs are feeling the pressure to act as heroes for bottom-lineresults. With revenues decreasing over the recessionary period, organizations have looked to procurement to save the day through increased savings targets to be achieved with fewer resources. To reach these ever-increasing (and increasingly important) savings goals, many in the procurement function have looked to technology in order to improve efficiency and effectiveness. eSourcing solutions offer tools that allow companies to source more effectively, manage more spend strategically, and build more optimal relationships with suppliers. But, how do you decide what to source? This is the role of spend analysis programs.
The Limitations of Traditional Spend AnalysisIf you were to poll procurement professionals on what they expect as an output of a spend analysis project, there is little doubt that nine out of 10 would respond, “commodity classifications” or “to get a better understanding of what I’m buying”. This is not surprising since most organizations have spend data in disparate purchasing and payables systems with little to no insight into the granular commodities the spend represents. For some, having this information aggregated and available via a normalized taxonomy represents a quantum leap forward. Even for this subset, however, limitations in the return from traditional spend analysis programs often exist.
Listed here are some of those that are most common.
- The inability of the provider to return granular and/or accurate classifications for spend transactions with no or limited supporting detail. While the percentage of coverage by transaction or total spend vary, the reality is that virtually all organizations have a subset of their spend data that does not contain rich supporting details such as meaningful invoice or PO descriptions. The fact that this subset often represents the spend the company is actually trying to get visibility into is clearly a catch 22.
- An internal view of purchasing activity and trends does not take external factors such as market dynamics, recently sourced commodities or best-in-class benchmarks into account. It’s great to know that we are spending 20 percent less in a particular category. However, if the market has shown an even-sharper decrease of 35 percent, an additional sourcing opportunity may exist that would have otherwise been missed.
- What now? Or what next? Automated tools can only take savings opportunityidentification so far. Pre-packaged or custom reports can be very useful forindicating likely opportunities, but to confirm if the opportunities are real usuallyrequires additional analysis and investigation of the data, existing contracts and the market. Furthermore, realizing the savings opportunity may require changemanagement (for example, implementing a true strategic sourcing process thatleverages spend analysis to identify, quantify and prioritize opportunities).
- A lack of adoption caused primarily by the internal-only focus leading to “paralysis by analysis” with users getting bogged down by a small minority of transactions that are classified inaccurately or not at all while the improvements in visibility that the program provides—and the potential for return that it represents—often go unnoticed.
According to the Aberdeen Group, lack of spend analysis capabilities is costing businesses
$260 billion annually.* That's why spend management leaders use Ariba Spend Visibility solutions to analyze and optimize their spend, processes and Performance.
The Critical Need for Improved Supplier Insight
The first of these additional dimensions to be considered is improved insight into the organization’s supply base. Below are six important supplier enrichment components that should be considered for inclusion in spend analysis and why each is critical in optimal strategic decision making.
- Supplier Parent-Child Relationships – Accurate supplier parentage information is critical in optimizing supplier leverage in negotiations and should always be a part of a spend analysis enrichment program. A real-world example of a quick-hit opportunity that resulted from accurate parent-child relationships came from a regional retail organization that was able to renegotiate usage rates with their energy provider when realizing that several of their utility providers actually rolled up to the same corporate entity putting them in a higher usage bracket.
- Industry Codes – Many third party sources exist that will provide supplier-level industry code information usually in either the NAICS or SIC taxonomy structure.This information is helpful in expanding existing relationships with preferred suppliers, but has another use. When embedded in the commodity classification process, industry code information provides an excellent source of information when limited quality supporting data exists as discussed in the previous section. While the granularity of the classifications may not be as deep, these industry codes are often the only clue available and when coupled with the spend profile of the company in question, can often result in useful commodity classifications. For this reason, when evaluating spend analysis providers, insist on understanding whether supplier industry details are truly a part of the classification process or simply a data element passed on from a third party. NAICS are also a required component for supplier diversity reporting (#5).
- Financial Information – A number of attributes including revenues, employee counts, bankruptcy indicators, liens counts, suits counts and credit scores are often useful in supplier assessment exercises. To the extent that this information is available in spend analysis, it can be a useful tool in assuring the viability of the supplier in the awarding of new business.
- Risk Assessments – Taking the financial information elements discussed in the previous section to the next level, risk scores assess the financial viability of suppliers and their relative risk of failure. Financial information is backward looking whereas risk scores are predictive. This information can be invaluable to a sourcing and procurement organization since the failure of a single or small number of suppliers can often apply significant pressure on the ability of the supply chain to function or, in a worse case, come to a grinding halt. Critical information in any economy, but particularly in a recessionary economy, is critical for success. Any spend analysis program that does not take supplier risk assessment information into account is passing on a tremendous opportunity to mitigate supply chain risk.
- Supplier Diversity – If your organization has a supplier diversity program in place, it is only logical that you would want to have this information available in a spend analysis program. To the extent that your spend analysis provider has the ability to extend your identification on which suppliers are certified as diverse, your diversity program can only benefit. And the program often has organizational revenue implications as the use case becoming more common is the request of customers to understand the percentage of your suppliers who are diverse. More coverage in this instance can lead directly to increased revenues—an excellent basis for ensuring accuracy of supplier diversity statuses.
- Green Status – With environmental concerns clearly on the increase, if you have not already begun to track green suppliers, it is very likely that you will need to do so at some point in the not-so-distant future. There is even the chance that governmental regulations may at some point require the segmentation of green suppliers. While the identification and tracking of green suppliers is in its relative infancy, ask your spend analysis provider for their plans in this area so that you are assured that your future needs will be addressed.
There are a myriad of potential business needs addressed at least partially by Visibility. The following table lists many of the most common, some very specific and others fairly broad, and the primary ways that Visibility helps to address each:
Since Visibility is critical to virtually all decision-making, the list of potential business needs could continue indefinitely.This list is only intended to provide examples.
Imagine the power of having accurate, up-to-date visibility into all your company's spending. Now imagine that this classified data is enriched with key business and market intelligence -- all delivered through an intuitive, yet advanced analysis engine.
Market Visibility: The Window to Savings
Imagine attempting to drive your car while looking only at your dashboard. You would have some good visibility into some key information—how fast you are going, how much gas you have, whether or not your vehicle requires servicing and possibly even a limited view of where you are going (if you are fortunate enough to have GPS). But, I’m sure we would all agree that your ability to successfully navigate the car would be severely impeded without looking through the windshield to what is ahead. The traditional approach to spend analysis is not all that different. Objectives varysomewhat, but most companies engage in spend analysis solutions in order to identify new and different categories that represent potential savings opportunities. To date, the expectation has been to achieve this objective by reviewing historical spending activities and trends while ignoring market and supplier dynamics. This approach is not all thatdifferent from driving your car while focused on the speedometer. An internal view is critical, but simply not sufficient to have success. The good news is that these are now problems of the past. Next-generational spend analysis programs offer the window to savings through a variety of indices and benchmarking programs, permitting users to compare their spend information with external market factors to drive actionable analysis.