Spend analysis is high on Procurement agenda since the mid 1990 but remains a challenging matter. Spend analysis is a complex topic on its own and encompasses all activities related to “the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of decreasing procurement costs, improving efficiency, and monitoring compliance. (Wikipedia)“. To generate value from spend analysis, 4 main levers have to be pulled: Enhancing data quality, Increasing Visibility, Analysing data (category profile, user/supplier/process/price/(…) compliance), running inter or intra-company benchmarking/comparison. If impressive advances have been made with technology with regards to data quality or visibility, lack of data and expertise in each category and within each company are the last barriers to overcome for unleashing its full potential.
Spend Analysis : A substantial source of value
Value that spend analysis can drive is tremendous. Aberdeen has released several reports with this regards. Below are some excerpts:
Already in 2004, Aberdeen was stating in its white paper “best practices for spend analysis” that ” inadequate spend data management capabilities are costing businesses $260 billion in missed savings opportunities annually”.
In 2007 in its study “Spend Analysis: too hard for the money”, Aberdeen was estimating from the interview of 700 companies that spend data analysis was representing 12.7% of savings from sourcing activities while improving compliance rate to contractual agreements up to 73%
In 2011, Aberdeen reported that “organizations using spend analysis on average captured 24% more spend under management than those not using it” – and 9% cost avoidance savings as a part of a spend analysis initiative as compared to 5% for other companies…
Interestingly enough, a) although value is tremendous, b) although the topic is already addressed since a couple of decades if not more, c) although it’s not rocket science, d) although companies are more and more under cost pressure, spend analysis remains an under-exploited potential for most companies if I rely on what I’ve seen in the 100’s of leading companies I’ve been working with in the last 5 years:
- Spend data quality is often considered as an issue within the company,
- Visibility is possible but real-time, not easy to access and actually, requiring some consultants to be shared on a Powerpoint presentation
- Data analysis is basic and ad-hoc, making compliance checks far from being industrialised
if the situation is such, it’s because even the most advanced companies are struggling resolving 3 major challenges in spend analysis :
- Data quality
- Multiple and disparate sources
- non standard vendor, product or service naming convention
- Inaccurate and incomplete data and thus classification errors
- labor intensive cleansing and classification activities
- Category Expertise
- lack of domain expertise in both products and data attributes to enable understanding, enrichment and error corrections of more than 400 different indirect and direct spend categories
- Analytics capabilities
- Lack of data per category enabling pattern identification, comparisons and benchmarkings
- Lack of automated and industrialised data pattern analysis processes
- Lack of real-time analysis
According to Aberdeen reports in 2011, “poor quality of spend data was ranked as the top challenge in achieving best-in-class spend analysis – and the “use of technology to automate data intensive processes” was listed as the “most critical” aspect of success in a spend analysis program”. Consequently, a lot has been done by service providers to address those issues in general with automated processes combined with quality content. Equally, analytic capabilities are quickly improving with the development of specific apps to bring visibility on targeted topics (compliance, e-catalogue usage, user behavior etc).
The holy grail : accessing Expertise and more Data
2 critical areas are still without satisfying solution, the need for domain expertise to manage 400 categories) and the lack of data (due to insufficient number of sourcing and procurement events per year on same category). On one side, question is how to access the required expertise to manage the typical 400 different spend categories while on the other hand, spend analysis is constrained by insufficient data to identify buying patterns or to conduct comparisons and benchmarks. Finding the way to address those 2 topics is the last step to close the loop in spend analysis. Accessing the right expertise and more data will help contextualising current information and make it actionable. It will undoubtedly unleash colossal value through deeper and wider analysis capabilities.
The future: Digital platform(s)
Yes, no doubt, I believe Digital platform(s) will resolve companies’ problem of not being able to have the right expertise internally and sufficient category content to identify value creation opportunities, faster and stronger. Indeed, enabled by their unique business model and concepts, Digital Platforms are providing to Procurement organisation the required ingredients that no company can ever develop on its own, operating in silos:
- A network of category specialists producing and consuming content,
- A connected spend management Ecosystem (all stakeholders and business partners),
- Data aggregation and exchange between participants (inter-and intra-company), automated with bots.
Now, question is: how can the standard “chicken and the egg” challenge of a Digital Platform start-up process, mixed with companies’ fear of sharing data beyond its walls, be overcome?