While talking with some of the marketing and spend visibility folks at Emptoris last week -- in a conversation completely unrelated to the recent litigation with BIQ -- the question came up about the best way to prove the ROI of spend analysis initiatives to non-procurment and sourcing executives. As practitioners and advisors, we all know the primary reason to conduct spend analyses in the first place. Quite simply, it's to come up with actionable initiatives to implement savings and risk reduction programs based on the findings such activities generate. But this does not help the fact that many executives outside of procurement look for reasons to kill or under-fund technology initiatives without a direct, measurable ROI. And unfortunately, larger spend visibility and analytics investments / programs can sometimes fall under the financial hatchet given their "indirect" ROI.
Given this, I thought the question of how to justify the direct ROI (or cost avoidance) of spend analysis efforts would make for a good post and even better reader commentary. So I'll start the discussion with a few suggestions on how to approach the "hard dollar" ROI of spend visibility and analysis investments, and hope that you, our loyal readers and posters, join in the fray.
First, I think that there's a strong anti-fraud executive ROI argument to be made for using spend analysis capabilities. Without insight into what individuals are buying and from whom -- and in what volume levels, on contract, at what price, etc. -- it is impossible to take a proactive approach to detecting and prosecuting procurement fraud within an organization. In a $5-6+ billion company, it's a pretty straightforward argument to make that it is highly likely that the procurement organization will more than recoup the costs of the application in less than 12 months just by identifying and correcting purchasing fraud. Along similar lines, it is possible to make the same ROI / cost avoidance argument based on the direct cost of non-compliance due to a lack of organizational controls from procurement fraud (based on possible SEC or state regulatory action against an organization).
Second, by taking the CFO's view of spend analysis and what she'll be able to do with the information in her activities on the executive level, it's possible to create a quantitative model based on the size of your organization and relative benchmarks about estimated "executive" savings or revenue generation opportunities. This might include such CFO-level driven conversation areas as overall balance of trade (with large partners). Or perhaps it could include a cost of non-compliance argument when it comes to working with global suppliers (and extended supply chain partners) on the denied party list.
Obviously, these are just a couple of suggestions based on tying the value of spend analysis to non-sourcing driven outputs and initiatives that result from the information such processes generate. I'd love to hear what you think on the subject. For if we can all help better sell the ROI (or cost avoidance) of spend analysis to non-procurement executives, I suspect we'll see even broader, continuous and sustainable adoption of spend visibility approaches going forward. After all, the only worse thing than not investing in spend visibility and analytics at all is doing it on an opportunistic basis to drive one-off sourcing programs.