Spend Matters welcomes a guest post from Frank Buchanan, a Manager in Strategy and Operations at The Hackett Group.
Experts will tout spend analysis as the lifeblood of a procurement organization, and they are right. But the purpose of this article is not to convince you of the benefits of a spend analysis, but to pass along key insights that will save you time and increase the effectiveness of your output. The following best practices are the result of conducting spend analyses for both medium and large sized companies in many different industries:
- Involve Leadership
The nature of a spend analysis forces you to interact with almost all departments, because they all have spend. If this is the first comprehensive spend analysis being conducted, some of the stakeholders you need to speak with will naturally react defensively. Think about it: outsiders suddenly want to know what they buy and from which suppliers. It's only natural for them to feel criticized, and if they don't have to help you, they won't. Or they might delay or provide incomplete information. But if the message comes from above first, with a clear explanation of the purpose and expectations, then you encounter a completely different stakeholder. This will also help when working with your ERP technicians, as the ERP data mining process typically demands more time than expected, especially when mistakes are made and "re-pulls" are necessary.
- Capture All the Supplier Spend
Supplier spend transaction data can reside in many different areas of the company, and usually does. A spend analysis will not be complete if it does not incorporate all supplier spend. Beyond the payables data coming out of the AP system, there might be wire transfers being sent to certain suppliers (e.g., health insurance providers), or there might be T&E reimbursements coming out of the payroll system, or the T&E card payment transaction detail might not show up in payables – sometimes there are surprisingly large supplier payments on the T&E card. However, before you collect the data, you need to make sure you have a computer program that will allow you to view and analyze the consolidated data. Excel becomes painfully slow once you get beyond 500,000 rows; Access can handle a bit more – up to 1.5 gigabytes, that is, if you know how to use it. I recently conducted a spend analysis that had 40 million rows of data, which required use of a separate program and high-capacity computer processers.
- Use a Custom Spend Taxonomy
Many companies use UNSPSC codes in their purchase order system because it is exhaustive, with 20,000 commodity codes from which to choose. But for a spend analysis UNSPSC is not ideal because it is not designed for strategic sourcing purposes. In other words, UNSPSC codes are not organized in a hierarchy that facilitates the identification of savings opportunities. Every company we help eventually reached this conclusion and we help them develop a taxonomy geared toward going to market (e.g., audit services and tax services are rolled up together because often the same supplier provides both), while still being customized to their business and nomenclature. It is important to develop this taxonomy early for two reasons: 1) Leadership approval will be required because spend analysis reports will eventually be widely distributed, and 2) You do not want changes to the taxonomy after you have already spent countless hours categorizing the spend data.
- Validate the Data
The process of collecting the spend data is complex and disjointed because ERPs are typically not designed to provide company-wide supplier spend visibility, surprisingly. Therefore, errors in the data are common. You must constantly be on the lookout for missing spend, double-counted spend, or simply incorrect spend. After all the data has been collected and processed, the best way to ensure that the spend analysis is accurate is to validate it. There are two good ways of doing this: 1) A top-down analysis, and 2) stakeholder interviews. The top-down analysis uses the financial statements to approximate the total supplier spend, and the stakeholder interviews involve speaking to the people who would know how much you spend in a given spend category. Some spend categories are fragmented and not owned by anybody in the company, but for those that have consolidated ownership, you will need their blessing in order to ensure the accuracy and legitimacy of your outputs. I recommend keeping detailed records of all stakeholder feedback, because different stakeholders will provide contradictory feedback as to what spend goes in which category bucket.
- Create a Repeatable Process
If you are conducting a spend analysis for the first time, it is going to be a trial and error process, especially if not supported by outside experts. It is essential to document the process as you develop it, so that it may be repeated. Because a spend analysis slowly becomes less useful as it ages. Most large companies perform refreshes at least once a year, if not more often. The locations of the data, the ERP data queries used, the spend category owners and contacts, supplier name consolidations (e.g., I.B.M. and IBM), the spend mapping rules, the top-down analysis methodology, etc. – all must be captured in order to reap the reward of your hard work and avoid unnecessary rework down the road. This becomes especially important if you are a global company, or a conglomerate, because this increases the likelihood of multiple ERPs (or multiple instances of the same ERP), which significantly complicates the process.
- Fully Leverage the Results
A spend analysis can provide value in a surprising number of ways. Many companies are routinely performing spend analyses, but not taking full advantage of the output's potential. The primary function is to identify strategic sourcing opportunities and "maverick spend" (i.e., off-contract spend), but it can also be used to: provide regular spend reports to department heads to increase the value of procurement and enhance relationships, identify invoice consolidation opportunities, optimize working capital strategy (i.e., payment terms), enable effective channel strategy development, and enable effective supplier risk assessments and mitigation planning – to name a few. Furthermore, the most common procurement performance indicators use total spend as the denominator in the equation, so for those without total spend it makes it difficult to track performance and benchmark results against peers.
While conducting a spend analysis for the first time is a difficult task, the output, if accurate and comprehensive, is invaluable to a procurement organization, for without spend visibility it is impossible to effectively manage a company's spend. These six lessons learned will make the process more efficient and the outcome more impactful.
Frank Buchanan has seven years of experience in both consulting and industry. His client experiences have included: Procurement Transformation, Business Process Outsourcing, Organizational Design, Change Management, Organizational Effectiveness, and Brand Strategy. Frank has managed multiple project teams in diverse industries.