Research & Insights
Spend Categories Taxonomies Are Hierarchical: Procurement Myth No. 18

Our series of the top 25 procurement myths continues here on Chief Procurement Officer. Make sure to check back as Pierre tackles more myths. 

No. 18: You Should Arrange Your Spend Categories By Hierarchy

Procurement folks know that general ledger codes are not a great way to model spend categories. It helps close the books but doesn't really help analyze supply markets.

However, if category management is supposed to provide a flexible approach to managing supply beyond just waiting for deals to show up for sourcing, then the method by which we model these categories should also be flexible, right?

One of the challenges in category management, though, is the fact that supply markets are multivariate in nature. In other words, they are networks, not hierarchies. Yet hierarchies (or taxonomies, if you will) are exactly how spend categories are modeled within procurement applications. It's a relic of parent/child relationships inherent in highly normalized relation databases. The problem, however, is that people model these hierarchies in many different ways and at many different levels even though the poor buyer is just looking to get better answers on how to manage that market. Procurement organizations are bombarded by “standards” such as SIC, NAICS, UNSPSC, NIGP (not really a standard since it's proprietary to a vendor) and on and on. None of them truly fit their needs anyway and the usually get bastardized if used at all.

The bottom line is that markets are multivariate. For example, consider contingent labor. Contingent labor spend is peppered across dozens, if not hundreds, of other spend categories, including indirect and direct spend (which is a fairly meaningless division if you really dive into it). Here’s another simple example: Should you model IT outsourcing as a services category underneath IT or an IT category underneath a services category? How about even opening up Pandora’s box of “big spend management” and consider all spend (including salaries), not just supplier spending (i.e., is there a potential outsourcing opportunity? what make/buy decision should be considered?).

The business cases for these examples are highly situational, but hopefully you can see the relevance of having highly flexible spend analysis capabilities that let you see the attributes of that spend category rather than just the magnitude of that spend (e.g. only by supplier and cost center). We’ve written more about this topic here if you’d like more insight. The analysis tools out there haven't yet really moved beyond the hierarchy, and fewer still can drive meaningful workflow off of it, but that's a topic for another day.

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