Overcoming the Catch-22 Problem of Justifying Spend Analysis Without a Clear ROI

Analytics are all the rage. And spend analysis is Procurement 101. So, getting some reasonable investment here shouldn't be a problem, right? Wrong.

The problem with analytics is that there is zero ROI. Huh?

What I mean is that the value in analytics is all “option value.” In other words, you don't know how much value opportunity you will uncover with the analytics until you actually perform them (and implement the identified opportunities). But if you don't know the economic returns commensurate with the investment, you can't justify that investment to a skeptical CFO (especially when the CIO might own the budget and has already spent a lot of money on an enterprise data warehouse). And, if you don't invest, you can't get the analytics that identify the value opportunities. This is the Catch-22 problem with estimating ROI on analytics.

So, how do you overcome this problem? I have written a PRO piece (read Parts 1 and 2 here and here) outlining the top ten strategies for overcoming this problem. But, let me first share one example here on the public blog.

One strategy to fund spend analysis is to view spend analytics not as an analytics project at all. Analytics are a means to the end, with the end being a continuum of projects and processes that use those analytics to create value:  supply base rationalization, internal compliance, supplier compliance, demand management, and so on.

For example, re-cast spend analysis as a component of a sourcing initiative that uses the analytics to create the savings that procurement will be on the hook for delivering. I have seen this work for a few of my clients in the past. If the CFO still wants a more tangible diagnostic to help “guarantee” the savings, and/or if IT is stuck in their “sunk cost fallacy” of throwing good money at bad data warehouses, then you’ll have to pull out the next set of tactics featured in our Pro/Plus piece. Some of these tactics can be facilitated by using certain approaches to engage different types of providers, but some are just good old-fashioned guerilla tactics irrespective of technology approach.

We will also be featuring a PRO article next week on 20 spend analyses you can run beyond the basics. Stay tuned!

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