Imagining a World Without (Good) Spend Analysis
“[A] procurement solution must allow managers to measure the purchasing activity, analyze it and draw the right conclusions.”
Vishal Chouhan, COO of Synertrade North America
Before procurement had spend analysis software solutions at our disposal, every question about historical purchasing activity led to unthinkable manual work or a big question mark. Now that we can centralize, cleanse, and normalize data for analysis - often with the assistance of tailor-made automation – many of us have stopped thinking about what life was like without it. But not all spend analysis is up to the task. In fact, having inferior spend analysis can be almost as bad as not having spend analysis at all. Poor spend analysis inflates expectations about the level of visibility we have, and may artificially inflate our confidence about how well we understand the spend we’re working to manage.
Realize it or not, you may be at risk of the following if you don’t have good spend analysis in place.
If there is one thing spend analysis eradicates, it is poor spend visibility, right? Unfortunately, if you have an obscured view into your spend because of poor or incomplete categorization, procurement may end up recommending a suboptimal sourcing strategy. Effective strategic sourcing requires procurement to clearly understand the business’ requirements and their projected demand volume for a given product or service. If inaccurate spend analysis leads procurement to think that demand will be significantly higher or lower than it ends up being, we may either over commit on volume or under play our negotiating leverage.
Wrangling the Long Tail
El concepto “Long Tail” nació del análisis de los primeros informes de gastos. Cuando analizamos a partir de un diagrama de barras el gasto por proveedor, se identifican claramente determinadas partidas con un valor reducido, pero con una permanencia a lo largo del tiempo, de ahí que se llamen “long tail” a dichos gastos. Pero ¿de qué sirve tener la gráfica si no puedes hacer nada al respecto? Hay riesgos y relaciones con esos gastos que deben abordarse. Sin aplicar una adecuada herramienta de análisis, puede ser difícil determinar si estamos ante un gasto “Long tail” (compras de poco valor) o uno que afecta a un proveedor estratégico o de nicho. El análisis del gasto sin inteligencia de negocio puede sacar a la luz el “long tail”, pero ciertamente no lo categoriza adecuadamente.
Manejar datos con baja calidad, poco fiables
In a way, ‘tail spend’ was created by spend analysis – at the very least it owes its name to spend analysis reporting. When looking at spend by supplier in bar charts, usually from high value to low, the long list of suppliers with very low spend looks like it goes on forever: hence being named the ‘long tail’. But what is the use of seeing your tail if you can’t do anything about it? There are risks and relationships in that spend that have to be addressed. Without applying business intelligence through spend analysis, it may be hard to tell the difference between another inch of low-value tail spend and a strategic specialty or niche supplier. Spend analysis without intelligence may make the long tail visible, but it certainly doesn’t make it actionable.
Working Past the Expiration Date
Think about the words we often use to describe leading business strategy and decision-making today: predictive, real-time, automated, and proactive. Now try to address current business opportunities with a spend analysis solution that contains old, stale data. That is simply not going to work. Last quarter and next quarter have almost nothing in common, especially when you are trying to get visibility across multiple geographies or business units. Accelerating the availability of spend brings the present into sharper focus and extends the visibility horizon towards the future.
Chaos Beneath the Surface
The organizations that need spend analysis the most are also the ones with a complex landscape of systems, suppliers, and purchasing activity. Full consolidation is the key to drawing maximum value from spend, and it requires procurement to bring multiple data sources and formats into one cohesive view – as if the purchases were made by one person. Weak spend analysis might bring data together onto one platform while failing to normalize by category or supplier. Or it might normalize that spend, but only with unreasonable amounts of manual intervention. Supporting insightful decisions in a complex environment requires spend analysis that is as organized at the top level as it is at the transaction level – and everything in between.
The quote from Vishal Chouhan above is meaningful because of one word: “and”. Spend analysis software companies can measure purchasing activity, and it also typically provides some level of analysis. But if it does not also allow procurement “to draw the right conclusions”, it is like not having spend analysis at all. The only alternatives to this are wrong conclusions and an absence of conclusions, neither of which is acceptable for procurement or the operation we support.
Kelly Barner is the owner of Buyers Meeting Point, an online resource for procurement and purchasing professionals. Her unique perspective on supply management is based on her time as a practitioner, a consultant at a solution provider, and now as an independent thought leader. Kelly has led projects involving members of procurement, supplier, and purchasing teams and has practical skills in strategic sourcing program design and management, opportunity assessment, knowledge management, and custom taxonomy design.