It was Peter Drucker who put it so succinctly: “What gets measured gets managed.” That statement from the justly feted business sage holds especially true for spend analysis – a methodologythat enables organizations to wrest more control over their spend.Spend analysis tools are smart – they collect spend data from across different enterprise source systems, classify this data into a standardized format, enrich the data with complementary information around supplier, category, and usage, and finally, analyze the resultant spend.
And the prize for doing this can be significant. For example, the Government Procurement Service (GPS)—an executive agency of the UK Cabinet Office—has successfully used spend analysis to deliver savings to be envied -- £2.5 billion to be precise. What used to be a vague estimate can now be transformed into tangible numbers. As David Shields, Managing Director of GPS says, “For the first time, we have achieved a detailed, accurate, and up-to-date reporting capability enabling visibility and control over spending across the whole of central government.” And we also see big prizes in the private sector. Using spend analysis, Aleris—a leading aluminum product manufacturer—was able to reduce its unclassified non-metal spend to quite a remarkable degree -- from over 92% to less than 0.50%. Not only have the company improved visibility into vendor performance, Aleris has also been able to improve contract management and pricing leverage, improving ROI.
Not only is the size of the prize significant, the management detail is to be heralded as well. Spend analysis tools also enable organizations to map their expenses down to forensic detail - purchase categories, suppliers, specific BUs/departments. This is something on the wish list of almost every CPO.
Given this huge opportunity, it’s therefore surprising that very few organizations actually use such a tool. As much as 71% of procurement departments lack full visibility into spend . According to a recent survey, 67% of respondents, including CPOs and VPs, indicated that spend analysis is a high or top priority for their enterprise procurement program.
There certainly seems to be a gap – on the one hand spend analysis seems to be high on the radar of CPOs, but on the other hand, very few organizations actually have such tools in place. The reason for this discrepancy might be understandable – the apparent scale and complexity of the task. Digital transformation across the purchasing function entails a fundamental shift in operations. It entails changes in people, processes, technologies, and tools used, which can be a daunting proposition. However, with the right strategy in place, and proper governance tools, it is possible to have a sustainable spend analysis framework that promises more accuracy, and more control over spend.
When compared to ERP systems -- where data changes are reflected once every few weeks -- a spend analysis tool enables instant changes to data. Also, very often, it is factors such as component availability, sources and quantities that end up reducing manufacturing yields. A spend analysis tool mitigates these kinds of supply risks, and drives more efficient supplier networks that are supported by accurate numbers, and not mere estimates.
In the past years, given the economic uncertainty, many of us have got used to an environment that is “lean and mean”. Also, in an age where business continuity depends on effective cash management, spend analysis tools enable CEOs to tightly monitor the company’s spend. In that sense, they are clearly a crucial and strategic tool. Spend analysis tools provide the ability to view external spend in real time, rectify any inconsistencies during the early stages and contain any excesses! When it comes to digital tools, a spend analysis tool probably provides some of the best Returns on Investment (ROI). Our sage Mr Drucker was right – you manage what you measure. If you’re interested in understanding more about this topic, please take a look at our paper on the subject -- Digital Purchasing – A New Route to Spend Efficiency.