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If the benefits are self evident, then why doesn’t every company have a Spend Analysis and Strategic Sourcing Program?
If spend analysis does generate significant cost savings and provide procurement efficiencies, then why did a recent Aberdeen report on spend analysis say that “one-third of enterprises do not have a formal program in place to manage spend analysis for the enterprise?” The majority of the companies that have a spend analysis program use manual tools to collect and analyze spend data. Aberdeen stresses that the top action for spend analysis is to adopt technologies to increase spend visibility, and the type of technology recommended is an enterprise-wide, fully automated solution. This enables industry leaders to realize greater cost savings across different areas of enterprise spend.(Ref. #1)
These findings may suggest to readers that spend analysis is out-of-reach for organizations that can’t afford to implement an enterprise-wide spend analysis suite with integration into ERP systems and e-sourcing systems. Price tags of $100,000 to more than $500,000 for spend analysis systems 4 give readers considering these solutions reasons to delay a decision or even take it off the table permanently.
The cost, lack of knowledge and availability of a scalable and customizable spend tool and sourcing services may be a reason for companies not using or even considering spend analysis. If spend analysis conjures images of time-consuming, labor-intensive projects and large unwieldy spreadsheets and databases, then a company-wide spend analysis program will seem like an insurmountable task.
There is a knowledge gap in most procurement departments when it comes to the range of tools and options available for meeting almost any combination of cost, customization, scale, and deployment parameters. The procurement function like other areas in a company has its share of “fires being fought” to keep the supply chain running smoothly. And it is understandable that capable professionals do not prioritize spend visibility and efficiencies of strategic sourcing. When they do raise the priority of spend visibility and strategic sourcing, their efforts in reviewing available tools and professional services are clouded by more urgent daily activities and lack of time to investigate sufficiently.
Multiple sources of spend data is a particularly difficult obstacle to overcome since studies have shown that many large and mid-size organizations have 5 or more sources of spend data. Also, a significant portion of the spend data is either incorrectly categorized or categorized at an incorrect level for detail to be helpful. Another hurdle to starting spend analysis is the lack of resources, either people with the right skill sets and expertise or the necessary tools for a spend analysis project.
The reality is that no matter what your circumstance or need, there are solutions available to reap the rewards and benefits of spend analysis, strategic sourcing, and category management. Now, let’s discuss “Traditional Approach” and the new “Alternative Approach” to gaining benefits.
Traditional Approach to Spend Analysis and Strategic Sourcing
The “Traditional Approach” for spend analysis and strategic sourcing most discussed in trade magazines and articles is a resource and time intensive project spanning the course of several months (at least 6 months). The Traditional Approach usually includes significant investments in a spend tool likely involving IT and systems integration with various ERP systems. The strategic sourcing initiative may be conducted in “waves” or phases that may run anywhere from 3 months to 9 months, depending on the size and complexity of the categories being sourced. When a company chooses to go with external partners for spend analysis technology, teams of consultants, and subject matter experts to supplement company procurement resources, results are delivered over a time span of months and at a significant cost.
There is no question that this is a proven methodology. However, from a project management and budget perspective, the project as described is a massive undertaking and it is easy to understand why many companies choose not to embark on such a path even with the knowledge of the potential benefits of spend analysis and strategic sourcing. The milestones along the Traditional Approach roadmap described above can be listed as follows:
- Development of procurement and sourcing strategy and implementation plan;
- Implementation of spend analysis solution;
- Train procurement staff in use of new tools, methodologies and reporting;
- Implementation of new processes or organizational changes;
- Launch of sourcing teams targeting first wave of categories;
- Staggered completion of category sourcing initiatives;
- Change management and post-implementation activities;
- Launch additional waves of sourcing categories, etc.
While the Traditional Approach has been proven to be effective, these results are achieved with significant financial and/or human resource commitment. Consider this, the goals of a robust and repeatable spend analysis and sourcing process can also be achieved by alternative approaches that get to the same destination in a shorter timeframe with a focus on cost effectiveness and time-to-value.
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