Spend analytics, in one form or another, is used by almost every organization. However, I have seen many examples where no actual spend tool is in place and where both controllers and purchasing professionals do their best to pull financial data out of accounting systems in search of cost savings opportunities.
The hidden costs of spend analysis.
There are a number of benefits and costs of spend analytics, both clear and less visible, that should be carefully examined prior to investing in a solution. Probably the most significant hidden cost is not having an efficient spend tool or process in place. The costs of this can be measured in the number of internal resources, including controllers and purchasing professionals, spending valuable time crunching numbers.
Measuring the exact amount of time spent is not always easy, but a good starting point would be to list all the FTEs in the controlling and purchasing community who are number crunching and then work out how much time would be saved by introducing a spend tool. Once the hidden costs have been calculated and highlighted, the question is what action to take based on that information.
In theory, FTEs can be cut once a spend tool is rolled out and money can be saved to achieve cost reductions. But in most of the real-life cases I have seen, the game plan has been to use the time saved for more productive work such as using controllers to focus on analytics rather than collecting and cleaning data.
Purchasing staff can also invest more time in strategic sourcing activities and compliance tracking, thus creating more savings.
The benefits of improved sourcing and compliance savings
Over the past 15 years, I’ve witnessed more and more CFOs and CPOs become aware of the potential savings that can be achieved by having clear and visible controls in place for managing the purchasing category portfolio.
From the “hidden costs” that are mentioned above, we have concluded that a spend tool would free up resources as well as provide new insights and analytics.
The first benefit stream will come from sourcing savings including running competitive sourcing events. A spend tool provides transparency into spend that makes it possible for category managers to find new saving opportunities. A spend tool also frees up time for purchasing staff that can be used to bring more categories under the umbrella of competitive sourcing. Finally, it will open up time to run more sourcing events.
The second benefit stream will come from compliance savings, which will help manage the supplier portfolio to ensure spend is with preferred contract suppliers. Spend can be tracked with preferred on-contract suppliers set in relation to total spend, both per category and per region. Finally, corrective actions can be triggered where and when they are needed.
The options and costs for spend analysis tools and refresh services
The costs associated with spend analysis can be grouped as follows:
- Implementation cost
- Tool and technology cost
- Refresh run costs
All cost components must be taken into account as they are unavoidable, regardless of whether an organization chooses to buy spend analysis as a service or to have an internal IT department build and manage a spend solution (or any options in between). What is important from a business case perspective is to include all cost components in order to reflect the lifetime cost of a spend solution.
Implementation costs typically consist of external consulting fees and internal resources. These costs are usually transparent and therefore calculating them is comparatively straightforward.
Tool and technology costs include license fees, maintenance costs, and development costs. Maintenance is primarily for an in-house solution where the IT department maintains and develops the technical platform. Development costs are also primarily for an in-house solution where the IT department builds and develops the spend solution.
Instead of the IT department being responsible for the maintenance and development areas and their associated costs, these fees could be included in a transparent license fee as part of an external solution.
Refresh and run costs and the processes associated with carrying them out include data extract, technical resources for data refresh, and purchasing and business resources for the data refresh.
Procurement leaders should be aware of the hidden costs associated with spend analytics, particularly if done without the support of a spend solution. When proposing, planning, or implementing a spend analytics solution, it is critical to budget for these factors. This will provide a structure for calculating the lifetime expectations of your spend solution.
The efficiency gains associated with spend analytics tools can and should be invested in bringing in more savings in both strategic sourcing and compliance management. This cyclical approach leads to continuous process improvement and therefore continuous improvement in efficiency savings.