The article below is written by Robin Adriaans on January 6, 2012
The Procurement and Finance & Control disciplines are highly interwoven. For instance both disciplines get their management information from the same source: invoice lines and financial obligations. However, the drivers for using this source differ. To prevent both disciplines from ‘poisoning the well’ it is important to speak the same language and understand each other’s motives. The following article discusses how to overcome the challenges within spend data management and realize sustainable savings, a common interest of Procurement and Finance.
‘The numbers tell the tale’ is a simple truth that certainly applies to Procurement. Spend information provides insight in how much out of pocket money is leaking out of the organization to suppliers other than the preferred contracted suppliers. Spend visibility is not only important to track benefits in the Procurement Order Cycle but is also critical success factor in closing the loop with the Strategic Sourcing Cycle, as illustrated in the figure below:
Information on dollars spent and dollars that will be spent feeds the sourcing process (the circle on the left). This information on the past, present and future gives buyers valuable feedback on the success of their current sourcing strategy. It helps them to identify sourcing opportunities and set the right priorities. Combined with data on the performance of current suppliers, buyers can develop a more effective sourcing strategy.
Spend information originates from the purchase-to-pay process (the circle on the right). Data is captured during the requisitioning to payment process, in particular when status changes occur (e.g. approval of requisition, receiving goods or services, and invoice settlement). As mentioned before this information is not only used by Procurement, but it also enables Finance to control costs.
Contract management (the circle in the middle) connects the two cycles. It’s important that the identified benefits (left circle) are captured in the contract (middle circle) and actually end up in the pocket of the organization itself (right circle). Spend information enables an organization to track benefits and provides the visibility needed for compliance monitoring.
Two main challenges
Accessibility of data
Often, data is scattered over numerous systems. Only a portion of the spend goes through an eProcurement application. However in many organizations not all invoices have an underlying purchase order. Often those invoices go directly through a Finance application. Depending on the size and structure, an organization can have several eProcurement and Finance applications. So, using one source system alone will not provide a comprehensive picture of the spend landscape. To get the most effective result on spend analysis at the very basic level, multiple extracts from different systems are needed to provide the full dataset.
At best, the accounts payable application is linked to a Business Intelligence application. Relevant data can periodically (daily, weekly, monthly) be transferred to a data warehouse, which can be used to generate reports. Second best is using the reporting tool within the accounts payable application, often an ERP. These are often limited. If you are less fortunate, you may be able to extract a data-file and import this into MS Excel or MS Access for further analysis.
Quality and consistency of data
As mentioned, accounts payable usually is the primary source for spend analysis. The driver for accounts payable to capture invoices differs from those who use the data for spend analysis. Procurement, for example, needs a report based on commodity or category, while the main parameters for invoice registration are the cost center (or another cost object) and the ledger account. Although, a certain correlation between the general ledger and category tree can be established, this correlation is insufficient for Procurement to make reliable spend analysis.
A related problem is the lack of an unambiguous classification of spend. This often occurs when invoices do not capture line item details and don’t have an underlying purchase order. Many organization settle for aggregated spend at the supplier level, leading to many internal discussions on the reliability of the spend analysis and the added value of Procurement.
This does not necessarily mean that spend analysis is impossible. It does mean that the process of collating, cleansing, categorizing and analyzing information takes more effort and is more time consuming.
The foundation for solid spend analysis, and for every good report, is data management. If the data is not captured in a good way you never get a good report. You need to distinguish two types of data: master data and transaction data. It starts with master data. The most relevant master data objects for spend analysis are the following: vendors, products, cost centers, and ledger accounts. These objects can also contain information allowing a drill down when creating spend analysis. For example, a supplier hierarchy explaining the relation between a parent company and its subsidiary companies. This understanding can help you to identify savings by combining certain purchases and negotiating better conditions.
Master data is used to capture transaction data. Transaction data within the operational procurement process concerns requisitions, purchase orders, goods receipts and invoices. The reporting requirements also determines what information is captured in the master and transaction data.
The best way to increase data accessibility and quality is to capture data on a first-time-right principle. A well designed P2P process makes this possible. Key components of a best-in-class P2P process are the following:
- Established P2P channel for all commodities: A requisitioner is guided to the right P2P channel and the system automatically captures the data needed for Procurement as well as Finance
- Mandated usage of available P2P channels: It is difficult or even impossible to purchase outside these channels. This ensures that the same type of information is recorded consistently
- Early data validation in the ordering process: If all relevant information is captured in the requisitioning phase, then the ordering process goes smoothly and all data is available for spend analysis. By translating contract agreements into electronic catalogs you can predefine all the relevant information accurately: product code, description, price conditions, classification code, general ledger account, vendor, etc.
- Consolidated invoices without purchase order: Ideally, for each received invoice there is a purchase order. However, for various reasons this is not true for all received invoices. These invoices must be included in the spend analysis. Enriching the invoice data manually would be a very labor intensive job. However, there is software available which can help classify spend data afterwards with a high degree of accuracy.
- A good reporting tool available: Not only is good data available, but also different reports can be generated, depending on the user of the information. For example, a CPO / CFO will want a dashboard with an overview of key KPIs; a purchasing manager will be interested in tracking the performance of individual buyers; a buyer will need to perform analysis of its commodities to identify savings.
In practice, many organizations are reluctant to perform spend analysis. The main reason is that it is difficult to get the right information on the table in order to carry out the analysis. Information from the start of the process (the left cycle) has to be compared with information from the far end of the process (the right cycle). The drivers for the information differ. In the Strategic Sourcing Cycle, saving potential is identified based on commodities and Sourcing opportunities. In the Procurement Order Cycle, costs are measured and realized savings are calculated.
A goldmine of actionable information exists where information at both ends has been combined in a thorough analysis and identified savings are compared to actuals. The same analysis is also the basis to determine whether planned savings are realized. Here, Procurement and Finance have a common interest. Procurement wants to demonstrate its added value based on savings and Finance need to monitor the development of costs and where possible, reduce them.
There are only two things needed to achieve this:
- Data management
- Good reporting supported by an analysis tools that unlocks the goldmine
These are attractive targets to aim for together.