Technology: In search of intelligence

Being able to easily access accurate, complete information about your company’s purchasing can deliver big returns, says Mathew Harrowing.

Tantalus, once favoured by the Greek Gods, made the mistake of sharing confidential information and divine foods with his friends. His punishment was to be immersed up to his neck in cool water which disappeared whenever he attempted to quench his thirst. Fruit hung on trees above him, but when he reached for it winds blew the branches beyond his grasp.

It may be a bit extreme to compare the tormented Tantalus with the pursuit of spend intelligence but despite the progress made over the past five years, effective solutions still remain tantalisingly out of reach.

In my experience, the purchase of complex electronic procurement and sourcing systems hasn’t produced the promised return on investments simply because of a lack of usable spend intelligence.

I would define spend intelligence as the ability to take transactional purchase information, automatically cleanse, transform and enrich the data and then derive maximum value from it to inform a whole range of supplier management, cost reduction and process improvement initiatives.

Without such intelligence, opportunities to make savings are simply not identified, performance cannot be accurately measured and efficiency gains are difficult to quantify.

Why is this so? Poor data management, changing systems and processes, the accuracy of postings and the inherent complexity of Procure to Pay (P2P) all impact the production of Spend Intelligence.

There are several underlying reasons why accurate intelligence remains more a chimera than reality. Firstly, from a historical perspective, ERP solutions were developed for accountants, by accountants (and typically implemented by trainee accountants.) System implementations have focused a disproportionately large amount of resource on organising accounting proceat the expense of giving P2P professionals the analytic tools required to do their job.

Secondly, the modern procurement environment has developed significantly; purchasing is increasingly strategic, complex, and fast moving. In such an environment, rapid access to usable information is critical. However, hitting moving targets can be difficult when you rely on transactional systems or time-consuming report building processes. The outputs are not relevant or timely to the business requirements.

Thirdly, nobody has really come to terms with addressing errors inherent within P2P. According to the Institute of Management Administration, between 3.6 and 5 per cent of all invoices have some form of error associated with them (IoMA AP Department Benchmarks and Analysis 2005). Internal error rates vary considerably by company but also impact process and efficiency.

Furthermore, the longer the error remains in the process the costlier it is to fix, yet, historically, the focus has tended to be on identifying “material” errors. A multitude of small errors can also add up to significant lost profit. Fixing these errors at a detailed level also improves efficiency and data quality.

Fourthly, procurement arrangements are increasingly too complex for ERP solutions to track effectively. Even traditionally simple commodities are subject to multi-tiered pricing, discount and rebate arrangements. Some clients deliberately over-complicate their arrangements to ensure that competitors cannot calculate base costs, but in these situations it is challenging to ascertain whether we are obtaining the full value of these beneficial arrangements or just incurring additional process costs.

Finally, lack of imagination. P2P is one business process yet it is historically viewed as two: purchasing and finance.

Management information is typically organised around either function and does not successfully manage the interaction and interdependencies. As an example, purchasing and finance are both concerned with settlement issues but neither typically have sufficient visibility over the whole process to inform decision-making.

So what is the future of spend intelligence? Effective spend intelligence tools must deal with the historic data and system issues by enriching source data and providing flexible on-demand reporting for all aspects of P2P.

Such systems are not concerned just with “how much did I spend” but also with the impact to the business of using a particular supplier, the costs of using a particular supplier, the return rate, the quality of the data, contract compliance and any areas where there may be errors and bottlenecks.

Effective spend intelligence tools must inform supplier and transaction efficiency. As Capgemini stated in its 2005/06 report on supplier management: “The most mature companies are looking for advanced spend analysis tools and for tools to support the process of managing supplier relationships”.

As an example of this, a client had recently negotiated five per cent off the cost of goods. Closer analysis determined that the average invoice value was less than £250, payments weren’t being consolidated and one in seven transactions was being reversed, resulting in a total process cost of £66 per transaction, substantially off-setting any savings. The resolution is obvious but the diagnosis could only be achieved through access to effective Spend Intelligence.

The analytical capabilities of spend intelligence services must be broadened and deepened. I use a four-dimensional approach in creating spend intelligence: the purchasing transaction, observance to agreed terms, transactional performance and governance. If these dimensions are mapped against strategic and operational requirements we get a rounded view of the true costs of our spending. In addition, by analyzing transactions against these dimensions spend intelligence becomes relevant to all involved in the process.

The information must be provided on an ongoing basis allowing continuous performance improvement. As requirements change, reporting must evolve and be smart enough to deal with data quality issues in real-time. new technologies and methods of deployment and distribution have enabled the complete outsourcing of the provision of management information, where a specialist company provides all of the analytics plus maintenance, daily technical operation and support. The advantages are that activities are managed centrally, distributed via the web and infrastructure costs are shared across many clients. The other advantage is that set-up costs are comparatively low.

The distribution of spend intelligence should be broad. Changing the behaviour of a company requires time and commitment. Staff seldom support new initiatives unless they see the value and can track results. Stakeholders would be more interested in complying with procurement initiatives if they saw the impact their spending and compliance has on the business. As the saying goes, “when performance is measured performance improves”.

Lastly, Spend Intelligence solutions must be secure. All transactional systems require bullet-proof security but I see “hosted” spend solutions that are simply spreadsheets or PowerPoint presentations and accessible via a simple log-on. unlike Tantalus, let’s not share confidential information with unauthorised parties.

And the benefits of getting this right? The Yankee Consulting Group did some research And concluded: “Recent interviews with market-leading purchasing organizations indicate that enterprise-wide spend visibility can reduce total spending by an average of 2 to 4 per cent. Integrated spend intelligence tools can deliver twice that return.”

Mathew Harrowing is Commercial Director at Etesius.