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I’ve been in procurement long enough to know spend visibility is foundational to any procurement organisation. However, most teams struggle with poor-quality data and find it difficult to justify investing in a third-party data solution to solve the challenge. During Procurement Leaders’ Americas Congress, held in March 2018, less than 5% of attendees said they have above-average spend visibility and data intelligence. Meanwhile, three-quarters of the audience acknowledged spend analytics and value measurement are major challenges – particularly in defending procurement’s contribution to measurable EBITDA improvement.
Trying to measure and justify the return on investment (ROI) upfront is a circular challenge. It is nearly impossible to demonstrate the potential value of a solution without first performing a detailed spend analysis, but no sourcing and procurement organisation can make a claim to be world class – or even close to world class – if it does not fully understand its non-payroll spend.
Unfortunately, many traditional spend analytics systems often fail to solve the problem they were designed to fix. They are undone by noncompliance, data entry errors, fragmentation of data across multiple systems and poor data discipline. Many of these solutions encompass complex organisational schemas such as UNSPSC, which was designed for other purposes and applies a categorisation structure that reflects the way supply markets are organised. Furthermore, general ledger (GL) codes are simply not a trustworthy substitute for a true procurement and sourcing taxonomy, and were designed for people who write the checks.
In my experience, I’ve found that companies are most successful in justifying and building the case for a spend analytics investment when they focus on three main areas.
This can be one of the biggest value-drivers for spend analytics. Present spend analytics solutions as an organizational initiative, not just a procurement initiative. Use analytics to get organisational heads hooked on a procurement view of data and use the insights to better educate heads of other functions who are likely committing millions of dollars of expenditure to suppliers and don’t understand the importance of procurement and sourcing to drive EBITDA improvement. As a procurement chief, you need to know where your money is going and spend visibility is the key to expanding the function’s influence.
Spend analytics, if done well, will directly lead to the development of a savings roadmap and outline waves of sourcing targets. As a spend analytics tool will enable the function to identify significant cost savings, sourcing leaders should be able to demonstrate a considerable ROI.
CPOs often find themselves justifying their existence through savings. Spend analytics is no different. The reality is unless you are constantly utilising and monitoring your vendors, ensuring they uphold their commitments negotiated during the sourcing process, there is plenty of room for savings leakage. I’ve seen companies with such a lack of compliance management, the average rate for compliant spend was as low as 40%–60% – meaning roughly half of their projected savings were lost. Spend analytics solutions make this initiative easy, allowing procurement professionals to be more strategic and less tactical.
To put it simply, your strongest argument for spend analytics is that you cannot save what you cannot see. Spend analytics and the resulting spend visibility are base-level requirements for any procurement function.
Jake Wojcik is senior vice president at Insight Sourcing Group as well as the Software as a Service spend analytics company SpendHQ. He has 18 years of experience in management consulting with a focus on procurement, sourcing and supply chain management.
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.