18 Jan 2011 Spend Analysis Payoff
A significant amount of effort – and money – is spent by procurement organisations on spend analysis. It’s a complete no brainer. Without understanding what you spend, how can you begin to manage it. Knowledge is power. What gets measured gets managed. All true of course but how do you actually derive commercial benefit from spend analysis. In other words – “show me the money!”
This article is inspired by an article in Spend Matters UK/Europe where Peter Smith asks what benefits can be derived from spend analysis. Despite the apparently obvious necessity of spend analysis the connection between it and the accounting entry that shows the financial benefit isn’t always clear. It’s too easy to get locked in a world of Kraljic quadrants that mean little to the outside world so purchasing professionals need to take this question seriously and you need to get your elevator conversation about why you do what you do clear. It’s rather like procurement savings generally. Where in the accounts does it show procurement savings? Where does it say “This is how much we saved”?. How does the CFO know it not a case of “The Emperor’s New Clothes”? Establishing the connection between procurement initiatives and the real and actual bottom line impact is fundamentally important.
Why Invest In Spend Analysis?
There are a variety or reasons that a procurement organization might cite to justify an investment in spend analysis: Identifying poor performing suppliers; instant analysis of supplier by category and capturing non-compliant spend – all of which are worthy – but they’re not benefits. Ask yourself the “So What?” question or imagine yourself in the CFO’s office explaining your analysis of spend:
“So you know how much spend is compliant do you college boy? Fantastic! I have no idea why I’m supposed to be interested in that number but before you explain, remind me, how much do we pay you?”
Knowledge is power but it’s what you do with the power that counts.
There is a wide range of benefits from using spend analysis: saving money; management of regulatory compliance; supplier risk management; supplier performance management and more but let’s just look look at the first one – saving money.
Identification and Prioritization of Saving Opportunities
Strategic sourcing projects can deliver significant savings. Opportunities to consolidates spend by category for example in order to leverage purchasing power and reduce cost can be identified by analyzing the detailed profile of your spend. Thorough analysis not only allows you to identify these opportunities, it allows you to prioritize them so that the most significant savings can be delivered as quickly as possible.
Crystallization of Savings through Compliance
The best deal in the world is no use if the business doesn’t use it. Purchase to pay tools and techniques like e-Procurement can drive compliance to contract but you don’t know how successful these methods are unless you have spend visibility. Spend analysis allows you to monitor and improve your purchase to pay practices to deliver the saving promised.
Spend Analysis Approach
Spend analysis is a fundamental procurement tool that supports real and actual commercial benefits and it is important that an approach is adopted that focuses on those tangible commercial benefits. Know what those benefits are – know what the key performance indicators are – and ensure that your spend analysis reports aren’t just about building a library of knowledge but that they are about actively impacting those KPIs.