1. Next-Generation Spend Analysis
In today’s economy, CPOs are feeling the pressure to act as heroes for bottom-line
results. With revenues decreasing over the recessionary period, organizations
have looked to procurement to save the day through increased savings targets to
be achieved with fewer resources.
To reach these ever-increasing (and increasingly important) savings goals, many
in the procurement function have looked to technology in order to improve
efficiency and effectiveness. eSourcing solutions offer tools that allow companies
to source more effectively, manage more spend strategically, and build more
optimal relationships with suppliers. But, how do you decide what to source? This
is the role of spend analysis programs.
The Limitations of Traditional Spend Analysis
If you were to poll procurement professionals on what they expect as an output of
a spend analysis project, there is little doubt that nine out of 10 would respond,
“commodity classifications” or “to get a better understanding of what I’m buying”.
This is not surprising since most organizations have spend data in disparate
purchasing and payables systems with little to no insight into the granular
commodities the spend represents. For some, having this information aggregated
and available via a normalized taxonomy represents a quantum leap forward. Even
for this subset, however, limitations in the return from traditional spend analysis
programs often exist.
Listed here are some of those that are most common.
1) The inability of the provider to return granular and/or accurate classifications for
spend transactions with no or limited supporting detail. While the percentage of
coverage by transaction or total spend vary, the reality is that virtually all
We welcome the op- organizations have a subset of their spend data that does not contain rich
portunity to supporting details such as meaningful invoice or PO descriptions. The fact that this
subset often represents the spend the company is actually trying to get visibility
further discuss
into is clearly a catch 22.
your spend
management 2) An internal view of purchasing activity and trends does not take external factors
objectives and such as market dynamics, recently sourced commodities or best-in-class
challenges and help benchmarks into account. It’s great to know that we are spending 20 percent less
make you in a particular category. However, if the market has shown an even-sharper
into your decrease of 35 percent, an additional sourcing opportunity may exist that would
organization’s have otherwise been missed.
superhero.
3) What now? Or what next? Automated tools can only take savings opportunity
identification so far. Pre-packaged or custom reports can be very useful for
indicating likely opportunities, but to confirm if the opportunities are real usually
requires additional analysis and investigation of the data, existing contracts and the
market. Furthermore, realizing the savings opportunity may require change
management (for example, implementing a true strategic sourcing process that
leverages spend analysis to identify, quantify and prioritize opportunities).
4) A lack of adoption caused primarily by the internal-only focus leading to
“paralysis by analysis” with users getting bogged down by a small minority of
transactions that are classified inaccurately or not at all while the improvements in
visibility that the program provides—and the potential for return that it represents—
often go unnoticed.

2. The Critical Need for Improved Supplier Insight
The first of these additional dimensions to be considered is improved insight into the organization’s
supply base. Below are six important supplier enrichment components that should be considered for
inclusion in spend analysis and why each is critical in optimal strategic decision making.
1) Supplier Parent-Child Relationships – Accurate supplier parentage information is critical
in optimizing supplier leverage in negotiations and should always be a part of a spend analysis
enrichment program. A real-world example of a quick-hit opportunity that resulted from accu-
rate parent-child relationships came from a regional retail organization that was able to renego-
tiate usage rates with their energy provider when realizing that several of their utility providers
actually rolled up to the same corporate entity putting them in a higher usage bracket.
2) Industry Codes – Many third party sources exist that will provide supplier-level industry
code information usually in either the NAICS or SIC taxonomy structure.
This information is helpful in expanding existing relationships with preferred suppliers, but
has another use. When embedded in the commodity classification process, industry code infor-
mation provides an excellent source of information when limited quality supporting data exists
as discussed in the previous section. While the granularity of the classifications may not be as
deep, these industry codes are often the only clue available and when coupled with the spend
profile of the company in question, can often result in useful commodity classifications. For
this reason, when evaluating spend analysis providers, insist on understanding whether sup-
plier industry details are truly a part of the classification process or simply a data element
passed on from a third party. NAICS are also a required component for supplier diversity re-
porting (#5).
3) Financial Information – A number of attributes including revenues, employee counts,
bankruptcy indicators, liens counts, suits counts and credit scores are often useful in supplier
assessment exercises. To the extent that this information is available in spend analysis, it can According to the
be a useful tool in assuring the viability of the supplier in the awarding of new business. Aberdeen Group, lack
4) Risk Assessments – Taking the financial information elements discussed in the previous of spend analysis
section to the next level, risk scores assess the financial viability of suppliers and their relative capabilities is costing
risk of failure. Financial information is backward looking whereas risk scores are predictive. businesses
This information can be invaluable to a sourcing and procurement organization since the fail- $260 billion annually.*
ure of a single or small number of suppliers can often apply significant pressure on the ability That's why spend
of the supply chain to function or, in a worse case, come to a grinding halt. Critical informa- management leaders
tion in any economy, but particularly in a recessionary economy, is critical for success. Any use Ariba Spend
spend analysis program that does not take supplier risk assessment information into account is Visibility solutions to
passing on a tremendous opportunity to mitigate supply chain risk. analyze and optimize
5) Supplier Diversity – If your organization has a supplier diversity program in place, it is their spend,
only logical that you would want to have this information available in a spend analysis pro- processes and
gram. To the extent that your spend analysis provider has the ability to extend your identifica- Performance.
tion on which suppliers are certified as diverse, your diversity program can only benefit. And
the program often has organizational revenue implications as the use case becoming more
common is the request of customers to understand the percentage of your suppliers who are
diverse. More coverage in this instance can lead directly to increased revenues—an excellent
basis for ensuring accuracy of supplier diversity statuses.
6) Green Status – With environmental concerns clearly on the increase, if you have not al-
ready begun to track green suppliers, it is very likely that you will need to do so at some point
in the not-so-distant future. There is even the chance that governmental regulations may at
some point require the segmentation of green suppliers. While the identification and tracking
of green suppliers is in its relative infancy, ask your spend analysis provider for their plans in
this area so that you are assured that your future needs will be addressed.

3. Market Visibility: The Window to Savings
Imagine attempting to drive your car while looking only at your dashboard. You would have some good visibility into some key in-
formation—how fast you are going, how much gas you have, whether or not your vehicle requires servicing and possibly even a lim-
ited view of where you are going (if you are fortunate enough to have GPS). But, I’m sure we would all agree that your ability to
successfully navigate the car would be severely impeded without looking through the windshield to what is ahead. The traditional
approach to spend analysis is not all that different. Objectives vary
somewhat, but most companies engage in spend analysis solutions in order to identify new and different categories that represent
potential savings opportunities. To date, the expectation has been to achieve this objective by reviewing historical spending activities
and trends while ignoring market and supplier dynamics. This approach is not all that
different from driving your car while focused on the speedometer. An internal view is critical, but simply not sufficient to have suc-
cess. The good news is that these are now problems of the past. Next-generational spend analysis programs offer the window to sav-
ings through a variety of indices and benchmarking programs, permitting users to compare their spend information with external
market factors to drive actionable analysis.
Check out these informative webinars on the power of having
VISIBILITY
into your companies spend!
• How to Uncover Hidden Savings through Spend Visibility Featuring Aberdeen Group
• Save Money in a Down Economy with Spend Visibility 11/20/2008
• Maximizing Savings Goals with Spend Visibility
• Spend Visibility: Fueling Your Sourcing Pipeline
• Spend Visibility - Beyond the Data

4. There are a myriad of potential business needs addressed at least partially by Visibility. The following table lists many of
the most common, some very specific and others fairly broad, and the primary ways that Visibility helps to address each:
Since Visibility is critical to virtually all decision-making, the list of potential business needs could continue indefinitely.
The above list is only intended to provide examples.
Imagine the power of having accurate, up-to-date
visibility into all your company's spending.
Now imagine that this classified data is enriched with
key business and market intelligence -- all delivered
through an intuitive, yet advanced analysis engine.