Common Spend Analysis Questions Answered
JAGGAER understands the traditional roadblocks to spend management and how important it is to gain insight into operational ineffectiveness in order to improve your sourcing success. A spend analysis allows you to do just that, but it’s no simple matter. Here, Brett Cornell, VP of Value Consulting for JAGGAER, answers some of the most common questions he encounters concerning spend analysis.
What’s the best taxonomy for my organization?
The best taxonomy is the one that works most effectively for your organization. Taxonomies define the structured way in which you want to see depth in your spend data. It’s this depth that enables you to convert information into actionable data for use in greater spend visibility, more effective sourcing, increased supplier leveraging and category/sub-category leveraging and improved compliance to contracts and preferred suppliers.
One key to an effective taxonomy structure is to ensure it “fits” your organization. Your naming convention often can impact user adoption and accuracy. Using nomenclature from within your organization often works better than standard, generic nomenclature; however, you may lose the ability to benchmark with broader taxonomies such as UNSPSC. Often a “hybrid” solution or having the ability to use your own, but still map to UNSPSC may be beneficial.
One final thought around taxonomy is to develop the structure to the level of depth required. For example, often solutions can go 2-6 levels deep. If a category only requires you to go 2 levels deep to understand it, then only go to 2 levels. If a category requires deeper levels to ensure appropriate classification and actionable data, then go 6 levels deep. Solution providers are happy to help guide you in these types of decisions.
Am I limited to spend related data only?
No. Spend analytics is one part of a greater data analytics world. While Procurement teams often have a specific need to better understand and leverage spend data, this can often be coupled with other data to make more informed business decisions. Pulling in market indices, financials and other non-spend related data can often broaden and enhance any analysis being conducted. For example, analyzing supplier risk assessment information, supplier performance data and spend data could be very beneficial in understanding the supplier’s degree of positive and/or negative impact on your organization. Understanding that your lowest cost supplier may actually be a higher cost supplier due to decreased quality or performance impacts could be crucial.
I already have an ERP system, why would I want or need spend analysis?
ERP systems aren’t designed for the specific needs of a procurement team and tend to have more Finance, HR and/or Manufacturing related views. They often are not designed with the level of flexibility or ease of adaptability required for today’s dynamic, fast-changing business needs. And finally, making changes within an ERP system can be difficult for various reasons.
Spend analytic solutions allow Procurement Teams to focus using data that meets their needs in formats for their perspectives. Dashboards and “out of the box” reports allow teams to focus on more strategic activities because the data is actionable versus spending time tactically compiling, cleansing and categorizing the information.
How resource intensive is it to implement spend analysis from my team’s perspective?
Most solution providers work to minimize the resource requirements for the customer; however, there are areas where you should expect your team to spend some time. Areas to consider include:
- Data extraction (number of systems and ability to extract data from these systems)
- Required formats (is the data required in a specific format?)
- Taxonomy development
- Business requirements (what “outcomes” and reports are needed from the solution by the various teams?)
- Validation of the data upon return
- Training in solution usage
What are the approximate costs to implement a spend analysis solution?
Costs vary (typically) depending on the size of the organization (ie, how much spend must be classified), how often the data requires a refresh and in some cases, the number of users. Today’s solutions are quite affordable and provide a significant return-on-investment due to the benefits an organization obtains.
What is the Return-On-Investment for a spend analysis solution?
A return-on-investment assessment for a spend analysis solution may be based on several potential savings areas including, but not limited to the following:
- Time savings estimates for spend aggregation exercises, such as annual or quarterly spend aggregation or sourcing event aggregation
- Increased spend under management, leading to increased professional buying oversight and more impact on sourcing/buying
- Savings related to price comparisons across organizational entities
- Savings related to developing and driving a sourcing pipeline
- Time savings related to report management for procurement and other departments
- Impacts on risk mitigation and risk management processes
- Identification and reduction or elimination of contract and preferred supplier leakage
- Savings related to pricing inaccuracies (if used as a method for invoice verification)
Organizations vary in both the items they accept in their ROI assessment and in whether they credit the spend analysis solution or other areas with the savings (ex: sourcing). Additionally, your ROI may be impacted by your organization’s willingness to accept efficiency savings or not. Often, a spend analysis solution enables teams to focus on more strategic activities which may or may not get credited to the solution, even when the solution is an enabler for this change.
For more information on spend analysis, check out our recent webinar.