Alex Manek, Business Advisory for SAS Ireland, identifies the proven value of analytics for high performance procurement in the public and private sectors, and the key outcomes that customers can expect.
In today’s business environment, organisations are striving to reduce costs and improve profits and efficiencies more than ever. Without insight into supplier spending, companies struggle to determine how much are they spending with each supplier, which of their suppliers offers them the best quality and service for the price, and what are their top commodities, items or products in terms of organisational spend.
Without this information, companies are unable to leverage spend for volume discounts in negotiations, determine supplier risk to rationalise supply base and ensure supplier compliance to purchase contracts, leaving money on the table. Additionally, further opportunities exist to understand and eradicate fraud, waste and error from complex procurement processes.
Organisations require the ability to cleanse, categorise and report on their supplier performance and purchase history so that they can make better, more informed decisions about how they spend their money in a timely, more strategic fashion.
An Aberdeen survey reported that spend analysis delivers the following customer benefits:
• 75 per cent increase in savings from sourcing efforts, based on spend analysis;
• 33 per cent improvement in compliance with negotiated agreements;
• 22 per cent reduction in sourcing cycles, enabling companies to increase the volume of spend that is strategically sourced.
Not only can individual organisations employ modern techniques to become more efficient in procurement, there is also a national opportunity. With approximately €6.9 billion of potentially addressable spend from public sector organisations, an opportunity exists to take advantage of modern data integration techniques to allow evidence-based decision-making when it comes to public spending.
By creating the role of Chief Procurement Officer in the Public Service, the Government and the Department of Public Expenditure and Reform in particular are proving that they are serious about developing serious rigour around public sector procurement. Inevitably, there will be a focus on driving costs out of the system by becoming more efficient, implementing the necessary process and control mechanisms, and utilising technology to understand how much of the €6.9 billion can be saved.
According to Alex Manek, Business Advisory at SAS, organisations can rapidly deliver savings of a between 6-10 per cent on procurement spend through the implementation of spend analytics in their organisation. “Typically an organisation will go from zero to 100 per cent insight within weeks of gathering their data together for analysis,” he comments. “Additionally, whilst the time to value is high, advanced analytical techniques will yield further savings and consolidation through the identification of waste and potential abuse, as well as increasing contract compliance.”
In order to gain the necessary insight into what is being spent, on what, by whom and with whom (thereby giving a comprehensive view of the procurement cycles within any organisation), certain tasks must first be completed by an organisation as regards data collection and manipulation.
The following diagram outlines one potential high level realisation of a spend analysis process flow.
In the first instance, detailed data must be gathered from the existing procurement systems. This includes:
a) Invoice line data: Typically gathered from the procurement systems for a given business interval (e.g. monthly or quarterly). This is the granular data that outlines how much was spent on what item and who the order was placed by and who it was placed with.
b) Supplier data: This is the information about the approved suppliers in use within any organisation. As well as name, address and other information, it may also include information in regard of the viability of the supplier from external sources such as Dun & Bradstreet etc. If there is a ceiling on spend with certain suppliers, this information is also typically supplied.
c) Purchaser data: This is typically information on those individuals within an organisation who are authorised to place purchase orders and also any information on spend limits that pertain to each individual.
Once the data has been gathered, it is loaded into the spend analysis system and verified with the organisation in terms of quality and accuracy.
The next critical step, in regards to spend analysis, is to agree a baseline standard to which the invoice lines will be compared. Fortunately, there are a number of standardised schemes that are commonly accepted. The best known of these is the United Nations Standard Products and Services Code® (UNSPSC) or eClass, for example, which provides a hierarchical taxonomy for the classification of goods and services.
This is vitally important, particularly at national level where there are many organisations of different sizes, functions and procurement maturity. There should be no deviation from the chosen classification code to ensure that there is absolute clarity across all systems. For example, how can we ensure that systems understand that the following four items are, in fact, exactly the same thing?
The primary ‘engine’ in any analysis of procurement spend within any organisation is the matching of invoice lines against the selected taxonomy and the verification of the results of this.
Any worthwhile spend analysis solution must ‘remember’ what an invoice line was classified to, so that the next time it passes through the system applies the same classification. Once this has been completed for the selected period or set of invoice lines, essentially the organisation has a hierarchical view, typically to three or four levels, on what was spent on what.
The final steps relate to the visualisation of the data in a way that is meaningful to the organisation. This will usually be through a set of defined interactive reports, web portals and increasingly delivered to mobile platforms such as an iPad or other tablet device. This allows business users to quickly and accurately view information about what is being spent and where it is being spent. Typically a standard report set will tell an organisation the following:
• How is my spend split across the top level categories in percentage terms?
• Who are my top 10 vendors?
• How much am I spending on top level items, in monetary terms, against my budgets?
• Who is placing the orders with my suppliers?
• What does committed spend look like into the future?
• Can I forecast cash flow and payment schedules?
• Do any of my existing suppliers fall into an ‘at risk’ category?
• What will expenditure on a particular classification look like in 12 months’ time?
Once reporting requirements are defined and agreed, the process should continue to include new invoices after each period of business with new invoice details sent for classification and reporting, along with any changes to suppliers and purchasers.
After a period of time, a comprehensive view will emerge, allowing finer grained control over procurement spend within and organisation. It is at this point that advanced analytical techniques can be utilised to begin to address issues, including:
• Fraud, waste and abuse: Are orders being placed with suppliers that are not approved? Are there anomalies that should be investigated in some cases?
• Link analysis: Are there links between certain suppliers and/or purchasers that suggest collusion which need to be investigated?
• Budget forecasting: Based on the trends, is the organisation likely to over/under spend on a certain category or with a certain supplier?
• Correlations: Do orders of certain goods and services lead to the order of other goods and services?
While the traditional focus when it comes to spend analytics is cost reduction, at a national level there are further implications and opportunities for the Irish Government. For example:
• Job creation: Supplier analysis would allow government to understand how its spend affects different sectors thus enabling an evidence-based mechanism to channel more spend with indigenous Irish companies to urge job creation;
• Regional perspectives: Vendor classification and profiling would also allow the Government to understand how government spend is spread in different localities across the country. Additional insight would be gained as to the level of spend with our euro zone partners and further afield;
• Open and transparent government: In order to preform spend analytics, the first step is to gather and integrate the data. This will afford the Government the opportunity to allow the citizen the ability to see what their tax euros are funding.
Many ERP and systems vendors offer proprietary solutions utilising their own technology and specialist services companies also can assist. The issue at a national level is the proliferation of systems, which is estimated at over 4,000 when the school system is included.
What is therefore required is an exercise in collecting and integrating the available data, choosing a classification and taxonomy that meets with international standards and the resources to address the opportunity.
For more information, contact Alex Manek on:
Tel: +353 (0)1 613 3915
Mobile: +353 86 8091 875