What is the ROI of Spend Visibility and Analysis Solutions?
While talking with some of the marketing and spend visibility folks at Emptoris last week -- in a conversation completely unrelated to the recent litigation with BIQ -- the question came up about the best way to prove the ROI of spend analysis initiatives to non-procurment and sourcing executives. As practitioners and advisors, we all know the primary reason to conduct spend analyses in the first place. Quite simply, it's to come up with actionable initiatives to implement savings and risk reduction programs based on the findings such activities generate. But this does not help the fact that many executives outside of procurement look for reasons to kill or under-fund technology initiatives without a direct, measurable ROI. And unfortunately, larger spend visibility and analytics investments / programs can sometimes fall under the financial hatchet given their "indirect" ROI.
Given this, I thought the question of how to justify the direct ROI (or cost avoidance) of spend analysis efforts would make for a good post and even better reader commentary. So I'll start the discussion with a few suggestions on how to approach the "hard dollar" ROI of spend visibility and analysis investments, and hope that you, our loyal readers and posters, join in the fray.
First, I think that there's a strong anti-fraud executive ROI argument to be made for using spend analysis capabilities. Without insight into what individuals are buying and from whom -- and in what volume levels, on contract, at what price, etc. -- it is impossible to take a proactive approach to detecting and prosecuting procurement fraud within an organization. In a $5-6+ billion company, it's a pretty straightforward argument to make that it is highly likely that the procurement organization will more than recoup the costs of the application in less than 12 months just by identifying and correcting purchasing fraud. Along similar lines, it is possible to make the same ROI / cost avoidance argument based on the direct cost of non-compliance due to a lack of organizational controls from procurement fraud (based on possible SEC or state regulatory action against an organization).
Second, by taking the CFO's view of spend analysis and what she'll be able to do with the information in her activities on the executive level, it's possible to create a quantitative model based on the size of your organization and relative benchmarks about estimated "executive" savings or revenue generation opportunities. This might include such CFO-level driven conversation areas as overall balance of trade (with large partners). Or perhaps it could include a cost of non-compliance argument when it comes to working with global suppliers (and extended supply chain partners) on the denied party list.
Obviously, these are just a couple of suggestions based on tying the value of spend analysis to non-sourcing driven outputs and initiatives that result from the information such processes generate. I'd love to hear what you think on the subject. For if we can all help better sell the ROI (or cost avoidance) of spend analysis to non-procurement executives, I suspect we'll see even broader, continuous and sustainable adoption of spend visibility approaches going forward. After all, the only worse thing than not investing in spend visibility and analytics at all is doing it on an opportunistic basis to drive one-off sourcing programs.
- Jason Busch
Given this, I thought the question of how to justify the direct ROI (or cost avoidance) of spend analysis efforts would make for a good post and even better reader commentary. So I'll start the discussion with a few suggestions on how to approach the "hard dollar" ROI of spend visibility and analysis investments, and hope that you, our loyal readers and posters, join in the fray.
First, I think that there's a strong anti-fraud executive ROI argument to be made for using spend analysis capabilities. Without insight into what individuals are buying and from whom -- and in what volume levels, on contract, at what price, etc. -- it is impossible to take a proactive approach to detecting and prosecuting procurement fraud within an organization. In a $5-6+ billion company, it's a pretty straightforward argument to make that it is highly likely that the procurement organization will more than recoup the costs of the application in less than 12 months just by identifying and correcting purchasing fraud. Along similar lines, it is possible to make the same ROI / cost avoidance argument based on the direct cost of non-compliance due to a lack of organizational controls from procurement fraud (based on possible SEC or state regulatory action against an organization).
Second, by taking the CFO's view of spend analysis and what she'll be able to do with the information in her activities on the executive level, it's possible to create a quantitative model based on the size of your organization and relative benchmarks about estimated "executive" savings or revenue generation opportunities. This might include such CFO-level driven conversation areas as overall balance of trade (with large partners). Or perhaps it could include a cost of non-compliance argument when it comes to working with global suppliers (and extended supply chain partners) on the denied party list.
Obviously, these are just a couple of suggestions based on tying the value of spend analysis to non-sourcing driven outputs and initiatives that result from the information such processes generate. I'd love to hear what you think on the subject. For if we can all help better sell the ROI (or cost avoidance) of spend analysis to non-procurement executives, I suspect we'll see even broader, continuous and sustainable adoption of spend visibility approaches going forward. After all, the only worse thing than not investing in spend visibility and analytics at all is doing it on an opportunistic basis to drive one-off sourcing programs.
- Jason Busch
Having struggled with this issue both internally as a practitioner and as a consultant the approach that I've settled on that tends to have most success is a "programs without visibility vs. programs with visibility" comparison, and using the support of the commodity managers. Look at the historical results the organization has achieved in its sourcing programs by commodity to date and ask the commodity managers to tell you how they got the savings and how they could have got more. So the facilities commodity manager will tell you she got 5% based on her buying power as per the $1M spend in the purchasing system but could have got more if she'd known total spend across the 100+ locations she's responsible for. Do the spend analysis and confirm her spend is $4M and work with her to get the new savings number she could have got with this knowledge. Maybe it's now 15% savings. So you do this for all commodities in scope - work with the commodity managers (or equivalent) to find the missing savings based on how much spend there actually is post-spend analysis compared to what they used in their negotiations. If the spend is totally unmanaged with no commodity managers then I usually bring out examples of what I saved myself for the order magnitude of spend the spend analysis shows for that commodity. The last piece is to show the organization how the new 15% savings can now get applied to the $4M spend, not just the $1M, by using the spend analysis tool to track who's not buying off the new contract then use appropriate carrots and/or sticks to make sure they do.
I hope everyone will have a merry holiday full of foolishness, mirth, folly, fun, family and (safe) drunkeness. we could all use a break.
Thought this was apt re: Catch 22.....from Joseph Heller's book....
There was only one catch and that was Catch-22, which specified that a concern for one's safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he was sane he had to fly them. If he flew them he was crazy and didn't have to; but if he didn't want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.
"That's some catch, that Catch-22," he [Yossarian] observed.
"It's the best there is," Doc Daneeka agreed.
If you're too busy to read it, watch the movie. Alan Arkin is great and it's a stellar cast.
spend analysis used in context of 'spending analysis' which is analyzing the dollars paid by you, acts as a good feed for the reality check on the contracts already sourced, if you had any for the expected spend dollars vs. money actually spent.
Else, spending analysis provides you lead how to better leverage spend by reducing suppliers or adding more (competition) accross categories. It could also lead you to start thinking of renegotiating contracts if you had an option of revisiting price for the existing contracts.
In context of direct spend it could help create strategy around tiering of suppliers apart from any other ideas.
Thus in short, it is a gold mine of information and let's the smart sourcing managers kicking **** here and there to get few more dollars out of the money already being spent.
In our user conf last year, a customer, when asked about ROI for Spend Analysis commented that it is like asking a blind person the ROI for getting his sight back.
But what's really great is the comments - deep, informative, education, and heated with debate. (I count no less than 53 comments in total to these postings - and many of them are longer than the posts themselves!) This is much more educational than any marketing efforts the major players can hope to undertake - I love it!