Decisions Special Feature – Track the cash: Corporate spend analysis crucial to e-sourcing

Companies can gain a great deal by listening to their suppliers. Supplier relationship management isn’t just about implementing systems used to produce statistics to bash your providers over the head and force price reductions. Used successfully, the systems can also help to introduce innovation and product development. “We did an e-optimisation event where there were something like 700 items and 200 suppliers,” says Heinz’s Hemsley.

Powerful relationship
Perhaps one of the best examples of supplier management technology is provided by Portuguese energy company EDP. The Iberian energy leader has grown from a relatively small regional utility to a global powerhouse in just a few years, acquiring several international businesses along the way ­ and with each acquisition comes a new list of suppliers, all of which are crucial to corporate success. But successfully integrating those businesses and their suppliers is critical ­ an issue also faced by many finance directors who have steered organisations through periods of rampant consolidation.

Luis Ferreira, procurement director of EDP, approached the problem in an innovative way ­ by establishing a joint venture, Sinergie, which focused on spend management. The project made use of data provided by both Dunn & Bradstreet and Achilles, a company that identifies, evaluates and monitors suppliers on behalf of various companies.

The utility’s rapid growth by acquisition had resulted in the accumulation of almost 20,000 suppliers spread across four databases. The inaccuracy of that data was made evident by the fact that more than 6,000 of the supplier accounts weren’t even active. “We are integrating businesses in Spain, in the north of Brazil and in the United States,” says Ferreira. “But the first point that we should put together is the way that we are spending money. What we need is the beginning of an alignment in procurement to get these potential savings, these synergies in the group.”

Sinergie allows EDP to categorise both existing and potential suppliers into low, medium and high risk.

Would-be suppliers must also complete a rigorous questionnaire and registration process before being able to do business with the energy company. This information is then interfaced with the company’s more traditional ERP systems to provide Ferreira with detailed, up-to-date information on suppliers and potential suppliers for the purpose of spend analysis and risk management.

Sinergie is doubtless one of the world’s more advanced supplier relationship management solutions ­ EDP has even gone to the length of securing the intellectual property of the technology developed by the joint venture for at least the next five years.

But while EDP’s approach is to be applauded, there are many off-the-shelf software packages that can be implemented and adapted to large enterprise needs. Heinz, for example, uses software provided by technology companies Ariba and Emptoris (both systems are used to extract value from a disparate collection of legacy systems and databases while the manufacturer implements a company-wide SAP installation); Vodafone also uses Emptoris; the Welsh Assembly has just signed a deal with Italian software provider Bravo Solution which also helped the Office of Government Commerce save £270m over a three-year period.

Clearly, access to this technology is not difficult. But it has still to get to the level of more familiar technologies such as business intelligence, customer relationship management or corporate performance management.

Duncan Jones, a senior analyst with Forrester Research who focuses on sourcing and procurement technology, says that good spend analysis is crucial if an organisation is to source strategically. It differs from business intelligence, he says, because it enriches the data that lies within legacy ERP systems that would otherwise be extremely difficult to extract and use. “With spend analysis you are able to look at data which has many different descriptions and normalise it,” he says. “We call it enrichment ­ taking base data and turning it into something you can use, such as single category goods being bought from several suppliers.”

Making sense of it all
He also talks of the problems that are caused with consolidation. When companies come together, it’s incredibly difficult to integrate systems which may refer to a product that both companies buy in very different ways. “For the first time you can say, ‘do you realise we spend X amount of money with such-and-such a supplier?’” Jones says. “It’s about taking a mass of unstructured data and making sense of it ­ not like business intelligence, which is generally adding up numbers.”

Of course, with that knowledge comes power. Companies are able to negotiate far better rates with suppliers if they have the right visibility of spend; but also, internal compliance can be vastly improved and spending patterns tracked and predicted in order to produce far more accurate forecasts. Jones goes on to say that it makes sense for companies to implement spend analysis systems from software companies already in the enterprise. Both Oracle and SAP, for example, have their own spend analysis systems.

But this raises another interesting point. Many companies will already have purchased the software licence to use these applications, yet fail to do so for the simple reason that it continues to drop below the radar.

“Anecdotally, that’s often the case,” agrees Jones. “We call it shelfware. I’ve certainly spoken to a lot of clients who have encountered that problem.”

Of course, having access to good quality software and systems is only useful if the people that are using it know what to do with the information. At a recent round table debate hosted by Procurement Leaders, Guy Allen, procurement director of Fujitsu Services, warned of the problems companies can encounter when they get too deeply involved in spend analysis.

“I think you’ve got to be careful with spend analysis, because analysis is looking at numbers and not doing anything,” he warned. “If you talk about spend management, that’s far more interesting. One of the things we learned when we put a spend database in at SmithKline Beecham was that people got very excited about the numbers but didn’t do anything. So the really important thing for me is, having done the analysis, what actions does it drive?”

It is an extremely valid point; getting bogged down by the minutiae of corporate spend could well be quite interesting. But the real value comes through abiding by the 80:20 rule ­ that is, 20% of deals are responsible for 80% of the value. Successfully tackling that 20% is critical if companies are to successfully drive down costs, while at the same time maintaining good relations with suppliers.

“Spend analysis has been seen as a very specialist area, but now companies are seeing it as a very relevant area of e-sourcing,” says Forrester’s Duncan Jones. “Spend analysis helps you find where the opportunities are. It comes with a lot of business logic and the ability to extract information from corporate data.”

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