Page 1

SETLabs Briefings VOL 5 NO 3 Jul-Sept 2007

Managing Costs by Leveraging Procurement Information Intelligently By Rajib Saha

Augment your enterprise’s spend visibility and redefine your procurement strategies with the 360° approach to enterprise cost management


hief procurement officers (CPO) today face

organizations can adopt appropriate strategies,

great challenges to comprehend on how

policies and systems to improve procurement

their organizations spend in buying diverse


categories of materials and services. Without a clear understanding of dollar outflow, it becomes


difficult for them to carve out cost-saving

To deliver high-performance in procurement

strategies that can come through improvement

organizations need: (a) unified view of enterprise

in procurement operations. Enterprise Cost

procurement data residing in multiple systems;

Management (ECM) can help them understand

(b) multi-dimensional analysis to transform

their organization spend scenario and develop

data into information, and (c) integration of

strategies to achieve cost saving.

marketplace, process and technology aspects for

ECM can be defined as the set of

comprehensive insight.

processes, tools and practices to achieve visibility

These above-mentioned objectives can

and control on enterprise spend. ECM provides

be achieved through a two-pronged approach.

insights into areas for savings and exposes

1) an ‘inside-out’ view of transactional spend

procurement process inefficiencies as well. With

data residing across multiple systems through

comprehensive view on spend through ECM

advanced analytical software applications, and


through category

The 360° approach to ECM would be

enrichment, supply market analysis, processes

to follow a gradual approach to understanding

assessment and technology evaluation.

enterprise spend landscape with the ‘inside-out’


an ‘outside-in’


The ‘inside-out’ view provides visibility

view followed by ‘outside-in’ view. The 360°

to operational performance whereas the

approach to ECM can help in understanding

‘outside-in’ view drives strategies and policies.

end-to-end enterprise spending through the

Through ‘inside-out’ view, by using spend

combination of both side views. In the 360°

analysis applications, one gets to know from

approach, outcome from inside data analysis

historic data, how an organization has spent for

would be enriched with market, process and

a given past period. Deficiencies, if any, in the

technology analysis to make better decisions.

internal processes can be identified as a result of

Before elaborating both views of ECM and

spend analysis. These analyses certainly lead to

comprehend 360-degree approach, one need to

savings by addressing the identified anomalies.

also understand cost management challenges

But they have limitations in unlocking

that today’s procurement department faces.

"Inside-out" and "Outside-in" views of procurement help enterprises have a 360° understanding of their cost management landscape

continuous value once the process anomalies


are addressed. Therefore questions arise on -

Organizational focus on procurement has radically altered

over the last decade.

• How to achieve incremental benefits?

Procurement has transformed from back office

• How to leverage changes happening

transaction processing department to a strategic

within the business context to impact

function. Today, procurement departments play

procurement performance?

significant role in organizations in achieving competitive positioning and price leadership

The ‘outside-in’ analysis provide insights on

in the marketplace. Procurement executives

the ‘how’ or ‘what next’ aspects of improvements

are under significant pressure to contribute to

by integrating external elements that are

their organization bottom-line. In industries

relevant to procurement. This analysis identifies

like automotive or discrete manufacturing,

incremental savings opportunities available

where product cost would be a prime factor

to the enterprise due to changes in external


environment, like supply market, input material

function has emerged as strategic differentiator.

price changes etc.

To maintain profit margins, the need for high





performance in procurement would be obvious


in such industries.

program enables


overcome these challenges and draw a roadmap










number of challenges while spearheading

The roadmap would be the outcome of deep

procurement transformation initiatives. Poor

analysis across multiple dimensions. ECM paves

view of enterprise spend would be a key issue.

the path for CPOs to meet their cost savings

This would be due to dispersion of data in

targets and contribute to their organization

multiple systems across the enterprise. Poor


data quality and inconsistencies add further complexities.





decision-making becomes difficult. Traditional


ERP or legacy systems do not provide the kind

Spend analysis application enables enterprises to

of reports that today’s procurement executives

extract, enrich and analyze spend or procurement

need. Integrating market knowledge to the

data. It allows enterprises understand spend

internal analysis to enhance sourcing decisions

patterns (by suppliers, categories, business units,

Spend analysis applications bring with them multiple benefits — primary among them being, getting insights on savings opportunities and process improvement areas

would be another challenge. There are issues

regions) and spend leakages (non-compliance,

with non-standard procurement processes and

price variance)

technologies among multiple units and regions

processes. It provides insights for identification

of an enterprise.

of savings opportunities while also indicating at





happening within existing

process improvement areas.

introduction of new vendors or switching away

Spend analysis application can be

from incumbent vendors, even if that reduces

described as a smart data warehouse with

cost. Then there are, other questions like -

advanced data cleansing, classification and

Which technology platforms or point

analysis tools. Some of the popular application

solutions are to be given priority?

providers in this space are Ariba, Zycus, Ketera, Verticalnet, The Buying Triangle, etc. The process

• What are the market changes in technology landscape that can

of spend analysis happens in three stages -


(1) extract (2) enrich, and (3) analyze.

leveraged? •


Would procurement outsourcing be the

- Spend data resides in

multiple systems like ERP, payment systems,

right strategy?


Spend data sources across enterprise

Spend Analysis Application

Data Source ‘n’


Data Source 2


Common Data Warehouse


Spend Analysis Reports



Normalize Enrich


Data Source 1

Figure 1: Spend Analysis - Extract, Enrich, Analyze for ‘Inside-Out’ View

Source: Infosys Research

e-procurement applications, procurement cards

Enrich - Once spend data from all dispersed

and T&E systems. More often than not, these

systems are loaded into the common warehouse,

systems are built over a period of time and


they are not integrated. The data formats are

would be needed to make the data meaningful.

different in these source systems. Moreover, an

Such data can be then used for further analysis.

enterprise can have multiple units or regions

Normally data residing in multiple enterprise

with different type of applications to store

systems are inconsistent. Different systems or

spend data. To get any visibility through such

business units may follow different nomenclature

dispersed data, pulling and storing them in

and coding system for the same line item. For

one single place in a standard form would be

example, ‘Desktop Computer’ may be stored as

mandatory. Spend analysis application extracts

‘Computer’ or ‘PC’ or ‘Personal Computer’ in

all instances of spend data across different

different systems. Different units or systems may

systems within the enterprise into its common

follow some sort of product classification but

data warehouse. Most commercially available

they may not be standard across the enterprise.

products (COTS)


From analysis standpoint, unless data is properly

extract data from popular or standard

classified and grouped, aggregation would not

applications and have tools for easy mapping of

be possible. So understanding total spend for a

data formats of other systems to their common

line item for leveraged sourcing would not be

warehouse format.

possible. Neither can price variance be identified








for a single line item bought by different units.

existing suppliers data. Such capabilities allow

Another example of data inconsistency can be

enriching supplier data and keeping supplier

supplier-naming discrepancy. Without a central

related information auto-refreshed.

master data management process and formal data governance structure, different business units

Analyze - In the previous two stages spend

within an organization may register the same


supplier in different ways. For example, ‘Hewlett

spend data, integrate them and add necessary

Packard’ may be stored as ‘HP’, ‘HP Inc’, ‘H.P.’,

intelligence to them for meaningful analysis. In

‘Hwlt Pckrd’ or ‘Compaq’. It may be possible

the final stage, the analysis capabilities (OLAP

that the same supplier ‘Hewlett Packard’ may

tools) of spend analysis application slice and dice

have been registered more than once (more than

the aggregated data across multiple dimensions,

one supplier code) due to different addresses or

viz., category, supplier, region etc. The tools

may be registered under different GL codes (as

provide reports with in-depth insights on how

IT product supplier, as IT service provider, as IT

an enterprise have been spending dollars in

consultant etc) due to multiple line of products/

different categories with multiple suppliers in

services supplies. Unless supplier data have

different units or regions. With such granular

been normalized, organization cannot estimate

visibility, enterprises can perform the next level

supplier relationship value (total spend) for

of analysis and roadmap planning to save money

better bargains.

directly by negotiating prices with supplier









or indirectly by improving spending related

capability to add taxonomy information to each

processes. Simply put, one can get answers to

record to arrive at some standard commodity

some key cost management questions like:

structure for all products and services. Most COTS applications have artificial intelligence

• How





distribution by dimensions like categories,

based algorithms -- like, Bayesian analysis, Knearest neighbor analysis, natural language

suppliers, units, regions etc?

parsing and rich knowledge libraries. This

• How is the Pareto analysis by category, by

enables granular classification aligned to various

suppliers? Where to focus in strategic

standard commodity taxonomies (like UNSPSC,

sourcing efforts?

SIC, eClass etc) or any custom taxonomy. Spend

• What is the aggregated enterprise

analysis applications have rule-based engines

spending for any category? What is the

to normalize data inconsistencies like spelling

leverage opportunity?

errors, acronyms, similar descriptions, duplicate

records, etc.

Who the key suppliers are? How much is the aggregated spending with these key

Also, links among suppliers can be


identified to group them, normalize supplier






data and recognize supplier families. Some

Are there purchase price variations for

niche spend analysis packages have high-

any category? What is the savings

end capabilities (web crawlers) to integrate


information from external sources, like supplier

• What is the contract compliance

catalogues and content providing sites with

percentage for any category? How much


spend is through non-preferred suppliers?

online payment from a few business units while

• Which units/regions are not following

others are still continuing paper based payment

contracts? Which categories have high

for those same supplier(s). To correct such


anomalies it would be imperative to know the

• Which




process in both scenarios to identify optimum

consolidation opportunities? Are parts

‘to-be’ process for payment to such vendors.

rationalization opportunities available?

Such process related views are not available through spend analysis. Some of the key procurement areas






that need visibility beyond spend analysis

provides visibility to understand what is

applications are

happening within the procurement department •

of an enterprise. They also bring out intelligence residing within procurement related transaction

Categories amenable for strategic sourcing and their risks-benefits scenarios

• Process changes required to improve

data. Procurement executives can understand which departments/ buyers have not followed

performance and implement compliances

which corporate contracts. They may find that

• Metrics definition to track process performance

some suppliers are supplying same items to •

different units (within enterprise) at different prices.

Technology up-gradation and outsourcing opportunities.

Through these analyses spend analysis reports provide great insights for saving money

If one tries to create the roadmap

and improving cost management metrics. But

from spend analysis reports, it would be based

to take a more holistic approach one needs to

only on internal information. But that would

know how organizations can reduce incidences

limit better business decisions and would not

of spend leakages by changing or improving

help realize greater benefits of enterprise cost

processes. It is required to know what

management. Strategies made without taking the

technology up-gradation would be needed in

external view would not reflect the marketplace

procurement portfolio to overcome barriers of


manual processing.

Such questions would not THE ‘OUTSIDE IN’ VIEW DRIVES

be answered by spend analysis application.


Spend analysis application cannot take into context the effects of changing external

To identify incremental opportunities and to

environment. For example, changes in prices

deliver high performance, enrichment of spend

of crude oil would have an impact on spend of

analysis reports would be needed by integrating

packaging supplies (laminates). The effect on

other analyses. Without integrating external or

laminates’ prices would be significant for any

‘outside-in’ view with available spend analysis

CPG manufacturer. The spend analysis tool

reports, ECM programs would not yield great

cannot provide such information. From spend

returns. Figure 2 depicts on how after such

analysis reports, one may discover that within

integration, the ‘outside-in’ view drives ‘what

the enterprise some suppliers are receiving

next’ in terms of spelling out spend management


Category Information Enrichment

Supply Market Intelligence

Process Analysis

Metrics Benchmarking Spend Analysis Reports

Technology and Outsourcing Assessment

Spend Management Strategy & Roadmap

Figure 2: ‘Outside-In’ View Drives ‘What Next’

Source: Infosys Research

roadmap. Enrichment through ‘outside- in’

identification and prioritization of categories for

analysis happens in the following dimensions -

strategic sourcing. The spend analysis reports would not provide clear direction on this. Two

• Supply Market & Category

factors drive the decisions for strategic sourcing:

• Process & Benchmarking

a) estimated savings opportunities, and b)

• Technology & Outsourcing.

category risk ‘Estimated savings opportunities’ here refers

Supply market & category - Spend analysis

to the savings identified after enrichment of

provides granular visibility on dollar outflows

spend analysis reports based on market facts.

made in different categories in the past period

That would not be just the opportunity value

for the enterprise. What would be important

(dollar value) as an outcome of spend analysis

from an implementation plan perspective is the

application but also properly validated for


possibilities in actual business context. Or

the opportunity may be identified only after

• Vendor switching costs

integrating market information. For example,

for certain categories, the input prices may have

• Technical complexities

changed over the past few months and those

may affect costs of those categories. Technology

Supply disruption possibilities Business impact on failure Internal organizational resistance and change management issues

improvements could result in changes in prices

Commitment with incumbent suppliers

of certain materials like IT hardware. Such

• Supplier industry competitiveness.

market information needs to be factored in while evaluating savings. Or initiating low-cost country

From rapid execution standpoint, it

sourcing for some categories may emerge as a

would be prudent to take template-based

lucrative option. China or India has emerged


as preferred sourcing destinations for many

opportunities and ‘category risk’. Otherwise

categories like electrical accessories, electronics

it would be difficult to capture the right

parts and small-size automobile components. So

information in a structured format. Template

what can be the impact of sourcing from China

driven process programs can make the process

or India? Reports from spend analysis enriched

of enrichment and subsequent assessment

through external information on supplier markets

standard and repetitive. Once estimation of

and/ or category related information can help

both parameters is complete, one can create a

determine ‘estimated savings opportunities’ for

‘category matrix’ based on ‘estimated savings

different categories.

opportunity’ on one axis and ‘category risk’




assessing ‘estimated


on the other. The matrix helps prioritize


opportunities’ would not be sufficient for decision

categories and phase-out strategic sourcing

on strategic sourcing. The risk associated with

implementation plan.

categories needs to be examined and estimated. To assess risk of supplier change or new supplier

Process & benchmarking - Processes are core



to metrics improvement within any business

understanding of supplier market dynamics

function and procurement is no exception.

would be crucial. The spend analysis application

Process views are essential to relate findings

may show, through supplier ‘grouping’ and

of spend analysis to process deficiencies. For

‘parent-child’ linking, that significant amount

example, maverick spending or non-compliance

of spend would be possible through establishing

to contracts is the result of non-existence of

one supplier across the enterprise for some

processes to integrate contract prices to



procurement systems. To improve on metrics or

would depict as opportunities for volume

to implement compliance requirements, process

leverage and savings. However, while assessing

analysis exposes gaps to plan for process re-

category risk one may discover that those items

engineering. For a comprehensive process view,

are proprietary in nature and the leverage would

it would be essential for process owners to get

not be feasible for cost-savings. While category

the ‘as-is’ process maps across business units

risk assessment is done, one should assess

for different category groups (direct, indirect,

areas like:

MRO materials and services procurement) and










While defining procurement metrics, linking

contract management, supplier registration,


them across levels needs to be kept in mind. That

supplier collaboration and supplier performance

enables procurement performance measurement


by rolling up as well performance improvements

Such process analysis allows

identifying best practices within the enterprise

through cumulative impacts.

and plan for enterprise process harmonization. However,

harmonization would be easier

Technology & outsourcing

- enterprise

said than done. There are multiple challenges


ranging from system variations to internal

fragmented. On the one side are traditional ERP

people issues.

or legacy systems to maintain transaction and




The other side of process view is

master data and on the other, there are niche

defining and tracking of key metrics that can be

applications for specific functionalities (like

rolled up to measure procurement performance.

contract management, order collaboration, e-

Unless the existing performance can be

procurement, catalog buying etc.) or specific

measured and benchmarking metrics can be

category management (like travel & expenses,

set, planning would never be objective. As a

print, contract labor etc). Then there are a host

result of improper planning, implementation


would falter. Metrics for benchmarking need to


be defined at three different levels that address

Rossettanet, XML, SOA.


metrics view requirements of different users

for and



architecture viz., EDI,

Outsourcing is rapidly growing in

within the organization -

the procurement space. For industries, like automotive

1) Executive - For example, total spend as




procurement can be a core competency area

% of sales, no. of suppliers per billion

and strategic to operations. For many others,

dollar of spend, procurement operations

like banking or financial services, procurement

cost per billion dollar spend, no. of FTE

would be non-core and a support function. So it


may be feasible to transition entire procurement





satisfaction rating, etc.

function to outsourcing service provider(s) in

2) Operational - For example, cost reduction

certain industries while it would be limited

as a percentage of spend, % of suppliers

to specific processes or categories in other

that consume 80% of spend, % of spend


under procurement, cost per purchase order,

Technology and outsourcing assessment

% spend through strategic




provide insights for technology implementation


roadmap. To start with, one needs to understand

eProcurement system, etc.

the existing application portfolio, IT architecture

3) Process - For example, requisition to

and standards used by the enterprise. The ‘as-

PO cycle time, PO to settle cycle time,

is’ system landscape blueprint helps identify

contract compliance %, % of contracts

bottlenecks that need technology intervention.

negotiated centrally, % late payments

For technology requirement analysis,

to suppliers, no. of POs processed

a step-by-step approach can be followed.

per FTE, etc.

First, requirement of solutions that meet the


organization’s priorities can be ascertained

The objective of such assessment would be

and application providers’ market can be


screened to shortlist vendors. Then high-

development of appropriate business case.





level selection criteria template needs to be defined based on functional and technological


fitment requirements. The packages that match

Analyses across these multiple dimensions

the criteria can then

external to transaction data enable procurement


be evaluated for cost available

teams to create a transformation roadmap. They

technology options can be evaluated and


would be able to make informed decisions on

baseline plan for technology implementation

the initiatives that are to be pursued and hence

can be drafted.

plans can be prioritized. The shift from ‘what




happened’ to ‘what next’ and ‘how’ would result


assessment, it would be better to understand

in tangible benefits of ECM. Such shift would

overall organization plan on outsourcing. Then

be possible only after enriching spend analysis

it would be prudent to work on creating business

reports through these ‘outside-in’ views. However, driving ECM for long-

cases for procurement outsourcing. To do so, one

term benefits would require template driven

needs to know

program management. But creating enterprise •

Which processes or categories would be

wide templates and assessments of widely

feasible to outsource? What would be

diverse categories, processes, technology and

the risk?





How would transition take place? What

The crucial aspect is that these methodologies

time frame would be required for steady

and processes must be repeatable. Without


template based data collation and evaluation

What would be the new process and

process, repeatability cannot be achieved. That

organization scenario?

would make the program a one-time affair and incremental improvements would not be

• What would be the cost arbitrage savings,


long-term benefits and ROI?


would need their

resident subject matter experts to chip-in to create needs

templates and drive these complex evaluation

granular analysis of the ‘as-is’ process map

processes. In many areas, organizations may need

created earlier, plus a scrutiny of organizational

to engage external procurement consultants.




changes and governance structure. This can be






especially for MRO (maintenance, repair and

achieved through a two-pronged approach -

operations items) and indirect procurement 1) Assessment of processes for their fitment

categories (categories that are not used directly

to off shoring/ outsourcing and associated

into end product) where organizations may not

benefits thereof, and

have adequate skill set, market knowledge or

2) Analysis of organizational and governance

resources. In industries like banking or financial

structural changes through frameworks

services, such expertise may not reside at all

like RACI.

within the organizations.







Can evaluation of technology solutions be carried out in-house?

spending insights with other relevant analysis

• Are investments in a spend analysis tool

and external information. By leveraging internal

an organizational priority? Would the

procurement data with external information

ROI in spend analysis investment be

organizations realize two-pronged benefits-

significant and make the investment attractive?

1. Identification of saving opportunities

and strategies to achieve those savings like -








Are there resources available to manage such applications and maintain it?


consolidation, price rationalization, part

In today’s competitive market, procurement

standardization etc.

departments of organizations are under pressure

2. Identification of areas for improving

to deliver high performance, especially, in

process efficiencies by process changes,

cost management metrics. To overcome cost

technology adoption and outsourcing.

management challenges it would be imperative

These impact cost metrics and adherence

to get comprehensive knowledge about

to contracts and regulatory requirements.

enterprise dollar outflows and the available opportunities (internal or external driven) to


control it. The 360-degree approach to cost

ECM provides organizations significant gains

management provides complete view of ‘as-is’

that are not easy to ignore. With more and

procurement state as well as identifies available

more companies adopting such programs,

opportunities to reduce cost. With combination

ECM would be a key area for any organization.

of ‘in-side out’ and ‘out-side in’ analysis through

However, the important question would be

360° approach, organizations can get insights into

whether ECM programs can be carried out in-

their transactional data as well as understand the

house or to through managed service route. The

effects of external dynamics. That allows them

answer lies within the broader organizational

to adopt appropriate strategies, IT systems and

approach to information systems management

processes that meet the demands of their cost

and outsourcing. If answers to a majority of

management objectives. It would be prudent to

the below-mentioned questions are not in the

drive ECM through template-driven program

affirmative, it would be prudent to take managed

processes so that such programs can be initiated

service route or a hybrid approach -

at regular intervals. Equipped with ‘glass pipe’

• Is procurement core to enterprise

view through ECM, enterprises can thus achieve

operation and strategic to competitive

procurement transformation.

positioning? •

Are in-house experts available to track


and integrate market information to the


majority of categories?

Mickey North Rizza and Lora Cecere, Successful Supply Analytics: Five Areas

• Can resources be deployed to map

To Know, AMR Research , November 16, 2005.

enterprise wide ‘as-is’ process and systems?



Rip Greenfield, Spend Analysis: The First


Step in Strategic Sourcing, 90th Annual International


4. White Papers:


Spend Analysis , BIQ at http://www.

Institute for Supply Management, 2005.


A Practical Take on, Spend Analysis - you can’t live without it, Best Practices in

busiq. com/WhitePapers.html. 5.

Sunil Chopra and Peter Meindl, Supply

Corporate Procurement, Vol. 1, Issue 1,

Chain Management: Strategy, Planning

Jan 2007. Available on

and Operation, Prentice Hall, US, 2000.



Author profile RAJIB SAHA Rajib Saha is a Senior Consultant with manufacturing and supply chain practice in the Domain Competency Group. He can be contacted at

For information on obtaining additional copies, reprinting or translating articles, and all other correspondence, please contact: Telephone : 91-20-39167531 Email:

Š SETLabs 2007, Infosys Technologies Limited. Infosys acknowledges the proprietary rights of the trademarks and product names of the other companies mentioned in this issue of SETLabs Briefings. The information provided in this document is intended for the sole use of the recipient and for educational purposes only. Infosys makes no express or implied warranties relating to the information contained in this document or to any derived results obtained by the recipient from the use of the information in the document. Infosys further does not guarantee the sequence, timeliness, accuracy or completeness of the information and will not be liable in any way to the recipient for any delays, inaccuracies, errors in, or omissions of, any of the information or in the transmission thereof, or for any damages arising there from. Opinions and forecasts constitute our judgment at the time of release and are subject to change without notice. This document does not contain information provided to us in confidence by our clients.

Infosys - Managing Costs by Leveraging Procurement Information Intelligently  

Chief procurement officers today face great challeneges to comprehend on how their organization spend in buying diverse catgories of materia...

Read more
Read more
Similar to
Popular now
Just for you