Ten Critical Success Factors for Spend Analysis Software Implementations by SGadage

Procurement Executive Insight Management Issue February 18, 2016

Ten Critical Success Factors for Spend Analysis Software Implementations By Patrick Connaughton and Kurt Albertson

Executive Summary Spend analysis provides the necessary foundation for procurement organizations to make better, more informed sourcing decisions. Savings are typically achieved by identifying opportunities to aggregate spend and negotiate superior contracts; reducing maverick spend; and improving procurement operations and supplier performance. However, despite the maturity of spend analysis processes at many organizations, success is not predetermined due to the presence of rigid legacy systems, unrealistic project expectations and poor resource planning. To ensure the success of new initiatives or extend the value of existing programs, procurement organizations have to better understand the project risks and dedicate the right level of resources (time, staff, external help).

The Potential Value of Spend Analysis Is Often Stifled by Time-Consuming, Manual Processes One of the biggest advantages of using spend analysis software is the ability to automate the cleansing, enriching and categorizing of spend details. However, only 19% of companies studied by The Hackett Group have a highly automated spend analysis process today (Fig. 1). The remaining 81% rely on partially automated or completely manual processes to complete the analysis. FIG. 1 Use of technology in the spend analysis process Reports generated out of the existing ERP system

10%

Primarily manual

Highly automated

19%

33%

At 81% of companies, the process is entirely manual or only partly automated

38%

Partially automated

Source: Spend Analysis Poll, The Hackett Group, 2015

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Types of spend analysis data The sources of data to be used in spend analysis should be well understood because each has advantages as well as limitations. • Invoices/AP records: A source of virtually every dollar spent by the organization with external vendors, but it often has insufficient or incorrect categorization for spend analysis purposes. The data includes the name of the payee, but not always the vendor that provided the goods or services. • Purchase order data: Better spend categorization than AP data. Contains additional information like requisitioner or commodity. However, not every transaction has a PO associated with it. Point-of-entry mistakes limit the usefulness of spend categorization. • Travel and expense data: This includes pass-through cost for travel vendors not visible in AP data. Utilization rates of corporate T&E programs affect data completeness. • Purchasing-card data: Passthrough cost for vendors not visible in AP data. Limited amount of external spend is purchased with p-cards.

Given the high percentage of manually conducted analysis, it is not surprising that the actual benefits of spend analysis software projects often fall short of expectations (Fig. 2).

FIG. 2 Expected vs. actual benefits of using spend analysis software Expected

Achieved

Reduced amount of time required to complete spend analysis by:

49.1%

33.3%

Increased percentage of total spend being analyzed and reported on by:

48.8%

33.7%

Increased accuracy of spend reporting by:

55.4%

38.3%

Identified and reduced non-compliant spend by:

46.2%

18.2%

Identified cost-savings opportunities leading to additional strategic sourcing savings of (on average):

37.2%

15.2%

Identified opportunities and able to consolidate the supply base by:

28.8%

8.0%

Source: Spend Analysis Poll, The Hackett Group, 2015

It is important that companies wait to embark on spend analysis until they know what they are going to do with the data, who is to be involved in the project, who will use or benefit from the data, and how to measure and communicate success. Therefore, before doing anything else, the implementation team should interview key stakeholders to understand the types and frequency of data needed to help identify savings opportunities. If the responses are vague or uncertain, it is a good idea to run targeted education sessions that explain the capabilities of a spend analysis software solution. That way, the team can pinpoint the categories to be covered and the final output expected. This prevents teams from getting bogged down in the minutiae of designing spend taxonomies and lose sight of the goal: data-driven insights to use in discovering new savings opportunities. The more that stakeholders are involved in the design of the output and are educated about what to expect from the software, the higher the odds of satisfaction.

Critical Success Factors Once the initial steps described above are complete, these 10 critical success factors will help companies ensure data quality, staff the project team, and adopt best practices that increase the likelihood of extracting the full benefits of spend analysis software. 1. Project timing The data extract design-and-build phase can be the most tedious and time-consuming part of the project, especially when source systems are archaic or lack documented interfaces. When planning the level of effort required, build in extra time to account for quality and performance issues. Also, assign a criticality level to each interface. This way, if scope cuts are required, the team knows which work to prioritize. The duration of a spend analysis project largely depends on the volume and quality of data, the tool being used, and the skills of the project team. Hackett Group research shows that it takes an average of 62 working hours to conduct the analysis and 4.5 weeks from start to finish (total cycle time). Most companies prefer to refresh the analysis every three months. Others refresh the data only as needed.

Procurement Executive Insight I The Hackett Group I 2

2. Data refinement Catching and fixing data inconsistencies like wrongly categorized commodities or inaccurate cost totals is well worth the extensive investment of time required in the early stages of the project. Doing so keeps project credibility high and adoption on track. One option is to give a small project team sole responsibility for initially reviewing classifications before the larger group is given access to them. Choosing the right level of granularity for the analysis is key. Most companies conduct analysis at the sub-category level versus the master family level (Fig. 3). This has proven to be the right approach, as our research showed that performing analysis at the subcategory level drives a sevenfold reduction in maverick spend and 54% greater savings. FIG. 3 Level of granularity at which the majority of spend is classified for analysis 10%

Type (e.g., direct, indirect)

Master family (e.g., professional services)

Family (e.g., sales and marketing)

Category group (e.g., event marketing)

10%

48%

Sub-category (e.g., exhibit construction)

More granular than sub-category (e.g., item)

24%

Source: Spend Analysis Poll, The Hackett Group, 2015

It is also advisable to avoid being overly reliant on industry standard taxonomies. Classification taxonomies like the United Nations Standard Products and Services Code (UNSPSC) are helpful to support the data enrichment process but should not be mandated. In fact, many companies develop their own custom taxonomy, using an industry standard as a starting point (Fig. 4). This has proven to be a more effective approach because stakeholders are able to view the data in a format they recognize and understand versus an industryestablished standard. FIG. 4 Source of taxonomy used Internally developed taxonomy

75%

Universal Standard Products and Services Classification (UNSPSC)

40%

Standard Industrial Classification (SIC)

25%

NAICS

10%

Other

10%

Source: Spend Analysis Poll, The Hackett Group, 2015

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3. Project governance Treating spend analysis as just another ad hoc reporting exercise, without formal rules and checkpoints ensured by the presence of a steering committee, is a recipe for disaster. However, even though the project should be managed formally, a large group is not required for conducting the analysis: 43% of study respondents are able to conduct spend analysis using just two full-time resources, and 19% can do so with only a single full-time resource (Fig. 5). FIG. 5 FTEs required to complete spend analysis Percentage of companies 43%

19% 10%

10% 5%

8% 5%

Source: Spend Analysis Poll, The Hackett Group, February 2015

Change control is an essential part of project governance, in that scope changes and concerns about data integrity can quickly derail an implementation. To build confidence in the solution, change control for rule sets has to be rigorous. Change requests should be managed within the software if possible, as opposed to an Excel file or other system. This will not only help maintain traceability but also ensure ongoing accuracy. 4. Training Holding an all-day training session with the entire end-user community in the hope of covering all of the tool’s functionality is not a good approach. Instead, train super users who in turn will train people on the system in their respective departments. This “train the trainer” approach has the added benefit of decentralizing many routine administrative tasks like setting up new users and will serve as a first line of defense for troubleshooting. 5. Value assurance workshops For the first six months after go-live, users of the tool will be in a “discovery phase.” Hands-on experience during this period is more valuable than training sessions. Companies should bring super users together soon after the rollout to share how they are using the tools, discuss best practices, and question the vendor about common problems and additional features planned. 6. Organizational change The early results of spend analysis projects may unexpectedly reveal that the way companies are organizationally aligned makes it difficult to manage spend effectively. It is important to remain open to the possibility that the management of specific categories will need to be centralized (or decentralized). Otherwise, the time and money spent on the implementation may be wasted due to inability to execute.

Procurement Executive Insight I The Hackett Group I 4

7. Finance sign-off process For quality assurance, someone from finance should be allocated part-time throughout the project to validate that the totals in the spend analysis tool accurately tie back to the company’s accounting systems. This step will go a long way toward building credibility, and in turn, adoption of the tool. 8. Perfection vs. practicality At a certain point in the project, the teams have to step back and agree that the data is as complete and accurate as it can be without significant additional effort. For some companies, this may be 85% of the spend classified accurately from the top 20% of the data sources. For others, it might be 99%. The point is to have agreement from key stakeholders on what is “good enough.” 9. Empowering business users Refining the rule sets used to classify spend and modifying the reports should not be an IT responsibility. Business users should be able to enter rule changes – validated by the system – and run their own reports and analysis. Companies should ensure that the software they choose lets business users directly and quickly update rules on data classification. 10. Setting goals Measures of success should be reasonable and conservative. Rather than “Identify opportunities” or “Make strategic sourcing more efficient,” KPIs should be quantifiable, as in “Reduce the amount of time required to analyze a category by 80%” or “Bring 85% of all spend under management.” Stakeholders should be asked to approve each metric before including the results in a status report or scorecard.

Conclusion and Recommendations The highest level of automation possible should be the goal of companies embarking on a spend analysis project. That is only possible if the software is set up and implemented correctly. The tips in the previous section will help ensure a positive, sustainable initial outcome. Success will breed higher adoption and trust in the system. And as trust grows, stakeholders will become comfortable allowing more of the process to be automated. The investment is worth the time and effort. Companies with highly automated spend analysis solutions (versus partially automated) experience (Fig. 6): • 258% greater improvements in the time it takes to complete analysis. • 155% increase in the percentage of spend being analyzed. • 109% better spend reporting accuracy.

FIG. 6 Benefits achieved from spend analysis automation 69%

68% 51% 33% 19%

258%

Percentage reduction in time required to complete analysis

20%

109%

155%

Percentage increase in total spend being analyzed

Percentage increase in spend reporting accuracy

PARTIALLY AUTOMATED

HIGHLY AUTOMATED

Source: Spend Analysis Poll, The Hackett Group, February 2015

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Celebrating successes will help sell the solution to remaining skeptics. Schedule time with the harshest critics of the project to compare the old and new process of classifying spend and running reports. Emphasize improvements, such as the thousands of rules that are now automatically applied and the ease of maintaining them. Talk about the limited incremental effort required to refresh the analysis and how the solution is designed to be repeatable versus the previous project–based, non-repeatable process. The idea of marketing successes is a foreign concept to many in procurement, but it is essential to demonstrate value and sustain credibility with business users over the long term.

The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies. Services include business transformation, enterprise performance management, working capital management, and global business services. The Hackett Group also provides dedicated expertise in business

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About the Advisors

The Hackett Group has completed more than 11,000 benchmarking studies with major

Patrick Connaughton

corporations and government agencies,

Senior Research Director

including 93% of the Dow Jones Industrials,

Mr. Connaughton leads the development of The Hackett Group’s intellectual property in the areas of strategic sourcing and procurement. He has over 15 years of experience in supply chain and procurement research and advisory roles. He has published groundbreaking research in areas like spend analysis, contract life cycle management, supplier risk assessments and services procurement. Prior to joining Hackett, he was principal analyst at Forrester Research, where he focused primarily on helping executives mitigate risk through more effective supplier relationship management. Previously, Mr. Connaughton was a consulting manager at Manhattan Associates and Accenture.

86% of the Fortune 100, 87% of the DAX 30 and 51% of the FTSE 100. These studies drive its Best Practice Intelligence Center™, which includes the firm’s benchmarking metrics, best practices repository, and best practice configuration guides and process flows. It is this intellectual capital that enables The Hackett Group’s clients and partners to achieve world-class performance.

Kurt Albertson Principal – Procurement

In his current role, Mr. Albertson advises leaders of Global 1000 organizations on procurement and purchase-to-pay strategy, process, technology and organizational issues, conducts research to promote thought leadership, and leads client events promoting world-class performances, best practices and peer-to-peer learning. He offers a blend of consulting and industry experience, having served a wide variety of clients across many industries.

Email: info@thehackettgroup.com www.thehackettgroup.com Atlanta +1 770 225 3600 London +44 20 7398 9100 Sydney +61 2 9299 8830

in association with

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GEP is a diverse, creative team of people passionate about procurement. We invest ourselves entirely in our clients’ success, creating strong collaborative relationships that deliver extraordinary value year after year. We deliver practical, effective procurement services and procurement technology that enable procurement leaders to maximize their impact on business operations, strategy and financial performance. Honored as Best Supplier at the EPIC Procurement Excellence Awards, GEP regularly wins accolades as both a provider of a broad range of procurement services and innovative procurement software. Among its recent distinctions, GEP has been named Leader and Star Performer in Everest Group's PEAK Matrix of Procurement Services Providers, Leader in NelsonHall’s NEAT Matrix of Global Procurement BPO Service Providers, Winner in the HfS Blueprint Report on Procurement Outsourcing Providers, Leader in the Kennedy / ALM Vanguard Report on Procurement Consulting, as well as one of Spend Matters 50 Companies to Know and to the Supply & Demand Chain Executive 100. Clark, NJ-based GEP has 12 offices and operations centers in Europe, Asia and the Americas. To learn more about our comprehensive range of consulting and outsourcing services, please visit www.gep.com. For more about SMART by GEP, our cloud-native sourcing and procurement software platform, please visit www.smartbygep.com Access our free knowledge resources at http://www.gep.com/knowledge-bank 100 Walnut Avenue, Clark, NJ 07066 | P 732.382.6565 | info@gep.com | www.gep.com This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. © 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000174

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