SpendHQ: Building an ROI Framework for Spend Analytics

EXECUTIVE INSIGHT SERIES:

An ROI Framework for Spend Analytics

Executive Insight Series: An ROI Framework for Spend Analytics

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About the Author

When the Obvious Answer is Not Enough Trust us, we get it. It can be difficult to justify the ROI of spend analytics. As with most business cases you present to your CEO, CFO, or internal business stakeholders, the first questions asked are: “How much savings will this drive?”

“When will this hit my bottom line?”

Tom Beaty is the founder and CEO of SpendHQ partner Insight Sourcing Group.

Insight Sourcing Group is one of the largest pure-play boutique consulting firms in North America focused exclusively on Strategic Sourcing and procurement-related services.

Tom is also the founder of the Witness to War Foundation (www.witnesstowar.org), a non-profit dedicated to preserving the oral histories of combat veterans.

Executive Insight Series: An ROI Framework for Spend Analytics

Therein lies the problem. Trying to measure the ROI of analytics upfront is a circular challenge. Demonstrating the potential value of a solution without performing a detailed spend analysis is incredibly difficult. Once performed, you can identify a multitude of specific strategies for driving measurable savings that will clearly prove the value of spend analytics.

Consider this analogy: Investing in spend visibility is like investing in a car. Unless you drive for Uber, a car does not deliver an ROI in and of itself. But you need it to get to work. In the same way, spend analytics is imperative for the identification of the opportunities needed to drive results and to ensure the capture and sustainability of savings already achieved.

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Building the Case for Better Spend Visibility

The strongest argument for spend analytics is that you simply cannot save what you cannot see. No sourcing and procurement organization can make a claim to be world class, or even close, if it does not fully understand its organization’s non-payroll spend. For example, many of the most progressive private equity firms have required their portfolio companies to acquire a spend analytics solution.

This serves two purposes: 1) the private equity firm can consolidate the spend analytics data across companies to identify opportunities to gain leverage across the common spend among their portfolio companies 2) the private equity firm knows that the portfolio companies’ procurement teams have the basic tools they need to not only achieve savings targets but also to ensure the savings is actually delivered to the bottom line.

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This concept of “starting with spend analytics” is a proven best practice and is not in debate among the most sophisticated procurement leaders.

Unfortunately, however, not all CEOs, CFOs, and other executives understand what is fairly intuitive to experienced sourcing professionals.

The argument that spend analytics and visibility are simply core “table stakes” for any procurement organization can sometimes ring hollow to those who have not lived in the data desert that is common in procurement. The argument is further complicated by marketing promises made by procure-to-pay (P2P) software vendors, and bought into by some procurement professionals, that a P2P system will automatically yield spend visibility. As a 20-year sourcing consultant, I have yet to go into more than a handful of the 1,000-plus companies I have met who are able to produce sourcing-ready data from their P2P system. Therefore, a more robust argument is needed when trying to justify an investment in spend analytics.

Executive Insight Series: An ROI Framework for Spend Analytics

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Five Main Areas of Focus When Defining Spend Analytics ROI In our experience, we find companies are successful in building a strong case for spend analytics investments when focusing on these five main areas.

1. Sourcing Opportunity Identification & Sourcing Strategy Development Pairing spend visibility with a strategic sourcing campaign is the easiest way to justify the investment.

In any organization—particularly one where the procurement function is less mature—one of the first things asked of a procurement leader is to define the company’s annual savings goal. This task is risky, if not impossible, without adequate visibility into good spend data that is organized into sourcing categories that mirror how the supply base is structured.

Poor data creates multiple challenges for sourcing strategy development. Spend volumes can be significantly overestimated or underestimated which either leads professionals to make commitments to vendors they cannot keep or dilutes their potential leverage. Poor data often causes companies to miss entire suppliers in key categories that are perhaps in different data sets, such as expense management data.

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In many cases, spend analytics reveals entire categories of spend that have previously been unmanaged and, in some cases, unrecognized as sourcing categories. This is either because they have quietly grown over the years or are managed by local offices and no one understands the magnitude of the consolidated spend. And, of course, “tail spend” is often a complete mystery.

The lack of clear and confident spend data can be embarrassing. A professional may project savings from numbers that already reluctant stakeholders attack as inaccurate (even when they are correct). In other cases, professionals must go to their vendors, hat in hand, to ask, “What do we spend with you? And by the way, do you have a copy of our contract?” For those new to procurement, this is not the best-practice way to establish leverage with a vendor.

Therefore, the ideal way to justify a spend analytics investment is to bundle the cost with savings delivered from strategic sourcing projects that immediately follow the solution implementation.

PICTURE THIS Assume a company has $1 billion in spend.

A modest, low impact six-month sourcing campaign that only targets politically “safe” categories could easily yield $10 million in savings if not many times more. A spend visibility solution might be $45,000 to $75,000 dollars.

If the sourcing costs, whether with internal resources or a third-party consulting firm, were anywhere from $300,000 to $3 million dollars, the ROI on a one-year basis is robust at a minimum 3:1 and likely far, far better. On a threeyear basis (given the typical duration of vendor contracts), the ROI may be between 9:1 and ridiculous. The added cost of the spend visibility solution, even on a multi-year basis, is almost a rounding error. And keep in mind, $10 million in savings on $1 billion (1%) is a layup in all but the most mature sourcing environments.

Spend analytics, if done well, will directly lead to the development of a savings “road map” consisting of a wave or waves of sourcing targets. Due to the reasonable cost of most spend analytics solutions compared to the potential addressable spend, sourcing professionals should be able to demonstrate a massive ROI multiple.

Executive Insight Series: An ROI Framework for Spend Analytics

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2. Compliance & Savings Sustainability Compliance is a very sensitive area for procurement leaders, as you often find yourself justifying your very existence through savings. The reality is that unless you are regularly monitoring your preferred vendor relationships to ensure they uphold their contractual commitments (“vendor compliance”), and to ensure your company is using the correct vendors (“internal compliance”), there is a great risk of “savings leakage.”

Therefore, the business case for spend analytics in this case is one of “savings sustainability.” The argument goes something like this:

Based on an analysis of our

$4 trillion in spend data, the average internal compliance rate for indirect spend can be

as low as

This is sobering news and some procurement professionals would almost prefer not to hear it.

However, we are convinced that this inability to “show savings on the P&L” is one of the major factors in a procurement organization’s loss of influence within their company and may heavily contribute to the high turnover rate of CPOs in some environments.

40-60%

,

meaning roughly half of the projected savings is being lost. In addition, we have found that following a sourcing event, suppliers regularly fail to fully implement and sustain promised pricing improvements.

“Without spend visibility, we run the risk of losing the savings we achieved through strategic sourcing either due to bad behavior by our vendors or through noncompliance by our own people. This could cost us anywhere from 10-30% of the savings we worked so hard to achieve.” * * Note that 10-30% is conservative.

If not corrected, this lack of vendor compliance can erode

10-15%

of savings on average.

Executive Insight Series: An ROI Framework for Spend Analytics

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In the case of the example above, this could be $1 to $3 million in lost savings, and possibly a lot more. In our experience, CFOs in particular do not have a hard time believing that vendors are out to get them and that their own people will break the rules if given a chance. “Compliance” can be defined in many ways— but these types of compliance are becoming more important in internal audits and even ISO certification. Even if you assumed that your organization is world class, a mere 5% recovery would be $500,000 in this example which more than justifies a spend analytics investment.

3. Comparative Analytics Comparative analytics is a much more advanced way of viewing your spend data. This often leads to an “AHA!” moment because, if done well, it will drive insights.

Imagine a retailer that has over 2,000 locations that vary in size, revenue, and product offerings. After implementing a robust spend visibility solution, it is fairly easy to normalize the 2,000 locations by square footage, revenue, or other variables and quickly compare the spend across locations. Outliers tend to pop off the page. For example, on a normalized basis, a retailer or other multi-location entity can see that some locations spend double the average in store supplies–indicating waste, theft, or something else that should be explored. Many categories can be analyzed in this way.

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This data tends to be powerful and senior executives usually find it highly compelling and actionable. The value goes well beyond procurement, as it also indicates the quality of management of the location. These operational insights often position procurement in a positive way and help earn procurement leaders a “seat at the table.”

In order to leverage this for a spend visibility business case, procurement executives can create examples of this type of analysis manually by analyzing a sample category where data includes location data. Simply normalize the data, and then create a graph showing locations on the X-axis and normalized spend (by square foot for example) on the Y-axis. Outliers will be very clear. In order to convert this to ROI, in a very conservative manner, take the average across all locations and assume that you can take all locations with spend above the average, and cut their overage spend by 50%. This will sum up to a total. If you chose a robust category and used the correct normalization variable, you will likely have a meaningful number to add to the business case. You can then conservatively extrapolate these figures to other categories where this analysis is likely to be fruitful.

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4. Demand Management In most cases, strategic sourcing can achieve 5-30% savings. Demand management, however, can achieve 100% savings for any spend that is eliminated. Assume you have developed a world-class contract through your equally world-class sourcing event. Now assume that your organization and the vendor have embraced it, and you have 100% vendor and internal compliance.

You can still optimize the deal further through demand management.

Whereas sourcing primarily focuses on price and terms, demand management focuses on quantity and assortment. Oddly, when a great deal is put in place, the usage of the deal sometimes goes up, meaning people buy more items or services due to the lower price. Even in cases where demand does not go up, a close analysis of any complex category virtually always reveals an opportunity to “take a second bite of the savings apple” through demand optimization.

Executive Insight Series: An ROI Framework for Spend Analytics

Demand drivers vary by category but often involve product substitution such as in MRO supplies where a lower-cost product with equal performance characteristics replaces a higher-cost item. Or it can relate to consumption reduction. For example, leveraging the comparative analytics outlined above, you may discover that some locations use far more energy than others. Simply sharing this data in a public manner can cause offending locations to be better stewards and use less energy through simple changes such as turning of compressors and lights at night, changing temperatures, replacing outdated equipment, and other adjustments.

In other cases, good demand data can lead to “make or buy” analysis. For example, you may discover that some locations are using temporary labor excessively and, in some cases, have kept the same temps for many months or even longer. These positions can often be converted to full-time for a significant savings. It is very common for categories like temporary labor to get out of control quickly. These are fairly simple examples, but good data can influence demand in more complex categories.

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IN ACTION This concept tends to translate well for senior executives. In order to leverage for a business case, you can manually perform an analysis on an example category such as temporary labor.

Analyze the data and identify the opportunities to reduce demand, convert temporary workers to permanent, or better manage things like overtime charges. Picking the right categories could create a material savings opportunity and add additional value into your business case. From there it is easy, once again, to conservatively extrapolate these savings to the rest of your spend. In our experience, demand management opportunities vary by category, but you can either apply 1-3% across your entire indirect spend or 3-6% to the best candidate categories.

Leveraging SpendHQ, we noticed that our client’s small-parcel shipping spend had increased faster than the overall business’s growth rate. Working closely with the procurement team, we performed a demand management analysis.

We discovered about 18% of the packages were shipped as “early AM shipments,” which means they were to be delivered by or before 8 AM. This translated to about 30% of their total spend as early shipping is a premium service. When we drilled in more deeply, we discovered that these priority shipments were primarily going to other company-owned locations. These shipments contained internal documents such as payroll checks, healthcare data, and so forth.

The problem we discovered was that the company’s offices did not open until 8:30 AM or later, which caused these FedEx drivers to have to come back on their second delivery route which was typically at 10 AM—the normal time for a standard shipment. In order the resolve the issue, we recommended that early AM service usage require approval.

This led to a 90% reduction in usage and a savings of over $300,000 per year. This opportunity was revealed through higher-level spend analytics and created an ROI on the investment all by itself.

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5. Stakeholder Engagement & Procurement Impact Expansion “In the past, when our CFO asked a question about our spend, I would have to get an analyst to run some reports using our BI tool. The analyst often then had to then massage the data and this usually took days or even a week.

When I finally presented the data, I was often questioned about it and candidly, I was not even sure it was right. Now, I can answer most questions immediately and this has materially changed my relationship with our CFO.” — CHIEF PROCUREMENT OFFICER, GLOBAL TECHNOLOGY COMPANY SPENDHQ CLIENT

Most procurement departments only impact a portion of their company’s spend. Often areas such as IT, Marketing, and other categories are managed by functional stakeholders instead of strategic sourcing professionals.

A procurement department that seeks to expand its influence will find that engaging with stakeholders requires bringing something to the table other than your credentials. We have found that offering data and insights as an investment in the relationship with your CIO, CMO, SVP of HR, or other executive is a great start.

These department heads often suffer from the same data challenges procurement professionals do. Solving that problem can help achieve more widely distributed value from the usage of a spend analytics solution which can lead to much easier approval of a business case.

As a related benefit, one tremendous value of a spend analytics solution, especially one that is easy to use with highly accurate data, is the ability to quickly answer questions from executives and stakeholders. The lack of a solution, or in some cases, a hard-to-use solution, causes big delays in responding to these often simple questions. This undermines procurement’s credibility. On the other hand, being able to confidently respond while on the phone with the executive dramatically enhances a procurement professional’s status and possibly opens the door to broader engagement either across more spend or in a more strategic way.

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Building Value with SpendHQ No procurement organization can make a claim for world class if they do not have quality spend data available at a moment’s notice. Spend analytics, and the resulting spend visibility, are base-level requirements for any procurement organization. Unfortunately, this argument is often not enough to gain approval from non-procurement executives.

The good news is that the potential benefits are typically so large, even a highly conservative business case can yield “no brainer” returns on investment.

SpendHQ is here to help you make the case and prove the value of a spend visibility solution. Please contact our team, and we will provide you with a sample business case and template for determining a return. We can also help you perform some of the targeted analyses outlined in this paper or help you go well beyond these straightforward examples.

There are many spend analytics solutions available in the market. However, SpendHQ is the only one built by sourcing professionals for sourcing professionals. As a result, many of the ROI drivers highlighted here, and more, are readily available the first day you use our solution.

This is not to help you build a business case alone—but because it is what world class looks like when embedded into a solution.

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TRANSFORM

VISUALIZE

ACT

SpendHQ takes your data in whatever form it’s in through our AI-driven cleansing process and categorizes your procurement data to a custom sourcinglevel category structure.

Our intuitive market-leading SaaS-based spend visibility interface with best-in-class KPI and custom report capabilities, providing users with the insights they need to make more meaningful decisions with their data.

More than a spend analysis solution, SpendHQ is transforming organizations by identifying savings opportunities and monitoring compliant spend.

Schedule a demo today to see how SpendHQ can deliver the visibility you need into your spend data.

Executive Insight Series: An ROI Framework for Spend Analytics

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