Spend Analysis a Top Priority, But Not Widely Adopted...Yet

Companies may not be running with open arms into spend analysis solutions, but there are definite benefits to be had for those that do.

Gaining enterprise-wide visibility into their companies' spend is a top priority for a cross-section of supply and demand chain practitioners. And while only a minority of companies currently are using spend analysis consistently to set a baseline for sourcing activities, interest in spend analysis is increasing and appears set to fuel a boom in the use of analytical tools, according to the results of a recent survey by Capital Consulting & Management Inc. (CCMI), a supply chain management consultancy based in Alexandria, Va.

The survey, conducted in conjunction with Supply & Demand Chain Executive magazine, included responses from more than 400 purchasing managers and corporate executives who completed an online questionnaire in November and December 2003.

Respondents represented a cross-section of industries, including high-tech manufacturing, consumer products, automotive and government. The average revenue of responding companies was approximately $2 billion, with about a third of respondents from Fortune 500 companies. A significant number of companies under $100 million and from $100 million to $500 million were also included.

In its report on the survey, CCMI notes that gaining "visibility into spending across multiple locations or divisions to help leverage spending and source more strategically" ranked as the most frequently cited single action to help respondents' companies improve their sourcing performance, with 25 percent of respondents holding this view.
A further 24 percent cited increased use of cross-functional teams, while respondents named supplier performance monitoring and deploying better tools for contract compliance less frequently as top priorities (19 percent and 17 percent, respectively).

The availability of online tools for requests for proposals (RFPs) and auctions ranked lowest, at 7 percent, which CCMI suggests could reflect the broad adoption of these tools or perhaps the need to have spend visibility and other capabilities in place before pursuing online RFPs and auctions.

But perhaps the survey's most surprising result was the number of companies not practicing spend analysis consistently. About half of the respondents said their companies use spend analysis "sometimes," usually when data are already easily available or when the spending magnitude is large, while 14 percent use spend data infrequently or not at all.

"The penetration of spend analysis is still pretty limited in Corporate America today," says Scott Elliff, president of CCMI, who points out that just one-third (32 percent) of respondents in the survey reported that their companies use spend analysis all the time to help set a baseline for sourcing activities, and only 20 percent said they are currently using spend analysis software. "That's surprising," Elliff says, "because spend analysis solutions have been around for several years now, but the uptake seems to have been constrained in some way or another."

The survey results suggest several possible reasons for the sluggish adoption of spend analysis, including cultural issues. For example, a majority of respondents (54 percent) cited the absence of a strategic sourcing process and mindset within their organizations as a key limitation to improving their procurement processes, while 32 percent pointed to a lack of organizational know-how as a limiting factor.

Technical hurdles also appear to play a role. A total of 41 percent of the respondents ranked their inability to get data from disparate systems as the greatest challenge to effectively gathering the raw information necessary for spend analysis, and 31 percent said that they lacked the analytical tools necessary to identify savings opportunities.

In fact, 74 percent of respondents said they are still using desktop software, such as spreadsheets and databases, moderately or extensively for spend analysis, while 47 percent said they rely on their information technology (IT) organizations to generate specialized reports out of enterprise resource planning (ERP) or other systems.

These approaches to gathering and analyzing spend data can be a significant stumbling block when attempting to do spend analysis enterprise-wide, according to Nathanael Lentz, president and CEO at Verticalnet, a provider of spend analysis and supply management solutions, who was asked to comment on the survey results for this article. "A buyer who wants to analyze his or her own purchases may not have trouble loading that information into a spreadsheet," Lentz says. "But when you start looking at a corporate sourcing organization trying to understand activities across hundreds of buyers, across multiple divisions that use different systems, using a spreadsheet or an Access database really blows up on you."

It's not surprising, then, that 56 percent of the respondents said that their companies' use of spend analysis is limited either to individual locations or to a single division, while just 44 percent reported being able to use spend analysis on a cross-divisional basis.

Time was a constraining factor for nearly a third of the respondents to the CCMI survey: 30 percent said they simply lack the time to devote to spend analysis because they had to devote their hours to processing purchase orders and other day-to-day activities. In this regard, Elliff says: "People have not had the time to get out of their In Box to do higher value-added activities. That has been purchasing's Achilles' heel for a long, long time.

"But on the other hand," Elliff continues, "that means that spend analysis and e-procurement tools really do have a significant role to play if they can eliminate that In Box clog and help people add more value in the procurement area." And the results of the survey point to a growing recognition of the need to bring new tools to bear on the spend analysis challenge. Fully two-thirds of respondents said their companies are actively pursuing initiatives to increase their use of spend analysis tools and their overall spend analysis capabilities. Moreover, nearly half of those companies that are pursuing initiatives are already in the process of implementing new tools or methods (46 percent), while the balance are evaluating alternative solutions (31 percent) or are planning and budgeting for an initiative in the coming year (23 percent).

As a result of all these current and planned activities, nearly 90 percent of companies expect to be able to apply spend analysis on an enterprise-wide basis within the next three years, according to the survey. Elliff believes that these figures point to a coming boom in the use of spend data — and spend analysis tools — as companies look to improve their sourcing processes. "I do think we're looking forward to a dramatic uptake versus where we are today," he says.

Barriers to greater adoption of effective spend analysis clearly remain, however. For example, fully two-thirds (66 percent) of respondents cited better utilization of existing ERP systems and internal data warehouses as a key priority in their spend analysis initiatives. Verticalnet's Lentz sees this reliance on ERP systems as a key barrier, since the time and effort necessary to pull data out of back-end systems makes it difficult to turn spend analysis into the kind of repeatable process that can help a company ensure compliance and drive significant savings across the enterprise.

About one-quarter (27 percent) of respondents said that licensing a dedicated spend analysis software tool would be essential for their efforts to address gaps or limitations of ERP systems, while — perhaps surprising, given the limitations noted above — 18 percent said that they would be looking to increased use of desktop spreadsheets and databases.

Many companies are looking outside their organizations for assistance, with respondents saying that consultants play an important role either as partners in collecting data and developing strategies (22 percent) or for specialized tasks in support of internal efforts (39 percent). In a handful of cases (2 percent), companies have largely outsourced spend analysis to external consultants.

Reflecting on the overall significance of the survey findings, Elliff suggests that respondents' answers highlight the degree to which software is a necessary, but not sufficient, component of any initiative to better leverage spend data. "Spend analysis solutions provide a lot of value; they have the ability to analyze a great deal of data faster and more comprehensively than individuals can," Elliff says. "But, ultimately, people have to understand the data, they have to know what to do with the information, and how to turn it into strategies and tactics that actually will have a direct impact."

For his part, Lentz says he does not find it surprising that a majority of companies are not yet doing spend analysis on a consistent basis. "We are in a nascent phase here," he says. "Category managers have a decent sense of what they're spending, and they're running their own spreadsheets or tools. But at a macro level, across multiple divisions, across an enterprise, corporations are very early here."

That said, Lentz argues that companies that embrace spend analysis now could gain a leg up on their laggard competitors. "The leaders are really looking to do this on an enterprise-wide level," he says, concluding, "There's a cost to inaction, and the savings that you're not getting today are gone forever."

More information on the survey can be found at the Capital Consulting & Management Inc. Web site, at www.ccmiservices.com.

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