Executive Memo: Ten Years After

Spend management comes of age

Ron Nussle, Jr., wrote the book on integrated cost reduction. (Actually, he co-wrote a book called Integrated Cost Reduction, but no matter.) However, his real specialty is supply chain transformation, having been a part of three major supply chain makeovers in his career. In a conversation for the Lean Supply Chain article in this issue (starting on page 23), Nussle spoke at length of the success factors for any transformation, and top of the list was being able to speak the language of the people that sign the checks. Converting "defect parts per million" quality metrics into a financial metric like "cost of poor quality," Nussle said, will get the chief financial officer's attention. "Customer satisfaction" will catch the CEO's attention in a way that "on-time delivery" might not. "Material price variance" might not catch the chief operating officer's eye in the same way that "gross margin" will.

Bob Calderoni seems to have had this success factor in mind when he took over as CEO of Ariba in 2001, a time when the solution provider was focused rather narrowly on e-procurement applications and was still struggling to help its natural ally in the enterprise — chief procurement officers — sell the idea of procurement automation to the chief executive and financial officers who would have to sign off on the significant investment that an Ariba implementation required. Himself a former CFO, Calderoni said, in an interview shortly after his appointment, that both CPOs and chief financial officers lacked the tools to truly manage and control their spend, and he offered what Ariba was then newly calling its "spend management" software as the solution to this challenge. His message: To be leaders in generating shareholder value, companies must attack the largest chunk of their spend across the entire enterprise and encompass as many categories of spend as possible.

The message seems to have gotten through to its intended C-suite audience. Nearly five years after taking the reins at Ariba, Calderoni remains in the chairman and CEO posts at the solution provider, spend management remains Ariba's primary focus, and some 530 companies have signed up to use Ariba's solutions. Now celebrating its tenth birthday, Ariba has spent the half-decade since Calderoni's ascension expanding its product lineup through organic growth and acquisition to encompass a much broader toolkit for attacking an enterprise's total spend than the company's original e-procurement application, and Ariba now claims that its solutions are on 4 million desktops worldwide.

The company also has spent those years working with other solution providers in its space to shred misconceptions that once hung over e-procurement and spend management. Kevin Costello, Ariba's chief commercial officer, says that the biggest false impression was simply that e-procurement could not work. "Skeptics 10 years ago were saying that procurement was not a function that could be automated," Costello says. Today it's almost a given that spend visibility and analysis applications, spend compliance and contract management tools, online catalogs and electronic approval workflow solutions are all "must haves" for a well run procurement function.

Perhaps more importantly, by helping raise the visibility of procurement within the C-level suite, Ariba and its fellow spend management solution providers also have helped propel the procurement function along its trajectory to becoming a more strategic force in the enterprise. "In the past 10 years, procurement has really gone from the backroom to the boardroom," Costello says. "If you walk into any forward-thinking organization today, procurement clearly is a strategic function. They are involved heavily in the strategic planning of the organization. They're delivering results to the bottom line of the company that are measured not just in changes in budgetary line items, but in changes in earning per share."

And those, of course, are numbers that a CEO and a CFO can understand. How has procurement and spend management evolved at your company over the past 10 years? I would welcome your insights and anecdotes, and you can write me at [email protected]. I'll look forward to hearing from you.

Andrew K. Reese Editor, Supply & Demand Chain Executive