ROI, Today: Making the Near-Term Business Case for Spend Analytics
Most varieties of procurement software deliver some form of return on investment. Whether it’s an e-procurement system that consolidates process costs or a sourcing tool that optimizes supplier selection, successful vendors can always point to clear ways their solutions deliver value, both immediately and in the future.
When it comes to spend analytics, however, demonstrating ROI has proven more elusive. This is because dedicated spend analysis tools are often viewed as enablers to saving money through other methods, rather than a benefit in their own right. Yet while it is true that spend analytics deliver value by illuminating new savings opportunities, these tools can also be used to obtain tangible wins in their own right.
Not buying it? Here are three quick areas where spend analytics can create immediate ROI.
1. Error Identification
Perhaps the most obvious place spend analysis tools can deliver results fast is through improved error identification. This consists of uncovering issues like fat-fingered entries (e.g., a ludicrous extra zero on a purchase order), low-level fraud (e.g., reimbursement for expenses not related to work) and duplicate or erroneous payments (e.g., overcharges to Uber, which are currently quite common).
Without the fine-grained visibility offered by a spend analysis tool, many of these small errors can slip by unnoticed. Procurement professionals simply don’t have the time to scrutinize every receipt or purchase order that crosses their desks, but adding an extra set of eyes, either through software that continuously scans purchases or a third-party service that can help pick up the slack, can promptly address this issue.
Right when organizations turn on spend analysis, they claim immediate ROI from error reduction. Procurement can easily reclaim an erroneous expense and avoid unnecessary future payments, which can quickly justify the investment in analytics in its own right.
2. Existing Vendor Leverage
While focusing on error reduction enables procurement to tackle spend that is not currently well managed, applying spend analytics to increase existing vendor leverage allows organizations to improve performance in an area where they have already invested time and resources.
These initiatives fall into the category of projects that are simply a question of repurposing a vendor relationship that already exists. When spend analysis tools deliver a complete picture of where money is spent, procurement can then unify fragmented spend across the organization from the same vendor — for instance, unconsolidated spend disguised through different business names (e.g., Dell/EMC, a common example) or simply business units that are unaware of the collaboration potential. Where sufficient item level details is available, organizations can also address opportunities like price variance between like items from the same supplier, bringing all prices paid for those items to the lowest price.
To be sure, getting all internal stakeholders to comply to centralized deals is not suddenly accomplished through applying spend analytics. But examined critically, the compliance challenge really consists of two primary obstacles: ignorance and defiance. Of these, spend analysis tools can easily address the ignorance question by guiding non-compliant users to the right purchase, delivering immediate ROI and momentum that can be used to tackle the defiance portion.
3. CSR Risk Management
Aside from the ability to deliver savings, spend analytics can help organizations quickly address more strategic risk management efforts, as well. The ability to easily identify rogue vendors can benefit in numerous ways.
The simplest is a reduction in the total number of vendors being managed. Hackett estimates this cost at $750 per year per vendor; so a reduction in the number of rogue vendors quickly adds up.
But probably of even more business impact is business continuity during times of change: Spend analytics can immediately identify supplier vulnerabilities: a major supplier black-listed by sanctions, an overseas vendor caught out by changing trade tariffs, a manufacturer hobbled by new materials regulations. Such vendors may have been previously fine to work with, but as political or regulatory situations shift — ever more rapidly in today’s volatile business environment — procurement organizations require the ability to continuously monitor and adapt to these situations quickly.
In some cases, even an entire supplier base could be affected, such as during a natural disaster, embargo or cessation event such as Brexit. Analytics can pinpoint these geolocational risks at a push of a button.
And finally, keeping a business off the front pages of major media outlets, immediately protecting brand value is also worth mentioning. Many business examples exist today even stretching as far as precipitating bankruptcy, due to vendor base actions resulting in a massive backlash for the brand entity. Such benefits are latent: firemen never get praised for the fires that they avoided, only the ones they put out. But in these increasingly sophisticated times that we live in, there can also be a calculable ROI, because to avoid being hit with a fine for working with the wrong supplier can cost hundreds of thousands or even millions of dollars — to say nothing of the enormous potential damage to revenue that can come from bad publicity or public shaming.
Beyond the Basics
So, you’ve done the basics of spend analysis and even gotten some immediate ROI. Now what?
Forward-looking organizations are using spend analytics as the tip of the spear for numerous other lucrative initiatives, from developing should-cost models to creating better bids and supporting long-term, profitable growth.