By Guest Editor
I’m no stranger to discussing all the great things in store for the Procurement team who spends the time to develop a solid spend analysis. Pat on the back, I’d like to think I’ve done a pretty good job. However, there’s one caveat: I’m preaching to the choir.
I have no doubts that Procurement pros either see the value of a spend analysis, or can be brought to the light in short order. Where the going gets a little tougher is higher up the chain of command. Ultimately, we don’t just want Procurement to see the value in spend analysis, we want the top brass to see the value as well. Upper management usually needs the answer to a single key question before coming on board: Where’s the ROI?!
Show Me the Money!
The best way to get buy-in from upper management is to show a clear ROI. I wish I had a simple answer for doing this for a spend analysis. The Aberdeen Group attempted an answer a decade ago, and came up with some figures, noting that best-in-class enterprises saved 12.7% due to sourcing efforts based on spend analysis. These organizations also achieved a 73% rate of contract compliance. Why were they successful? Because these organizations were more likely to do three things better than their competitors:
However, was a spend analysis really the reason for greater savings or better contractual compliance? I would argue no, it is not. The Procurement teams that developed strategic sourcing initiatives, worked with stakeholders, and built stronger supplier relationships deserve all the credit.
Despite not directly contributing to an ROI, a spend analysis was still a critical component of the equation – the key phrase we need to convey is, of course, “component.”
We can evaluate the ROI of a strategic sourcing initiative – Baseline cost less new negotiated cost less the cost of moving from point A to point B. We can’t evaluate the ROI of a spend analysis, because a spend analysis is only part of this overarching process.
There are three ways we can convey this to upper management.
Position Spend Analysis as Part of a Greater Whole
Gasoline was getting expensive around the time the Aberdeen Group released their aforementioned report, at a national average of $3.45 a gallon (we’re at about $2.62 right now). If I wanted to calculate the ROI of switching to an electric vehicle, I could easily do so – Calculate the cost of a new car after selling my old one, estimate my average gallons of fuel consumed a month, and arrive at a break-even date.
What I can’t do is tell you how much ROI my new car’s steering wheel nets me.
Why is this? Just look at the name – this thing steers my vehicle. That’s a pretty critical component! Shouldn’t we be able to show an ROI on this incredibly important part? The answer is no for a logical reason – alone, the steering wheel has no ROI, nor does any other single part. Only when considered as an entire system can you assign an ROI to the electric vehicle, itself.
The strategic sourcing process follows this same logic. The spend analysis serves as a steering wheel, giving us a way to move towards specific projects that will result in savings.
Position Spend Analysis as a Tool
Quick, what’s the best way to annoy close friends who are photographers, chefs, or musicians? Look them dead in the eye and say “wow, you’re really good. You must have really nice cameras/cookware/instruments!” What makes this comment infuriating is that we are putting all the credit solely on the shoulders of the equipment these people use to make the amazing things they make; we’re writing off any skills that went into a final product. In truth, it is these unique skills that truly make the end product amazing rather than the tools.
Yet each of these people still need these tools to do their job.
The greatest Procurement pro could attack a category of spend and drive incredible savings while also improving SLAs – if he or she knows where to look. Without a proper spend analysis, this pro won’t know what suppliers are being utilized, how much money flows to which supplier, or how much overlap exists among buyers. Spend Analysis, in this case, becomes the tool that allows Procurement’s unique skillset to shine.
Position Spend Analysis as a Strategic Foundation
One response I don’t advise: “Well, boss, what’s the ROI in asking for an ROI?” This may sound tongue-in-cheek, but there’s a real value in asking this question (albeit in a more appropriate way).
Upper management asks for ROI confirmation because it is a strong gatekeeper. Simple math dictates that an organization will go belly up sooner or later if it takes on too many projects that don’t yield returns. Looking at a project’s expected and achieved ROI helps ensure the long-term success of the organization.
Spend analysis works the same way – We want the low hanging fruit, the fast initiatives that yield the greatest savings. We want to focus all of our time on projects that give us the most bang for our buck, and avoid those that do not. We can’t separate the good opportunities from the losers without a proper spend analysis.
Spend Analysis Doesn’t Have an ROI – and Doesn’t Need One
To sum up a long answer to a short question, spend analysis doesn’t earn an ROI because it can’t. But it doesn’t need to, either.
Why? Because you’d be hard pressed to earn a return on sourcing projects without it. It is a critical step in the process, a vital tool for Procurement, and a much needed gatekeeper to ensure our strategic sourcing initiatives yield results – but it isn’t a standalone process in and of itself.
About the Author:
Brian Seipel is a consultant and spend analysis lead at Source One Management Services, focused on helping global and domestic companies implement innovative solutions for driving revenue and expanding market share through procurement and strategic sourcing best practices. With a background combining Business Analysis, Information Technology, and Marketing, Seipel is an instrumental resource behind Source One’s spend analysis as a service platform, www.SpendConsultant.com.
George E. Krauter
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