Spend Analysis: Today’s Tools for Tomorrow’s Savings

By Roopa Makhija

Any business in search of capital has two main options: grow revenues or control costs. For the past few years, the economy has called for the latter as the most viable option. In fact, most agencies have already drained their internal cost control options and are looking toward the supply chain for the most realistic place to find savings.

Like all business enterprises, reducing costs is an ongoing challenge for federal agencies. The real test comes when agencies have to report how funds are being spent. In November 2002, the Aberdeen Group, a research services firm headquartered in Boston, MA, along with Penton Media’s supply chain group, examined the spend data management strategies, processes, and systems of 157 enterprises worldwide over a three-year period. One of their bleak conclusions was that “…few enterprises truly understand how much they spend–by product or supplier.”

Ironically, 80 percent of enterprises surveyed regard spend analysis as critical to their success, yet only half currently had a formal program. Now it is time for the other half to accomplish what the Office of Management and Budget (OMB) requested–that all agencies control spending and ultimately do more with less.

Spend Analysis

Spend analysis is the process designed to find out how much an agency is spending and with whom. It plays a critical role in identifying where cost reduction opportunities lay and how to source products and services more competitively. Spend analysis is often viewed as the first step in the strategic sourcing process, but done regularly, it can help agencies monitor ongoing costs, manage demand, and influence supplier choices all outside of the lengthier strategic sourcing exercise. Since 73 percent of an organization’s spending is addressable, significant savings opportunities abound. (Source: CAPS, The Watch Group, AT Kearney, Aberdeen Group)

One reason the term “spend analysis” is familiar to most agencies is because of the directives from the OMB. The department directed all agencies to begin implementing strategic sourcing by January 2006. The OMB’s memo also called on each agency’s Chief Acquisition Officer (CAO), Chief Financial Officer (CFO), and Chief Information Officer (CIO) to take responsibility for what it calls “the overall development and implementation of the agency strategic sourcing effort, which begins with a spend analysis and the identification of commodities for which strategic sourcing should be implemented.”

Spend Analysis Insights

With the proper execution of spend analysis, agencies gain the valuable insights necessary to truly follow through with cost-cutting initiatives. These include:

• Ascertain Spending Patterns–The only way to really understand spending patterns is to collect spending data from all systems, such as accounts payable, general ledger, ERP, e-procurement, p-card, and service providers.
• Capitalize Buying Power–Knowing when an agency has maximized its buying power comes from making sure the “spend” is spread as far as it can go, often referred to as “consolidating the spend.”
• Carry Out Knowledgeable Management Decisions–Spend analysis ensures no order will be placed without the confidence of knowing the details that went into the decision.
• Direct Constant Improvement–This includes efforts in contract fulfillment and managing the quality of supplier service. Having a rein on costs tends to bring both parties (buyer and seller) closer to successful fulfillment of a contract.
• Devote Effort Toward Planning and Budgeting–As a tool, a spend analysis process supports the management team in being proactive to maximize valuable resources.

Assess variations in cost, inflation and other dynamics. Forecasting also becomes a more simplified task in that all the data required to make these decisions is at one’s fingertips.

Government agencies agree this list is important. In fact, acquiring and using these insights are the foundations that lead agencies to better financial, procurement, and resource management.

Spend Analysis Challenges

Many ask how something like a spend analysis can be so vitally important, yet remain so challenging for most agencies to accomplish. The answer isn’t complete without looking at the evolution of spend analysis. In the early years, it secured a less than desirable reputation because of the time and resources involved. Obstacles came in the form of contrasting data sources, erroneous spending data, and problematic naming practices. Because of these hurdles, organizations only performed spend analysis on a sporadic basis because of the sheer effort involved. While this may have been helpful within the context of a larger strategic sourcing exercise, it was not beneficial for procurement professionals who needed to make regular strategic decisions and required solid information on which to base those decisions.

Often, the result was fragmented buying strategies that failed to fully leverage an agency’s purchasing power, thus missed opportunities for cost savings. What spend analysis needed to be truly effective was the right system to support it.

Spend Analysis Options

Fortunately, agencies that want to implement spend analysis programs have many options that can accommodate varying levels of technology, resources, and other variables. These range from purchasing software and using in-house personnel to perform the data gathering, cleansing, and analysis to working with an outside firm. Here an agency can arrange for the firm to regularly conduct varying levels of the spend analysis process using experts trained to analyze specific commodities and services. Agencies can pick and choose the level of service and type of technology that suits them.

Even with the various software and service solutions available, many agencies continue to use basic spreadsheet applications for managing and analyzing spending data. Those that have made the effort to develop sound and formalized spend analysis programs can now see what can be gained in terms of truly understanding spending patterns.

Accordingly, it’s not surprising why an increasing number of agencies are turning to outside firms to help them implement and achieve their spend analysis goals. One such agency is UNICOR, a wholly owned federal government corporation within the Department of Justice (DOJ). UNICOR provides employment and training for inmates in the Federal Prison System while remaining self-sufficient through the sale of its products and services. They perform spend analysis using the assistance of an outside firm through a contract that is available for use by all other DOJ entities. “The spend analysis,” according to Lisabeth Day, Chief, Policy and Field Support for UNICOR, “has helped us to strategically source major purchases and as well as combine like items, increase competition, and reduce costs.”

Avoid Supply Chain Vulnerability…Now

Today, best-in-class organizations understand that spend analysis has to be done regularly to be most effective. Supporting strategic sourcing activities and reducing costs for various commodities cannot otherwise be accomplished with anywhere near the degree of accuracy.

Although using technology, beyond spreadsheets and databases, to conduct ongoing spend analysis reports is a new endeavor for many agencies, gone are the days where time, energy, or cost commitments deter the regular use of the process. Agencies that are using this process recognize the convenience, ease of use, and reliability. Yet, more importantly, they know their agencies are experiencing increased efficiency, smarter decision-making, and less supply chain vulnerability as a result.

Editor’s Note: Roopa Makhija is the President of Global eProcure, a supply chain technology and consulting firm specializing in cost reduction through spend management, strategic sourcing, and outsourcing. To contact the woman-owned, Clark, NJ-based firm, call: 732-382-6565 or visit: www.govinfo.bz/5960-291.

A Successful Spend Analysis Program is Characterized by Four Key Processes

1. Aggregate Spend Data–Many agencies have disparate systems that require significant effort to collect the information. For instance, some must request the information from suppliers in order to get a complete picture of the spend data. This is because spend data is incurred through various sources such as purchasing cards,
e-procurement systems, or cash-and-carry spot purchases. What makes this step even more daunting is the need to have the spend information by line item.

2. Cleanse the Data–Once data is collected, it must be cleansed to eliminate duplicate entries for suppliers, standardizing supplier names (I.B.M. versus International Business Machines), and establishing parent-child relationships. Establishing parent-child relationships means linking corporate parents with subsidiary companies so a true picture of how much business an agency is giving a company can be determined, regardless of a company’s organizational structure.

3. Classify the Data–This is done through the use of a coding system for organizations such as the United Nations Standard Products and Services Code (UNSPSC), the National Institute of Governmental Purchasing (NIGP), or others. More federal agencies are using UNSPSC, but world-class spend analysis technology should be flexible with any coding system.

4. Analyze the Data–Once the spend information has been collected and cleansed, analysis can begin. This is the process where spend is broken down into spend by vendor, department, geographic location, or any other requirement deemed important by the agency. This step helps agencies determine where their budget dollars are going and what they can do to leverage spending to gain the most competitive pricing and terms with their suppliers. It can also help agencies in demand management efforts to reduce maverick spending and steer purchasers to more cost effective alternatives.

While these four steps are useful in knowing how to conduct a spend analysis, it’s equally important to know how often to go through the process. Of course, the first time around a spend analysis demands a far greater time commitment than it will ever again, but it does get easier with frequency, and frequency is a key consideration. Depending on the changing nature of a commodity or the business climate, agencies may opt to perform a spend analysis annually, semi-annually, or even quarterly to make it most useful. In any case, once is not enough.