Anatomy of a Spend Assessment
A company’s procurement spend is a valuable, yet often unrecognized, asset. It may not show up on the balance sheet, but it has the potential to generate a return that is equal to or greater than other assets.
As an organization grows, its procurement spend typically grows as well, creating more leverage in the market. Yet many companies pass over those thresholds without recognizing the opportunity at hand – until circumstances, usually financial, force them to confront it. Procurement transformation begins – and every successful one starts with a spend assessment.
Increasing Spend Visibility
Spend assessments involves collecting and analyzing data from all relevant systems to create a procurement-focused spend database. It provides visibility into what an organization is purchasing, how much, and from which vendors.
Although many organizations may benefit from a spend assessment, four situations most commonly create an immediate need for one:
- A CPO or CFO who is new to the role and eager to make an immediate impact
- A company that misses earnings and is pressured to increased EBITDA (or any organization in need of near-term savings)
- An organization with limited procurement resources that needs support to extract value from its spend base
- M&A activity that leads to aggressive cost synergy targets
In a spend assessment, a series of interviews with key stakeholders and contract reviews delves into the procurement practices of the organization, builds a fact base for each spend category, and helps those involved decide which categories are good candidates for strategic sourcing.
The first and most critical area to address is procurement data – its collection, rationalization, and use both for the assessment and onward. Data-focused questions an organization should ask during a spend assessment include:
- Is your procurement data useful in developing a sourcing wave plan?
- Are you able to make data-driven decisions?
- Do you know which categories make sense to address and source first?
- Do you have the right technology and processes to maximize success?
If the answer to those questions is “no,” then a deep dive into data is needed. It’s nearly impossible to build a credible, actionable plan without clarity into spend by category, subcategory, and vendor – and not many organizations have it. In working with more than 500 clients, we’ve found that the majority do not have clear spend visibility from their financial systems.
To gain that visibility, you need a procurement-focused spend database. Creating such a database involves:
- Collecting a year’s worth of spend data from every system where it exists – ERP, accounts payable, purchasing card reports, expense management systems, and so on.
- Consolidating the information into a standard format.
- Normalizing redundant vendor names.
- Organizing the spend into procurement categories that reflect the way the supply market is structured. Vendors in any given category should be competitors and viable candidates to fill the supply needs of the category.
Opportunity is Everywhere
The next step in a spend assessment is evaluating the different categories of spend to validate and measure potential savings opportunities compared to the complexity of achieving savings.
In addition to complexity, areas to explore in this step include:
- Constraints, such as restrictive contracts that give leverage to current suppliers
- Competitiveness of current deals, often assessed through detailed benchmarking
- Rigor of prior sourcing processes; a lack thereof typically indicates a chance to reassess and cut costs
- Supply market analysis, including consolidation, new entrants, and price swings
- Other category-specific nuances
Categories are then prioritized based on benefits compared to risks and effort required to achieve them. When analyzing your spend, don’t consider only obvious purchases. The opportunity for savings can be much broader. In the search for dramatic performance improvement, keep your mind open and you may be surprised by opportunities you might not have considered before.
Spend Assessments Are Only the Beginning
Spend assessments are part of the first, or Target Value, phase of procurement transformation, a diagnostic whose overall goal is to identify opportunities to reduce cost and move forward with change initiatives. Fact-gathering during that phase isn’t limited to spending. It also typically explores the maturity of the procurement function and aids in identifying critical gaps in the organization that are or could be roadblocks, such as:
- Does procurement have influence or appropriate relationships with key stakeholders?
- Do you have the right people to maximize success?
- Is your internal team capable of achieving savings targets?
- Would external support help to accelerate savings?
Phase 1 ends in the creation of a procurement roadmap, which prioritizes categories for sourcing, includes recommendations for procurement organization design and enhancement, and synthesizes findings into an execution plan.
Interviewing category stakeholders is a critical part of the fact-finding process in Phase 1. And including them from the start helps build the relationships and alignment necessary to a successful procurement transformation. If the right people are involved and the assessment is performed well, stakeholders will be on board with procurement changes even before they’re launched – making implementation much smoother and increasing the odds of success.
This is part three of a series of posts on procurement transformation. Next week, we’ll discuss the problems with procurement data in many organizations – and how to solve them.