Greater visibility into suppliers and associated costs and risks is considered by procurement leaders as a prerequisite for success.
According to a recent Deloitte survey, analytics will have the largest impact for over 65% of Chief Procurement Officers. However, many CPOs are just starting on their journey to improved spend visibility.
For the procurement leaders who have already decided to enhance their organizations’ capabilities by leveraging their business data to make better decisions, there can still be uncertainty on how to make the business case for purchasing spend analytics.
When building a business case for spend analytics, two critical questions must be answered: what return on investment should you expect and when will this value be realized? These should be straightforward to answer but of course every organization is unique in how they define, identify and deliver value.
For traditional procurement functions, the most significant value of spend analytics will be identifying cost savings. For more agile organizations, the focus may be on mitigating supply chain risks instead. When it comes to regulated industries, we often see a preference to use spend analytics primarily for compliance purposes. And ,of course, spend analytics can be effectively deployed beyond Procurement and ultimately used to support goals such as product innovation, revenue generation, corporate social responsibility and much more.
In my experience of working with our customers, cost savings is generally the most desired outcome of spend analytics so in this post I’m going to focus on savings for determining a ROI. Before we go into the detail of how to make the business case, it’s important that we make a few assumptions so we’re on the same page:
- It’s assumed that you’re looking at a pure software solution for spend analytics, which requires minimal professional services to set-up and deploy
- It’s assumed that your procurement colleagues are familiar with and comfortable using analytics tools
- It’s assumed that your organization’s data is adequately complete and accurate to conduct basic reporting and analysis
So, what is the ROI of spend analytics?
The short answer is the bigger the spend, the bigger the savings, but that logic depends largely on your procurement function’s maturity to interpret and analyze data.
It’s worth pointing out that there is, from our experience of working with hundreds of procurement teams around the world, a threshold where value creation from spend analytics can be difficult to achieve compared to the cost of the software. For organizations with less than $100 million spend annually, the return on investment can be difficult to justify; so traditional tools used for spend analysis such as Excel (which provides limited spend visibility and limited functionality) remain popular in smaller businesses.
For enterprises, procurement savings typically have a low and high range. For an organization with a minimum of $100 million in spend annually, we would expect, at least, a $1 million savings in the first year by rationalizing suppliers in a large category such as information technology (IT).
At the high end, an organization could generate as much as $16 million by:
- Implementing a strategic category management program
- Identifying overpayments to suppliers
- Lowering maverick spend by improving contract compliance
- Rationalizing invoices, products and suppliers
- Setting-up and running eAuctions
The business value of improved spend visibility is significant when the insight is effectively used by procurement. The most common obstacle we see isn’t the data (it’s there!); what is missing are the skills required to dive into and make sense of the data.
My colleague, Paul Cook, a former CPO and current Head of Sales at Rosslyn Data Technologies, wrote a helpful article on this topic: “Five reasons you should do a spend data opportunity analysis. Psst…think untapped savings.” He not only provides tips on where to find savings, but models its value. It’s definitely worth a read.
How soon can I expect a return on investment from spend analytics?
This is probably the most contentious question to answer because spend analytics providers, both software and professional services firms, will often say ROI is easy to achieve. That is not always the case - you need the right data you can trust before any further progress can be made. After decent levels of data quality have been established, it’s then fairly straightforward to conduct spend analysis and begin to identify actionable cost savings opportunities.
Our experience with our customers over the last decade dictates that you should be able to generate an ROI between six and eight weeks of having line-item level spend visibility. Two common methods of sequencing short-term value creation are:
- Identifying potential duplicate or erroneous payments to suppliers. Spend analytics will help you to automatically identify duplicate and erroneous payments within the accounts payable process and prevent this from happening in the future.
- Releasing working capital by analyzing days payable outstanding (DPO). This is an exciting area for procurement because DPO isn’t usually within their remit – but for procurement leaders who are actively looking at how to deliver business value beyond the norm, this added level of supplier knowledge will help to achieve that goal.
There are many ways to create value from spend analytics which will contribute to the ROI of your spend analytics investment. We often find that procurement leaders are nervous about committing their teams to big savings targets as it is ultimately their reputation that is on the line. With this in mind, we recommend that you start small so realistic expectations are set within and beyond your procurement function.
I hope this article has helped answer a couple of the most frequently asked questions around spend analytics. If you are looking to make the business case for spend analytics and you require assistance or advice, please feel free to reach out to me.