Mid-Sized Companies Can Reap the Benefits of Spend Analysis

1.     The Quest of Every CEO and CFO at Mid-Sized Companies:  Improving the Bottom Line

Strategic Sourcing and other expense management efforts can yield Returns on Investments of 200-500%, but can mid-sized companies (defined here as those with annual revenues from $50M - $1B) actually execute well enough to capture these bottom-line benefits? Mid-sized companies have the same Finance and Procurement imperatives that their larger cousins have: improve cash flow, reduce expenses and obtain high quality inputs. And they have access to similar tools to improve the bottom line, including process improvement, raising / lowering prices and changing the size and composition of their work force, etc. But one of the most effective, least disruptive and most underutilized tools for both a company its customers is Purchased Expense Management. 

However, you wouldn’t, for instance, go on a caving expedition without a caving helmet and headlamp, would you? The “headlamp” of Purchased Expense Management is insightful Spend Analysis. Spend Analysis and the resulting Spending Cube (who is buying, what you purchase, from whom, how much?), lights the path so that you can find your way from where you are to the improved profit results you desire. Spend Analysis illuminates and leads the way to better decisions about category strategy, which vendors to use, how to buy less, etc. This, in turn, leads to better planning and executing against Procurement and financial goals, and driving continuous and sustained improvement. 

Of course, you can just go on gut instinct and say, “Spending Categories X, Y, and Z are among the biggest we know about, and they aren’t terribly managed, so let’s start there…”. But kicking things off this way is likely to have results that are inconsistent at best, and may lead to burning a lot of time, money and goodwill at worst…kind of like bumping your head on a stalactite!

2.     But is Spend Analysis Appropriate for Mid-Sized Companies?

In the past, there were good reasons why Spend Analysis was pursued only by Fortune 1000-type companies – they had the resources needed to pursue these goals, i.e., sophisticated financial and operations systems, professional Strategic Sourcing staff, and access to large consulting firms.

It wasn’t long ago that Spend Analysis involved taking highly imperfect (and that’s being generous) data from systems which were not designed to support Procurement, and employ a labor-intensive, manual process to transform them into a Spending Cube. Now, there are cloud-based and desktop / excel-friendly tools which can help an organization reach their objectives inexpensively – often an order of magnitude less than companies spent in the prior two decades. Although you’ll still need to dedicate “bandwidth” (either internal or external) to gathering, normalizing and coding the data, these exercises will be vastly easier and better than you imagined if you had considered this them just a decade ago.

With regard to the bandwidth needed for this effort, the cost of this, too, has fallen in recent years, as it is now no longer necessary to land an army of top-tier consultants to perform the tasks of data gathering, analysis and synthesis needed for a good result. By leveraging external as well as internal resources judiciously, the “talent” cost of this effort also falls drastically.

Thus, with new tools and streamlined processes to accelerate data cleansing, categorizing, and analyzing, you can now complete this effort at a cost which is small compared with the opportunities it can unearth, and capture ongoing cost benefits at many multiples of the initial investment.

3.     Obtaining Greater Value from your External Spend

Procurement and Finance are aligned with regard to the goals of saving money and improving cash flow – check. But where and how to find and capture these improvements are not obvious. For instance, where is the low-hanging fruit (if any still exist)? Which expense categories appear promising based on spending mass, but have constraints or deal-breakers? Which vendors are “strategic” vs. “commodity”, and what strategies are required for each group?

After a successful Procurement effort, there are still the issues of ongoing compliance and measurement. One must be vigilant about “savings leakage” due to maverick spend at the client company and/or contract non-adherence by the vendors, among others. It is critical both for Procurement and Finance to be able to spot and correct these issues quickly, not after a year has passed and certainly not at the end of the contract term. 

Having a Spend Analysis tool and process which are maintained regularly, along with personal and organizational accountability for supplier performance, combined with customer service and savings tracking, are the keys to making savings transparent, believable and sustained.

4.     The path forward…

Taking the Purchased Expense Management path to greater profits begins with Spend Analysis. Review the solutions and resources available, the data and reports you already have, and perhaps the most important component, your organizational will to take these strides. The benefits of knowing how you are spending money with the outside world, how you can do it better, and actually capturing cost savings for your company are compelling, and like any journey (of a thousand miles or just a few), it begins with the first step.  So, put on your helmets, click on your headlamps and start exploring!

Steven Strickman, President, Serratus Management Consulting, Inc.