Spend Analysis vs ERP

Aberdeen Group recently published an updated report entitled: “Spend Analysis: Pulling Back the Covers on Savings” (October 2008). Consistent with their August 2007 report, the opportunity for those using spend analysis is impressive! Specifically, enterprises implementing spend analysis have been able to:
- Drive 25% more spend under management;
- Achieve a 5% to 20% cost savings for each new dollar of spend brought under management;
- Realize 67% higher savings on their spend;
- Achieve 11% higher contract compliance.

With results like these, it’s puzzling why organizations resist implementing spend analysis. One of the most common reasons offered is: “We don’t need a separate spend analysis solution. We already have an ERP system for spend analysis.” This argument typically comes from those who either haven’t tried to use their ERP system for spend analysis, or for those who are just unaware of the inefficiencies and ineffectiveness of this approach. They don’t know what they don’t know!

There are numerous benefits to a stand-alone, best-in-breed spend analysis solution.

1. Completeness – An ERP system may not contain all of your spend data. Often a company has multiple ERP systems which makes it difficult to consolidate spend data. Even when there is a single ERP system, it may not contain all spend (e.g. Corporate Travel Card, P-card, Contract Manufacturers, etc.). Or, a company may spend years getting to a single ERP system only to make an acquisition and find themselves with spend outside their visibility. Best-of-breed spend analysis solutions allow for the easy consolidation of data from disparate systems and conveniently accommodate changes in the business. This coherent view of all spend drives impressive savings!

2. Cleansing – ERP systems contain poor quality data which is difficult to correct and maintain. Brian Daniels, Partner at SpendRadar (www.SpendRadar.com), highlights a common fallacy. “The common misconception is that ERP data can simply be loaded into the data warehouse. Within the world of business intelligence “spend” data is unique in that it must be normalized and classified in order to make sense.” And, unfortunately, altering historical ERP data is sometimes forbidden because of accounting system connections. Even if allowed, it is difficult and time-consuming to correct Master Data and, once done, it will need to be re-done periodically. Conversely, a spend analysis solution provides an easy mechanism to correct data including things like misclassification, multiple supplier name variations and redundant items. These corrections are conveniently maintained as rules so that the same errors are corrected automatically with data refreshes.

3. Enrichment – ERP systems do not enrich the data. Enrichment provides information such as supplier ratings, contract performance, financial risk assessment, corporate parent/child relationships, supplier diversity status, etc. for compliance analysis and to aid in sourcing decisions. This information and its application to spend data cannot be done by within your ERP system. Spend Analysis solutions facilitate the grouping of suppliers into parent/child relationships, and the mapping feature automatically maintains corrections and groupings as data is refreshed. Aberdeen’s 2008 Spend Analysis report determined that Best-in-Class companies are 1.6 times more likely to utilize fully automated data enrichment processes allowing them to achieve process efficiencies and superior savings from fact-based decisions.

4. Classification – ERP data is either unclassified, misclassified or classified at a level that is not useful for sourcing. Classification, if done at all, is at a high level and does not provide the granularity necessary for sourcing. ERP systems are slaves to the accounting process, with spends typically classified by General Ledger (GL) account, not in logical sourcing groups. GLs tell you "who" in the organization made the purchase, or who will consume it. As sourcing professionals, we don’t care that Temp Labor was used for a Marketing event. We want all the Temp Labor spend in one bucket for sourcing leverage. Net, G/L codes rarely work for sourcing purposes. Duncan Jones, Sr. Analyst at Forrester Research puts it well, ”It’s about taking a mass of unstructured data and making sense of it, not like business intelligence, which is generally adding up numbers.” As Rod True points out in his excellent article, “Sourcing Groups – What Are They, Why Are They So Valuable, and How Do You Create Them”: “Creating these detailed item sourcing groups provides the foundation for the optimal leverage being sought through Spend Analysis and Strategic Sourcing.”

ERP data comes from disparate systems and/or is entered by diverse individuals and locations potentially using a variety of classification schemata. Those entering the data are typically not sourcing experts, which nets a high level of misclassifications. Spend Radar’s Brian Daniels posits: “What percentage of spend is currently classified as ‘Miscellaneous’ or incorrectly classified altogether?”. He suggests that an ERP system requisitioner may not:
a) fully understand the coding structure,
b) have time to manually search for the right code, or
c) care about accuracy so designates the wrong code or the infamous “9999 – Miscellaneous” category.
Brian has seen upwards of 70% of spend classified as 9999 – Miscellaneous! The bottom line is that the ERP coding can rarely be trusted!

On the other hand, spend analysis solutions allow you to correct and transform data, making changes to groupings and hierarchies, and to create rules that automatically map data to a specified standard or custom category structure. This allows the data to flex as the organization and its needs change. Importantly, this capability is repeatable thus automating classification for all future data refreshes. According to Aberdeen’s report, Best-in-Class companies are 25% more likely to auto-classify their spend thereby realizing significant efficiencies.

5. Usability – ERP systems are not user-friendly. Because ERP systems are designed for a wide range of purposes and a wide variety of users, they tend to be complex, cumbersome and not very user-friendly. They contain a lot of data, but getting it out in a usable form is a monumental task! Spend analysis solutions are designed for a very specific purpose and for a targeted audience. These solutions are “best in breed” and do what they do easily and well without any integration required. Product enhancements don’t need to compete across a broad application as with ERP, so product enhancements and new functionality are added more frequently.

6. Access – ERP systems are controlled by IT and often require IT support which diminishes access and flexibility. IT serves multiple internal customers with conflicting priorities and, like many organizations today, has suffered staffing reductions. Unfortunately, in order to access ERP data you must often “get in the queue” and wait until a resource becomes available. Or perhaps you only want to run a simple report, but can’t because the magnitude of data crunching slows or risks bringing down the system! Most Purchasing organizations want to be as self-sufficient as possible. Spend Analysis solutions manipulate the data off-line. They also contain their own standard and custom reporting capabilities. This facilitates a clear understanding of the organization’s spend, a critical input for strategic sourcing activities. The ability to “slice and dice” spend data in a great variety of ways and drill down to the transaction level, combined with virtually unlimited reporting capability frees users from the tyranny of IT schedules and canned reports.

Spend analysis takes “dumb” data and transforms it into actionable spend intelligence. Effective spend analysis is imperative for strategic sourcing, and strategic sourcing is increasingly important to business survival. This reality has elevated the strategic role of the procurement organization. According to the Aberdeen’s 2007 Spend Analysis study: “Top-performing enterprises effectively administer a spend analysis program by employing technologies that automate multiple facets of the spend analysis process, and enable organizations to more effectively leverage their procurement teams to manage more enterprise spend.” To be a top company in today’s economic climate we must equip our sourcing professionals with the best tool available allowing them to do their jobs most efficiently and effectively.

Still not convinced that spend analysis is superior to your ERP system? Why not do a “proof of concept” utilizing Paladin’s spend analysis as-a-service? This will allow you to test the value of the solution and the process for a nominal fee and with little disruption to your organization. Paladin Associates even offers spend analysis “free” when done in conjunction with a sourcing initiative performed on a gain sharing basis.

For additional information on this topic, we encourage you to consult the E-Sourcing Forum article: “Data, data, everywhere”, and the following write-up on the e-Sourcing Wiki: “ERP Inadequacies”.


This article was originally published in CheckMate News:
http://www.paladinassociatesinc.com/checkmate_vol_2_edition_2.htm