With the demands on procurement becoming ever more urgent, CPOs in nearly all industries are coming around to the value of going digital.
Zero SUM revealed in 'Supply Management Metrics that Matter' Report
Ardent Partners' 2017 Supply Management Metrics that Matter report certainly contains a lot of food for thought. After a rigorous and detailed research process the Ardent analyst team have distilled their findings into some intriguing stats and benchmarks.
One “thread” that runs through the whole reveals, at least to this author’s perspective, one of the fundamental mismatches between “intention” and “capacity to deliver” within today’s procurement operation. That thread is “spend under management”.
During 2017 we have seen and heard a number of different views, from industry analysts and commentators, on what constitutes a best-in-class percentage of spend under management.
In one pan-industry report, we saw a claim that 70 percent of spend under management was the apogee of procurement achievement. At a conference, we heard that most mature procurement organizations were achieving upwards of 90 percent spend under management. It has to be reported that this latter claim was received somewhat sceptically by the audience!
The Ardent Partners' Supply Management Metrics that Matter report tells us that the average enterprise remains fairly static at around 60 percent of spend under management, with best-in-class topping out at 87 percent.
Other numbers suggest that these stats should be investigated closely, and any CPO putting a stake in the ground to mark spend under management should look at everything in the round before hammering it home.
There are clues and hints that the apparent percentage of spend under management is not a genuine reflection of a state of affairs that is helpful. For example, one number suggests only around 56 percent of companies have full enterprise spend visibility. Without that critical precursor, high percentage spend under management will be elusive, to say the least.
Optimizing Spend Under Management
Let’s perhaps start, with a clear definition of Spend Under Management (SUM). Or rather let’s not, because there isn’t one. Or rather let’s not, because there isn’t just one. And therein, perhaps, lies the first of the problems.
It is possible, certainly, to report high levels of SUM if you are actively managing all the spend you know about. But it’s those unknown unknowns, isn’t it?
SUM can only ever be a subset of total visible spend. The first step to optimizing SUM must therefore be maximizing spend visibility. The best-in-class here, in our experience is very close to 100 percent. State-of-the-art spend analysis is extraordinarily good at delivering visibility and analytical capability.
Benefiting from Spend Data
The knowing is all very well. The doing is what matters most. The Metrics that Matter report tells us that less than 70 percent are able to leverage spend data to identify sourcing opportunities. That means nearly a full third of organizations must be hobbled at the first step.
Inevitably the whole point of spend visibility is to lead to action. Spend analysis is no intellectual exercise, it has a clear and obvious purpose. To reveal opportunities for doing things better. That means addressing the spend. Not just seeing it, and understanding it, but doing something different. With the supply base, with the terms or even with the commodities themselves.
It could be argued that the very heart of SUM is addressability. This is, perhaps, the main difference between definitions of SUM. To see that you are spending X million on category Y, but being unable for whatever reason, to address that spend is not really putting it under management.
Of course, some spend cannot be addressed but before we rush to label non-addressable spend as under management a careful assessment should be made.
Moreover, if we do identify spend as addressable, we should be in a position to do something about it. It is one of the more remarkable findings in the Metrics that Matter report, that less than 45 percent of addressable spend is sourced. More colloquially that means over half the addressable spend isn’t addressed, or one could stretch a point and say half the spend under management…well, isn’t.
What’s Right, What’s Not
Granted, not all addressable spend has to be addressed through sourcing, but less than half? Nope, that can’t be right, can it?
These two numbers seem incompatible.
60 percent of spend is under management, on average
44 percent of addressable spend is sourced
But that’s not to say that either number is wrong. What I’m suggesting is that putting “Spend Under Management” has become, in some circumstances an exercise in labelling, as opposed to the start of an active process.
There’s the thesis then. If we confuse spend under management with visible spend, we risk two things:
- Labelling difficult-to-manage spend as non-addressable and thus miss a raft of opportunities
- Believing that labelling spend as under management means that it is actually managed
I wonder if so much store is put in the process, complexity and sophistication of big data solutions that they’ve become an end in their own right. It takes something like the Metrics that Matter report to hold up a mirror to what we’re actually doing with the analyses to perhaps point out that we might be missing the most important point of all.
That point is this: if we confuse visible spend with managed spend then we could enter a vicious cycle of steadily decreasing results in favour of a steady increase in visibility.
Again, procurement is not an intellectual exercise. Data analysis exists to make it easier for us to act meaningfully, not as an end in its own right.
Breaking the Cycle
The SMART by GEP way is to not see data as something “other” to the process. We have designed and built the unified procurement platform to make data work as the fuel to drive the results engine, as it were. Thus, SMART by GEP has, built-in, some key process steps that are designed to make informed action easy and natural and leading to greater efficiencies in value delivery.
Advanced Analytics delivering intelligence and context as well as visibility is critical for spend analysis to be more than just data reporting. State-of-the-art spend analytics uses advanced algorithms to hunt for sources of value and structure the data so that you can do far more than just see it.
Project Management opportunities identified from analyses of historical activity need to be converted into action plans, quickly, concisely and efficiently. Too much “heavy-lifting” at this stage means many opportunities are under-exploited
Fully-Connected Sourcing the type and intent of a sourcing event needs to reflect its purpose. Why use an extensive multi-round RFx process when “commodity unit cost” is the only variable under consideration. Connecting the sourcing activity to the opportunity via a project structure maximises sourcing outcomes
Universal Supplier Visibility ensure the supplier activity you have analyzed to find the opportunity refers to the same suppliers you are asking to bid. Sounds obvious but it is often difficult to demonstrate or even prove. A single source of truth for supplier master data helps to drive meaningful results from supply-based focused sourcing.
Contracts as Value-Drivers can convert opportunities into realized value. Whilst the contract document needs to be revised, approved and signed often by individuals outside of procurement, that is no reason to put the contract outside of the source-to-pay process. It is vital that the contract is integrated into the data flow and process. Value realization is driven by constant contract compliance and utilization. Signing a contract might seem to put the associate spend under management. The truth is it is using the contract that actually puts the spend under management.
Unified Source-to-Pay ensures that purchasing activity is aligned to strategic targets is the singular means by which savings are delivered. Executed contracts must be utilized completely and correctly – and must eliminate maverick spend for the commodity in question – in order for targets to be achieved. Unifying procurement and purchasing, or source-to-contract with procure-to-pay in a single system platform creates the perfect conditions for maximum results.
Fundamentally, of course, the solution to the paradox of increasing visibility leading to decreasing return is a matter of mindset, not a matter of technology. Nevertheless, one should not underestimate the impact that a poorly-designed, disconnected software tool set can have. This paradox has not resulted from some kind of malicious intent but from the difficulty that procurement professionals face when trying to drive results from “the system.” If the software you have can ease or even automate the process of converting visibility into action, then the cycle can be broken and spend under management will once again refer to an active process the delivers concrete results, savings and value to the business.
To access the Ardent Partners Supply Management Metrics that Matter in 2017 report, download it here.