10th Nov 2017CPO
Saurabh Limaye – CEO @ Dataction
These days spend analysis is finding a mention in almost all procurement strategy discussions. Host of vendors providing spend analysis software, services or consultancy are going an extra mile to educate the broader procurement community about the approach, need and benefits of including spend analysis as an inseparable component of a spend management programme.
A lot has been spoken, written and discussed about various aspects of spend analysis including data collection, classification approaches and various type of opportunities that can be identified through spend analysis. This post discusses the lesser known topic – the considerations and approach for opportunity qualification and prioritisation.
High level spend analysis process leading to actions for realising the identified benefits:
Various types of opportunities can be identified using the following approaches:
• Traditional: Demand aggregation, supplier rationalisation, maverick spend reduction, tail spend management, compliance improvement, etc.
• New-age: Digitisation, substitution, process re-engineering, etc.
• Knowledge confluence: Benchmarking, industry trends.
A typical spend analysis project might unveil hundreds of opportunities – not all of them being pragmatic and with varying probability of materialising into actual benefits. Given the limited procurement resources and the limited shelf-life of these opportunities, a structured approach is needed to qualify and prioritise opportunities.
It is essential to note that significant data-enrichment is needed before this activity is undertaken. Typically data-enrichment involves collecting contract data, supplier scorecards, local procurement policies, regulatory information, etc. The difficulty in collecting this data varies by organisation and depends on many factors: availability of central data repositories, relationship between the local and central procurement functions, role and importance of procurement within the organisation and the underlying management support.
Simply speaking, this step includes filtering out the opportunities that are not worth further investigation. This might be because of various reasons:
• The impact is too low and the cost of investigating the opportunity might outweigh the benefits
• The opportunity has been recently investigated (as a part of some other project) and has been ruled out
• The project to leverage the opportunity is already underway
• It has an outward facing impact that needs some major behavioural changes at the customer end
• It conflicts with the procurement policy and/or organisational ethics
• It conflicts with government rules and regulations
All qualified opportunities are prioritised in the order of importance in this step. A suggested approach would be to use a four cell matrix (or equivalent) to plot scatter graph, and rank the opportunities on the basis of their relative impact and complexity of realisation.
Following is the high level guidance on ascertaining the impact and complexity scores:
Impact score: Based on the impact of following factors:
• Financial impact (cost savings, revenue enhancement, rebates, etc.). The opportunities must be grouped into a financial impact brackets (usually for a comparable time dimension of 12 months, 36 months, 60 months etc.) such as up to £100k, £100k-£500k etc., for ease of analysis.
- Financial impact must be net impact i.e. benefit less cost of realising it. As such any cost associated with termination of existing agreements, cost of parallel operations, project team cost, implementation cost, etc. should be deducted from the projected benefits.
- A net present value gives a more balanced view.
- Best and worst case financial impact should be calculated for cross-currency benefits using the boundary value Fx rates over the last 36 months (or future predictions if available). It is suggested to use the weighted average impact over the evaluation period.
- Risk of variation in the estimated financial impact (such as inflation, currency Fx rates, consumption volumes, etc.) .
Complexity score: Based on the impact of the following factors:
• Number of supplier relationships that get affected. More the relationships, higher the complexity. For e.g. if a supplier rationalisation opportunity involves termination of a number of supplier contracts (with or without specific termination for convenience clause) then great deal of effort and risk is involved in exercising the termination rights.
• Number of group companies/ departments that get affected. More the stakeholders, higher the complexity. Sometimes getting an internal consensus on ‘the right way forward’ is far more difficult than the supplier negotiations.
• The degree of management support. All opportunities with ‘full’ management support tend to be less complex.
• Dependencies on the scope of work (product or service) addressed by the opportunity. For e.g. replacing local ERP software with a group standard ERP software will impact all upstream and downstream systems interfaced with this software; hence the decision to change ERP system is very complicated.
• The degree of change required in the employee or customer behaviour. The opportunities requiring major change in behaviour tend to be more complex.
• Dependencies on the regulatory environment. Any opportunities which require adherence to any regulatory laws such as local sourcing, inclusion of minority suppliers, etc. might pose different challenges to convert ideas into real benefits.
• The complexity of Procurement structure across the group. Generally, realisation of opportunities across the group companies is easier if there is an organised structure and well-defined role for central and local procurement teams.
• Presence of any task force/ category committees (for the spend type where the opportunity exists) with representation from various group companies tends to relatively simplify the process of realising benefits.
The approach is a general approach and will need tweaking for each organisation.
It is recommended that the category managers should work collaboratively with the stakeholders and the local procurement functions on this exercise. The procurement leadership team should support the category managers with strategic direction, facilitation for management buy-in and intervention for overcoming roadblocks. If implemented with prudence and diligence, opportunity qualification and prioritisation exercise can help companies maximise their investments in spend analysis.
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