The Puzzle of Spend Analytics

 

Spend analytics is one of the greatest challenges for procurement organizations even today. Organizations look for a customized spend analytics solution where categorization is mapped according to client taxonomy, data is collected from multiple sources including POs and invoices, and analytical frameworks are setup to achieve savings.

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Spend Categorization: An Innovative approach

 

The existing ‘spend categorization’ tools first map the classification as per the UNSPSC taxonomy, and then as a second step align the UNSPSC categorized spend with the client custom taxonomy. This leads to inaccuracy in classification.

 

Most of the tools categorize about 70 percent of the spend by value. However, this only reflects around 20 percent of the spend by volume. In our experience, there is a lot of savings trapped in the tail spend which is the remaining 80 percent of spend by volume.

 

In our approach, we directly categorize the spend as per the client custom taxonomy and automate classification of 95% of the spend both by value and volume.

 

Spend Baseline: The right data points 

 

The second challenge is that data is captured only from the GL, AP and T&E where these tools are not able to capture certain data points for a holistic predictive spend analytics. The data points from P-cards, contracts, RFIs, POs, invoices need to be factored in to have an integrated assessment.

 

Our model captures data and meta-data from all available sources and supplements it with market and category intelligence, as well as supplier pricing models. This creates a 360-degree view to understand the opportunities for cost savings and compliance.

 

Spend Better*: Capture the savings within

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Understanding the demand and usage for cost optimization also becomes important for enhanced savings. For example, in the case of software, under-licensing can lead to hefty penalties, whereas over-licensing will result in wastage and extra costs. In addition, the total cost of ownership and product specification analysis provide insights to spend in an optimal way. 

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*Spend Better is a trademark of Bain & Co.

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Spend HyperCube

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The goal of the sourcing manager is to optimize spend management by way of sourcing the category to achieve savings. This will require data points from spend categorization, spend baseline and spend better – which we call a ‘Spend Hypercube’ - to help in sourcing and achieve savings. An agile, proactive and geographically distributed organization would ideally require such a solution. It provides visibility across business units and geographies, and thus creates a bridge over insular silos.

 

The Hypercube is platform agnostic, with easy integrations and flexible data refreshes, and does not require any process changes. The cube would draw the data from siloed ERP systems, GL and AP, spend tool if any, P-card, T&E systems contracts, RFIs, POs, and invoices, including usage logs and consumption data to provide an integrated and comprehensive spend database across categories, supplier and business units with a 360-degree analytics and visualization.

 

We leverage open source ETL tools like Pentaho to integrate & cleanse spend data, formulate business rules as per custom taxonomy to normalize & enrich vendor data, and categorize spend to provide insights and analytics. For large number of contracts, we utilize Natural Language Processing to extract metadata from the contracts. If data points need to be drawn from invoices and POs, we leverage machine learning to understand invoice patterns and pull in data for analysis.

The Hypercube provides insights to make intelligent decisions that can help senior leadership optimize spend and achieve savings.  We provide a holistic reporting with scorecards – intuitive and user-friendly with real-time updates on cost-savings or compliance requirements.

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With these insights, the procurement organization can make data-driven decisions. For example, whether the organization should bring the hidden tail under contracted spend or not. The Hypercube also provides insights into high growth suppliers, duplicate transactions, recurring subscriptions and suppliers with missing contracts, which can help better optimize spend. Such insights help the client organization to run an informed RFX for category sourcing.

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