For spend analytics you can trust, there can be no “other”

Dipan Karumsi
Dipan Karumsi
Managing Director, Procurement Advisory Services, KPMG

Dipan Karumsi is a Practice Leader with more than 20 years of supply chain and procurement optimization experience. He has served 50+ organizations across multiple industries and helped to develop robust procurement transformation strategies and execute complex operational improvement initiatives.

Read time: 4 mins
Spend Analytics Chart

In my last post, I talked about how timely access to data can help procurement organizations avoid embarrassing moments with suppliers. Now let’s turn our attention to getting quality data downstream.

This requires not only having broad adoption of the eProcurement tool, but also having a well-defined category taxonomy and making sure people know how to use it accurately. The taxonomy is where many organizations fall down; they simply don’t put enough time and thought into developing it, and thus create continuous challenges in getting access to quality spend data. 

Developing a well-defined taxonomy takes discipline and thought. Yet, in the rush to deploy the system, organizations may create a bare minimum of categories withoutthe appropriate levels, leave the category field optional, or even skip this step altogether, which then creates a rush to create this information at the time of go-live.

Or, they may create a category called “other.” If you want analytics you can trust, you need a category for everything. There can be no “other.” “Other” gives people who don’t want to think too hard an easy way out. Before you know it, you’ve got “other” showing up as 20% of your overall spend, which requires a significant re-categorization effort and can cause considerable data distrust.

An unorganized taxonomy also creates a lot of churn downstream. If you have transactions being routed by category to the buying organization, they’re going to have to research and identify the correct categories, adding time and manual effort into the process.  The most efficient way to get quality data out of your analytics system is to make sure your taxonomy and process is defined across the entire value chain from the start. Think of it as pre-analytics.

One of the first things we do when we work with an organization on sourcing or procure-to-pay is look at the spend taxonomy to see how it’s organized and understand how well the organization aligns around it. Is everything in alignment, or are there a number of unmanaged categories that have significant areas of spend? Is there a lot of spending in an “other” category?

For many organizations, the United Nations Standard Products and Services Code (UNSPSC®),  a standard product taxonomy that’s on the market, can be a good starting point for building or cleaning up categories. It provides standardized reporting, but it can also be overwhelming for some enterprises because of the level of detail it contains. This can end up creating more confusion, depending on the skill and experience of the people using the system.

You can edit the UNSPSC® down or roll some things up into larger categories, keeping organizational fit and alignment in mind. If you have too many categories and the distinctions are too fine, you’ll get the same item showing up in different categories. Then you’ll start to get those, "Where did my spend go?" types of questions which quickly lead to data distrust. On the other hand, if you decrease the categories available to the end user, sometimes they just won’t have what they need.

Every organization is different, and you have to identify what makes sense for your situation. Your taxonomy has to strike a balance between providing the visibility and data you need to manage effectively, while simultaneously not being too onerous for end users to adopt easily.

One key note: Taxonomy development should not be done in a bubble. Creating a spend taxonomy should be a collaborative process that includes a broad group of stakeholders. The more input you receive, the greater the buy-in will be on utilization and self-service reporting.

While some organizations opt to refine their taxonomy as they mature, I recommend they clearly define and deploy it up front. Constant changes in the way users see the taxonomy can cause confusion. In addition, spend reporting will be impacted if categories are removed, edited, or added, and alignment of workflow approvals to categories will need to be updated each time it is changed. 

Most importantl of all, do not create a category called “other” (or “miscellaneous” or “uncategorized”.) Getting real time visibility into spend is one of the big goals here. Allowing this kind of category automatically introduces the need for a manual process, which causes delays and inaccuracy.

If “other” is not an option, end users will learn to find the right category. Procurement can provide information and training to help.  Since most requesters concentrate on a handful of 10-15 categories, they'll be very effective at selecting the right ones once they learn them.

An up front investment in creating a thoughtful taxonomy is going to give everyone across the enterprise the ability to run accurate, real-time ad hoc reports in the eProcurement application. This is the power of analytics, and once people experience it, and see how much easier that makes their jobs, having no “other” will be no issue.