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Spend analytics helps avoid awkward moments with suppliers

 

Working with organizations in various sourcing and procurement roles over the past 17 years, one of the common challenges I see is not having access to information on a timely basis. The good news is, real-time, or near real-time spend analytics is within reach for companies willing to undertake a process of continual improvement, and there is a definite competitive edge to be gained by doing so.

 

Based on what I have seen, a three-month lag from the time of spend to availability of reporting is common, and many organizations cannot get access to data about spend that took place as long as six months ago. Real-time data is almost out of the question for most organizations, because by the time they run the reports, check for data integrity and test to make sure

there are no big issues, a couple months have gone by.

 

 

The further you get down the road, the more likely it is that you’ll be looking at many transactions that will never recur, spending valuable time and effort on things you can’t optimize.

 

Lack of timely data, or bad data, can also create some awkward moments, such as having to go to your suppliers and ask them how much money you spent with them. This happens more often than you would think, and the supplier will simply ask, "For what time frame?" and they'll usually be able to run the reports very quickly because they know their business on the customer side and can give you detailed information.

 

Not only is this an embarrassing situation, you also run the risk that they only give you what you ask for, or withhold material information. They're not going to want to share anything that puts you in a better negotiating position. Robust spend analytics helps you avoid these awkward moments and show up to supplier negotiations with more information than they have.

 

Better, faster access to information lets procurement organizations make smarter decisions across the board, leverage their spend across business units or plants or sites, and really drive value through savings in the sourcing process. This is one of the goals that many companies are looking to achieve through their e-procurement initiatives.

 

Both direct and indirect spend are critical areas for organizations, though traditionally the focus has been on direct spend. In recent years I have noted that attitudes about indirect spend have changed significantly. Many organizations which previously ignored indirect spend because it was "less strategic" or smaller in value have begun to take interest in this spend, recognizing that the opportunity to drive value is in fact quite significant.

 

Most organizations are now organizing the procurement function to focus on indirect spend but in many cases have not invested in people, processes and technologies needed to manage it. They are just now starting to realize there are many applications that focus on getting visibility into indirect spend to drive additional value.

 

As organizations evolve in this direction, a question that quickly surfaces is how to set up spend analytics. One way is directly through the procurement tool. Another option is to pull the information into a broader data warehouse that has access to all the other areas of spend, including direct spend, so can you can generate reports from a single database. If you have global operations, you may want to pull data from all geographies so that you have access to all of your global data in one location. There are different ways to do it, but a key consideration is the speed with which you get access to that data.

 

The other key consideration is of course data quality. I see many companies that have access to data, but people don't trust it. What ends up happening is they have to go to the individual parties in the organization that are doing the purchasing and ask a lot of questions, or again, back to the suppliers to get the information. It's inefficient, and it’s humiliating.

 

The organizations I see that are doing this well are those that have e-procurement platforms and have placed a focus on driving adoption across the organization. They’ve set up a well-defined spend taxonomy, and made sure people know how to use it. Categories are required for all spend, and they have a governance structure with clearly defined roles that have the ability to approve category selection within the taxonomy. Additionally, they don’t use a category called “other” or “miscellaneous.”

 

Ultimately, the most efficient way to categorize transactions is to do it up front; this ensures a quick flow into the downstream analytics system and gets you quicker access to the information.

Remember, getting access to real time visibility is the big goal here. That doesn’t happen overnight, but as you start to get your category taxonomy deployed, upstream systems straightened out, and processes established, the effort around data validation should decrease.

 

The data should get better and better over time, so you get to the point where users can run reports in the application on an ad hoc basis with complete confidence. Then they are empowered to make smarter decisions and avoid those awkward supplier moments.

 

Dipan Karumsi is Managing Director, Procurement Advisory Services for KPMG.