Predictive Analytics and the Future of Spend Management Part II

In my last post on this subject, I talked about what predictive analytics could do for strategic sourcing and procurement departments.  The problem is, outside of the Fortune 500 (and even within it), most companies still don’t have a cohesive strategy around sourcing tools in general, and so predictive analytics for procurement is a very distant dream.  So how can companies build a toolset that gives them the immediate visibility they need, while considering (and even implementing) the awesome and almighty power that predictive analytics represent?  The answer, not surprisingly, requires CPO’s and their equivalents to consider what they want their sourcing department to be for the organization, and necessitates a level of innovation and insight into future requirements that a CEO or board of directors can buy into.  The investment will be substantial, but so is the payback. 

Step 1: Develop Your Strategy

Most experts agree that when strategic sourcing and procurement departments finally make the decision to utilize toolsets, the starting point is spend analytics.  Without a good understanding of how much you spend and where you spend it, it is difficult to make business decisions around supplier relationship management, electronic sourcing events, or procure to pay tools.  But just picking a tool and implementing it won’t get you to the information you desire.  It’s at this stage where you need to start developing a vision for the department – what will your Procurement Center of Excellence look like?  How will you get the right data into your system?  How will your team and other users of the system be trained to ensure that data is entered correctly and the end result will be meaningful information?  How realistic is it that your current team is capable of implementing these tools successfully?  That leads us to our second step:

Step 2:  Hire the Right People

Most organizations will bring in buyers or other functional equivalents to act as subject matter experts during an implementation.  They describe what they need from a toolset, and the IT group makes it happen.  The problem with this strategy is that buyers don’t necessarily have the vision or understanding of the downstream value their data can produce is.  To get to that level you need to hire people that understand database modeling and the concept of Garbage In – Garbage Out.  You also need to be concerned with maintaining good datasets after the overall structure is finalized.  Having a team that is experienced with your ERP and have some level of IT background is a must.  You can always train these folks on the requirements you are looking for the system to produce.  It’s much easier to train an IT person in purchasing SOP’s than it is to train a buyer on database management.  Don’t misunderstand – you need both.  But the group maintaining the system and ensuring data quality should be IT-capable people, and at most sizable companies, it will be a full time job for multiple individuals.

Along those same lines, if you are still in the early stages of selecting ANY electronic tools for your organization, don’t follow the traditional route of bringing in Ketera, Zycus, Ariba, etc for capabilities reviews.  These are not the organizations you need to help transform your department.  While at some point you will need to examine specific toolsets, the immediate need is to identify a firm that is an expert in predictive analytics and can help you develop the vision for your department.  Those resources will know the types of data you need to capture and how to capture it, and can help you select specific toolsets down the line.  Of course, there is additional cost to utilizing a third party to help create and maintain the data you need to complete your vision, which leads us to Step 3. 

Step 3:  Get the C-Suite to Invest

The biggest hurdle I have seen strategic sourcing and procurement departments run into is getting the dollars to spend on their department, be it for software or resources.  So getting management to commit to both can be difficult.  One reason for the problem is that procurement departments don’t speak the right language when it comes to requesting funding for visionary changes.  Yet somehow IT, Finance, HR and other areas of the organization do it all the time.    There are definitely key words and arguments you should use to develop your business case for investment, including:

MDM – Get familiar with Master Data Management, and how it can help the supply chain/strategic sourcing departments.  Your CEO already knows what it is – the Sales team brought it to his/her attention years ago.

ROI – Get specific about what management can expect from this investment.  Savings, spend under management and risk offsets are all easy to calculate, and benchmarks already exist to help you demonstrate the payback in real dollars.  One key statistic from AberdeenGroup’s 2005 “The CFO’s View of Procurement” study could help you sell the deal – only 34% of projected savings from strategic sourcing activities are actually realized.  That means, on average, you can be 66% more effective as an organization when it comes to spend management!

Risk – the focus of any strategic sourcing group should be supplier management.  In fact, as Spend Matters recent noted, optimizing supplier relationships is the number one priority for CPO’s.  As a sourcing group, your focus should be on developing supplier relationships, offsetting supply chain risk, and tracking & identifying market intelligence.  Getting bogged down in administrative analysis that can be easily automated, and utilizing tactical resources to do both administrative and strategic tasks is ineffective.  Investing in tools that can pro-actively identify risk for you based on predefined criteria will help prevent problems before they have a chance to happen.

Creating the optimal vision for a “Procurement Center of Excellence” is going to be different for every company, depending on your industry, the size of the organization, and how well developed the current strategic sourcing & procurement team is.  As any good sourcing person knows, the key to great results includes asking the right questions and using the right process.  Dumping your efforts into spend analysis software and P2P tools will help your organization and keep you busy for a long time, but long term you need a lot more than that to be an industry leader.  Predictive analytics will help you fulfill that vision, but only if you consider it in the broader context of maintaining good data, good policies & procedures, and bringing in the right people.  Most other departments have already realized the power of predictive analytics; it’s about time for strategic sourcing and procurement to unleash that power as well.