Four years between friends?

Former British Prime Minister Harold Wilson once famously said "a week is a long time in politics". That may be true but when it comes to spend analysis it seems that four years is, well, nothing. Back in 2008 this blogger had a little more hair and a few less wrinkles but a bucketful of optimism about the likelihood that business enterprises and public sector organizations alike would embrace spend analysis as a "must-do" cost management capability. Based upon the results of a recent Supply Management survey however it appears that the majority of procurement professionals  - some 68% in fact -must still clamber over the prehistoric landscape of disparate legacy systems, throwing their best-guess bones of fragmented spend data high into the air in the hope that they spin and fall miraculously into some understandable pattern of sourcing decision support. Read Supply Management's survey findings and weep - weep hard, mind - here. 


In the hope that perhaps the majority of the planet did not read the first publishing of my 2008 blog post "Can spend analysis have an ROI" - the only happening that would feasibly explain the unforgivable findings of the the SM survey - I am re-publishing said post below. Earth take heed - if I have to return in another four years to berate your refusal to understand and act upon the value of spend visibility I may not be so understanding....

Can a Spend Analysis Have an ROI?

(originally published in 1Procurement Place on August 25, 2008)

Would a private equity firm ever think about investing in a company without conducting a comprehensive analysis of its ability to generate an attractive future return? Of course not! A friend of mine in private equity once told me that for every one hundred million dollars a PE firm invests it has spent a million dollars in internal salaries and due diligence consulting fees analyzing the deal prior to pulling the trigger.

In a somewhat similar vein, would you ever think about buying a new or used car without carrying out at least a rudimentary analysis of the comparative reliability and performance of the various models? I didn’t think so. If you’re like me, in addition to burying yourself in Consumer Reports you also spend all the weekends between February and July test driving every vehicle under the sun until your significant other finally explodes “enough already – make up your mind!”

What about hiring someone for your company? You wouldn’t make an offer to a person without a rigorous evaluation of their capability to perform the job would you? You pick apart resumes, fly candidates in for interviews, give them case studies, call their references, and conduct drug screens and background checks before extending an offer.

What’s the common theme in each of the above examples? It’s that in each case someone is making an investment of money (the due diligence consulting fees, the job candidate travel expenses) or time (lost family time at weekends doing test drives, lost work time interviewing candidates) to gather information critical to a particular decision making process. The return on the investment is an increased probability of a favorable outcome from the decision – a higher profit when the PE firm sells the company three years later, a pleasurable ownership experience for the car buyer, and a high performing employee for the hiring company.

So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? Quite simply, numerous companies of all sizes across many industries are making high dollar resource deployment decisions in procurement while having little or no access to a piece of information that is critical to the procurement decision making process. That piece of information would be about SPEND. Information providing answers to massively important questions such as: What is total spend? What is spend by commodity, supplier, and department? How much spend is currently under contract, in total and within each commodity? How many suppliers account for the top 80% of spend in each commodity? With how many different departments are your highest spend suppliers doing business? How much spend in each commodity is with non-approved suppliers? Which departments are responsible for the non-approved spend? Only by having answers to these type of questions will an organization be able to identify those commodities, suppliers and departments where the application of scarce procurement resources will yield the highest return.

How does an organization get these answers? By conducting aSPEND ANALYSIS, a process for producing a consolidated and accurate view of an organization’s purchasing expenditures by commodity, supplier and department. I won’t go into the intricate details of the spend analysis process here or the various tools available in the market to conduct one but, yes, to perform a spend analysis you will need to….make an investment! Depending on the approach you take the investment will take the form of people cost to conduct an internal analysis, software license fees for a tool, consultant fees, or a combination of all of these. The key is to perform an effective spend analysis that allows your procurement organization to focus its people, processes and technologies in the areas that will yield the greatest benefits. Examples of such areas are commodities with the highest total spend across the enterprise, commodities with too many suppliers, suppliers doing high volumes of business with different departments, and departments spending large amounts with non-approved vendors.

One of my clients with $500M of total spend recently conducted a spend analysis that identified just over $100M of spend with opportunities for sourcing, incumbent renegotiation and maverick spend reduction. Following the spend analysis this company focused its best and brightest commodity managers exclusively on this $100M and realized $28M of annualized cost savings. Without the spend analysis the same talent would have been wandering blind amongst the $500M and would have been very lucky to have found half of the $28M. Let’s say they were very lucky and found over half, say $18M. That would still mean that conducting the spend analysis had led to an additional $10M of savings. And what did the spend analysis cost? Less than $100K in software and services. Guess what, there’s a spend analysis ROI. And an attractive one at that.

You would be surprised (unless you get to see as many procurement departments as I do) just how many companies today are not able to identify the opportunity areas described above, and by inference are not able to prioritize the deployment of their procurement resources. Many of these companies will tell you they know where the cost savings are. They’ll tell you they know their business and that they know where to look. But they don’t really. They guess where to focus their people. They roll the dice on where to conduct a reverse auction. And they come up with dry holes again and again. Why? Because they haven’t invested. They haven’t done the due diligence. They haven’t test driven the commodities. They haven’t fully evaluated the candidates. They haven’t done a spend analysis.

The Magic of BBP

Interesting piece in the Pharma Times this week about how the UK's National Health Service (NHS) recently discovered it was paying widely varying prices for the same equipment and supplies. In NHS procurement waste “costs £1 billion a year” John Neilson of NHS Shared Business Services (NHS SBS), an alliance between the NHS and IT services firm Steria, reveals that a new NHS SBS database identified up to 19 different prices for the same pacemaker, and 22 different prices for a surgical tool. The article goes on to suggest that one of the biggest barriers to the NHS achieving significant cost savings in medical equipment & supplies procurement is that physicians are reluctant to participate in initiatives such as strategic sourcing because they fear they will have to compromise on quality and performance.

What jumped out at me from this article was the basic question: did anyone even know the NHS was paying all these different prices for the same product? To be fair, the article does not make it 100% clear whether the different prices being paid are for products with identical manufacturer brand names and specifications or only equivalent specifications from different OEMs. I read it as the former, for example the cardiology department in an NHS hospital in London might be buying a Boston Scientific Altrua Model # S404 Pacemaker for one price while another NHS hospital in Manchester could be buying the same S404 pacemaker for 10% less. This would be a totally believable situation with all the hundreds of NHS locations in the UK that could be buying this and other products with no coordination or communication between them.

If it is indeed the case that the new NHS SBS database has unearthed the previously unknown fact of multiple NHS buyers purchasing identical products at widely varying prices (and often I'd bet from the same supplier) then questioning the willingness of physicians to embrace the principles of strategic sourcing best practices is premature. What has been stumbled upon is actually one of Procurement 101's most basic but also most productive source of quick win cost savings - find out who in your organization is buying this product at the lowest price today and get everyone buying at that price, or "Buying at BBP (Best Buyer's Price)" as some purchasing veterans call the practice.

Buying at BBP is completely non-strategic but in some cases can deliver levels of early savings sufficient to fund the truly strategic investments required to create and sustain value over time such as strategic sourcing, supply chain optimization and demand management. In my opinion it's overlooked in many cases because it's so simple and, well, because let's face it we didn't go to business school to create value for our customers with such trivial solutions.

In the case of the NHS (and the same could apply to any mid or large-sized organization with multiple decentralized buying locations) I would be concerned that nobody is considering the Buy at BBP approach. Someone should be getting hold of those new database reports and identifying the name, rank and serial numbers of the buyers that secured the lowest pricing for those items with the highest annual combined usage across all NHS locations. Two things should then happen. First, these buyers should all be sent generous denomination Marks & Spencers Gift Cards. Second, someone should be assigned responsibility and authority to negotiate with the BBP suppliers to have the lowest price extended to all other NHS buying locations that are buying these same items. Suddenly, simply, almost magically a windfall of hard savings will have showered down upon the NHS without a single physician being asked to consider another brand or back down on a specification.

And one last thing. A new enterprise-wide database is not necessary to identify BBP opportunities. The same outcome can be achieved by pulling accounts payable vendor disbursement data from different locations and consolidating the data into one file. Look for those vendors being used by the most locations within your organization - these will likely be the vendors selling the same products to different buyers at different prices. You can then go the locations those vendors are selling to and pull item level usage and pricing data to identify specific pricing discrepancies and the savings available from buying at your organization's BBP. Sure, this approach requires a bit more manual effort and legwork but do you really want to wait around for one of those enterprise data warehouses to be built before you can create the cost savings? Besides, to quote Booker T. Washington: "Nothing ever comes to one, that is worth having, except as a result of hard work."

Except BBP.