VideoSee the Spend Management Buyer's Guide
It's been a bumpy ride for the software category known variously as spend management, supply management, sourcing management, supplier-relationship management, total-cost management, spend analysis, and, from way back (circa 2000), E-procurement. That so many labels can be applied to the same concept hints at the difficulties this category has had in fully defining itself. Those problems include a mix of dot-com hype, technological complexity, and entrenched ways of doing business—which have proved resistant to change regardless of what technology makes possible.
Despite those challenges, the basic concept of using technology to ease the many processes involved in buying goods and services, and to ultimately reduce costs in a number of ways, remains powerful enough to inspire vendors and customers to forge ahead. While the market for spend-management software, currently about $1.75 billion, was essentially flat in 2004, analysts expect a 3 percent rise this year and say that this figure is misleadingly low because vendor competition and new, lower-cost options such as hosted services mean that corporate adoption will be higher than revenue alone indicates.
Spend-management software relies on linguistic analysis algorithms to extract, cleanse, and classify, (by product, supplier, and other criteria) the messy data contained in invoices, purchase orders, contracts, and other purchasing records. The goal is to automate the way toward a closed-loop of spending analysis: determine from whom the company buys goods and services; narrow (or improve) the supplier base and negotiate better terms; manage contracts efficiently; and analyze the actual corporate spend.
In the past, such analysis meant bringing in a herd of consultants to thrash through the paperwork and produce a one-time snapshot of spending. That's a far cry from an embedded and largely automated process. But experts say that the ability to drill down into a company's spending habits is essential to cost-cutting efforts because most of the obvious targets (layoffs and elimination of or reductions in various forms of discretionary spending) have already been hit.
"For people who live in the world of ERP and general ledgers, it's very hard to get your arms around spend information," says Jim Frankola, CFO of Ariba, a pioneering spend-management software company that in some ways can serve as a proxy for the entire industry (in September 2000, its stock price topped $1,400 a share; today it stands at $13, which is nearly double what it was last August). At his previous company, Frankola once tried to ascertain what the firm spent on shrink-wrap. Information on those purchases was scattered across multiple systems, and coming up with the total figure—which might have helped in negotiating a discount—required plenty of digging.
Bill Gunn can relate. Hired two years ago by Gap Inc. to head up its nonmerchandise procurement organization, Gunn takes advantage of the daily business-intelligence feature in the company's Oracle ERP system to "have at our fingertips the supplier spend data that used to take three or four months to gather."
With more than 3,000 Gap, Old Navy, and Banana Republic stores nationwide, Gunn's company has what he describes as "a real hidden asset in our nonmerchandise supply chain," which includes the vast network of suppliers that play a role in opening and maintaining all those stores. With a fourth, as-yet-unnamed brand aimed at women over 35 in the works, Gap wants to manage those suppliers as efficiently as possible. The spend-management capabilities in the Oracle software, Gunn says, address all facets of the process, including the critical but often-overlooked back-end analysis.
"In the past, we'd contract for certain pricing and related terms," he says, "but we had no way to know whether those agreements were adhered to. Most agreements have plenty of variables that can affect the ultimate spend, so it's not enough to negotiate terms up front that satisfy you. You have to follow through and see how the spending actually played out."
"There's no clearer or more direct lever to improve financial performance than to focus on spend or procurement," says Tim Minahan of the Aberdeen Group, a Boston-based IT consulting firm. "While every additional dollar in revenue a company earns entails significant costs in sales and overhead, every dollar saved drops straight to the bottom line."
Once you back out the cost of the software and associated process and organizational changes, of course. But those changes often provide an impetus for spend-management software investments. Nate Lentz, CEO of Verticalnet, a provider of supply management software and consulting services, says that often as a result of acquisitions, many companies now want to centralize spend efforts rather than negotiate and source at a divisional level. "When they do spend analysis across the corporation, they discover an enormous opportunity to leverage their scale for both direct and indirect materials," he says. Or as Faheem Ahmed, head of market strategy for supply-relationship management at ERP vendor SAP, says, "Purchasing is moving from being tactical to being strategic."
Reader Comments» Post a comment