CFO IT - Spring 2005 Issue

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Where Does the Money Go?

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Companies interested in spend-management software have no shortage of products from which to choose, but those products tend to fall into distinct categories. Some provide a broad technology platform that can accommodate virtually any purchase a company might make. Others address a distinct category of spend, be it raw materials or services such as contract labor. And some are narrower still, focusing only on a specific expenditure such as telecommunications, travel, or facilities maintenance.

While some analysts maintain that spend-management software is a big-ticket item of interest only to companies with at least $1 billion in revenue, there are new, smaller vendors that charge as little as $10,000 to start (as opposed to a tab of $1 million or more on the high end), and they usually offer their services in a hosted model, requiring virtually no changes to a customer's infrastructure. Monthly charges may be based on a flat fee, volume of transactions that pass through, or other criteria.

Many analysts say that to take full advantage of spend management, companies may have to piece together several packages or services, although there has been plenty of M&A activity in the space as some vendors work toward more-complete offerings. Others are content to combine software and services with consulting help in specific areas in which even a savvy purchasing department might lack the requisite knowledge to craft the best contracts.

That was the case at Wachovia when, following its 2001 acquisition of First Union, which brought its total number of branches to 2,700, an idea to track electricity, gas, and water bills suddenly clicked. "We'd talked about how smart it would be to do this," recalls Ginny Schlosser, CFO of corporate real estate at Wachovia Bank and former CFO of corporate real estate at First Union, where the idea first took root. The merger, combined with soaring electricity costs at the time, gave the project life.

The bank opted for a software/consulting service from Cadence Networks that not only gives it the clear picture of total spend it needs to negotiate better electricity rates, but also helps it trace wasteful usage, including the location of leaky water lines. The bank now plans an additional step: to reduce energy and water consumption through employee education and other initiatives.

It's not unusual for spend-management systems to yield double-digit savings—about 15 percent, according to industry watchers. They also cull out the maddening waste that so exasperates many thrifty CFOs—for example, a $75 difference in room rates at the same event in the same hotel. Armed with solid, up-to-the-minute data, companies can identify waste, eliminate rogue spending, negotiate better deals, and in general make better decisions.

Irritability Factor
But there are problems. As the CEO of one spend-management company says, "There's a growing sense of irritability over what these expensive applications promise and what companies actually get from them. Indeed, another Forrester study found that 35 percent of respondents whose companies had invested in procurement and sourcing technology said the benefits were below expectations. Companies face three challenges: deciding what software (or combination of software) best meets their needs, getting suppliers to cooperate, and making the organizational and process changes within their own companies that are needed to move away from business as usual.

Also hanging over the greater adoption of spend-management software is the bad taste left in many people's mouths by the earlier foray into E-procurement, which tended to focus less on analyzing spend data and more on reducing transaction costs.

Managing the relationships with suppliers is also tricky. As Minahan warns, "You can only negotiate a 15 percent discount from your suppliers for so long before you put them out of business—you're sucking the fat out of the suppliers' profit margins." Zealous users of online auctions, trading webs and early E-procurement systems now take a more holistic view of the entire procurement cycle, versus focusing solely on negotiating costs.

GlaxoSmithKline knows this learning curve: in 1997, before it had become part of GlaxoSmithKline, pharmaceutical company SmithKline Beecham developed an internal procurement system dubbed SpendTrak that it believed put the company ahead of its competitors. "But SpendTrak only allowed us to do coding at a supplier level, not the granularity required to perform compliance reporting on preferred suppliers," explains R. Gregg Brandyberry, vice president of procurement for global systems and operations at GlaxoSmith-Kline. The company could see how much it spent with IBM, for example, but it couldn't get a quick read on a specific contract. "Especially on certain indirect goods and services," says Brandyberry, "we wanted to make sure we weren't overbuying, or that the specification was for what we actually needed."

Beginning in 2004, GlaxoSmith-Kline installed Emptoris spend-analysis software and began to get granular, making sure that spending follows the terms of carefully negotiated contracts. The software also helps the company get a sense of the performance of vendors supplying various indirect goods, so that, as Brandyberry says, "We can ask ourselves, 'Do we need to buy Superbrand X when another brand will do?'" Glaxo is now ascertaining whether the system can be expanded to encompass spending on a broad range of services.