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Even in tough times, companies often fail to track corporate spending. New software may help.
Bob Violino, CFO IT
September 15, 2003
The very idea of "spend management" should appeal to any finance executive—particularly at a time when many companies face flat revenues. For many, though, the term is an oxymoron, as corporate spending has been anything but manageable.
Now an emerging class of enterprise spend management (ESM) software claims to give organizations more visibility and control over their spending while reducing costs through improved sourcing and procurement. Early adopters are enthusiastic about the ability of ESM to help manage expenses,organize supplier contracts, and generate better deals from key suppliers.
Despite the initial excitement, finance and procurement managers and other experts caution that this is an evolving market, with many vendors offering relatively untested products. Implementations can be complex—particularly for large companies—and organizations need to thoroughly research the software and the companies that sell it before making what could be a major investment. Most companies won't reveal exactly what they paid for ESM products, but some acknowledge that comprehensive systems cost millions of dollars. Experts also note that the technology provides only part of the solution to runaway spending; the software must be accompanied by process improvements and accurate data.
Few question that there's a need for ESM. "It surprises me how much companies really don't know about what they're spending money on," says Christa Degnan, supply-chain research director at Aberdeen Group Inc. in Boston. "They've never had granular detail on who they're spending with, how much, and why they're spending." Pierre Mitchell, vice president of research at AMR Research in Boston, predicts that ESM will evolve from product niche to corporate discipline. "If you don't determine how much you're spending by supplier, commodity, and business unit, you're running blind," he says. "You have no control over your spending."
ESM addresses such functions as spend analysis, electronic sourcing and procurement, and contract management. Information about expenditures is captured in a central place, where it can be used to a company's maximum benefit. ESM is designed to provide greater understanding of what the organization is spending—on commodity goods and services, maintenance fees, materials, travel—using analytics to gauge spending by cost, type of commodity, and vendor. Companies can view in the aggregate contracts that have been negotiated by different departments.
Ariba Inc., which coined the term enterprise spend management, is considered by many to be the market leader. Ariba was also among the pioneers of E-procurement, a technology that looks conspicuously like ESM, although analysts say there is a genuine distinction, with ESM uniting procurement and several related functions. The ESM market is attracting the attention of such enterprise software providers as SAP, PeopleSoft, and Oracle at the high end, along with a number of smaller companies, some of which, such as Ketera Technologies, offer ESM capabilities as a Web-based service. Many smaller companies tend to specialize in specific spend-management categories, such as contract workers, telecom expenses, or travel.
Companies deploying ESM say they're seeing such benefits as reduced spending and more-efficient procurement, and many say the products are more than paying for themselves. American Express Co. is in the third year of an ESM project that has resulted in hundreds of millions of dollars in savings, says Gary Crittenden, executive vice president and CFO. The company is using a combination of Ariba's ESM applications, a homegrown E-procurement program, and a spend-analytics tool from Zeborg Inc. to better manage billions of dollars of spending on indirect goods and services each year.
The New York-based financial and travel services company has gradually moved toward centralized procurement using Ariba's Buyer product, encouraging departments to purchase commodities through central procurement or risk paying fines of $1,000 the first time they don't do it and $10,000 the second. Few have had to pay the fines, says Crittenden. American Express is using a homegrown procurement program outside the United States but may roll out Buyer to its international offices.
Another product, Ariba Contracts, helps American Express ensure that the amounts people spend on goods and services—such as PCs, printing, or temporary labor—are based on specifications and prices negotiated in supplier contracts. The company's procurement department is using Zeborg's ExpenseMap, an online tool that captures and analyzes spending data. The product provides granular detail on where money is spent, how much is being spent, and by whom. Could similar results have been accomplished for less money using existing financial software and policy enforcement? "In a large company like ours, there's no way to do this on a spreadsheet" or through policies alone, says Crittenden. "You need an industrial-strength platform that supports thousands of people around the world."
KeyBank in Cleveland, Ohio, has invested millions of dollars to create a multifaceted ESM "ecosystem" that includes Oracle ERP applications, Ariba E-procurement software, and an internally developed contract-management system to control and analyze spending. The bank now runs 95 percent of its spend data through ESM components, tracking every type of spending except salaries and interest expenses, says Deborah Manos, senior vice president and chief sourcing officer. The company saves about $135 million annually on products and services, including office supplies, telecommunications, travel, and express mail.
Textron Inc., a diversified manufacturer based in Providence, is using a variety of tools to track spending but is looking for a system that will provide a more complete picture. Textron's finance department uses software from Hyperion that aggregates accounts-payable data from throughout the company. The$11 billion conglomerate, which provides such diverse offerings as aircraft fastening systems, industrial products, and financial services, has more than 100 accounts-payable systems and more than 50 ERP systems, due to historical growth by acquisition. The Hyperion software gathers useful spend data at the chart-of-accounts level, but Textron wants more granular analysis that identifies commodities and products, says David L. Oppenheim, director, integrated supply chain.
Oppenheim says Textron's supply-chain leaders track spending on direct materials—such as parts that go into planes—by gathering accounts-payable information and importing it into spreadsheets to create databases. The company wants a complete solution that will track all enterprise spending, manage contracts, conduct reverse auctions, and provide more-detailed analysis of spending, and it has sent out a request for information to multiple vendors. "We want to make sure that each of our businesses doesn't go out and try to create its own homegrown spend-management system—or worse, buy one," says Oppenheim. He isn't sure any one vendor can provide what Textron wants: an integrated solution.
Companies implementing ESM say the process isn't simply a matter of installing software and reaping the savings. For one thing, data from purchase orders and other documents needs to be cleaned up. "You can't have a toxic level of data, where you've got missing fields, duplicate records, and errors," says Oppenheim. "ESM is a great concept, but if you have the same poor data, you won't get payback."
At many companies, spending categories aren't well defined, says Mitchell of AMR. Businesses that report $1 million in spending as "miscellaneous," for example, will have to categorize it more specifically if ESM is to provide any value.
To pave the way for ESM, finance departments will need buy-in from business units, because they're the ones who will be feeding data into the system. Getting businesspeople to go along isn't always easy. "Central procurement is a hassle for them," says Crittenden of American Express. "You have to give them an incentive by showing them they'll be saving a lot of money."
Some say the software needs friendlier interfaces so that it can easily be used by nontechnical staff. Perhaps the most common criticism is that many spend-management products lack integration—with other spend-management components, ERP finance systems, and vertical market supplier applications.
Despite these shortcomings, analysts say spend management's time has come. "If I was counseling a CFO, I would tell him the software is now mature to the point where it does the job well," says John Christensen, a partner at Deloitte Consulting responsible for its global procurement and sourcing practice. But he warns against a strictly technocentric approach, instead advising CFOs to take the lead role in creating a strategic cost-reduction program, with ESM as a key component.
Bob Violino is a freelance writer in Massapequa Park, New York.
Managing Spend Management
Thoroughly research the market to find vendors and products most suited to your organization's needs. Many vendors offer spend-management tools, but many products don't work together and some might provide functions your existing systems already address.
Enlist the support of the CEO and other senior business executives. Ensure cooperation from business-department leaders by demonstrating the potential benefits of central purchasing, such as reduced costs and greater accountability.
Put in place processes to make sure the data going into spend-management systems is free of errors and includes all necessary information about purchases.
Enforce the organization's policies regarding procurement and purchasing of goods and services, even if it means fining those who don't comply.
Hire people who are skilled at negotiating contracts with suppliers and also understand spend-management technology. Train employees to use spend-management software to shop for and buy corporate commodities.