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Using Spend Analysis to Smooth the M&A Path
4 Steps to Consolidate Your Purchasing Power
September 21, 2011
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Audience Profile
Has your company been involved in or have plans for a M&A within the next 12 months?
What's the biggest Spend Management challenge you face?
© 2011 Forrester Research, Inc. Reproduction Prohibited © 2009 Forrester Research, Inc. Reproduction Prohibited
The Many Sources of Value from Spend Analysis
Andrew H. Bartels Vice President and Principal Analyst
© 2011 Forrester Research, Inc. Reproduction Prohibited
Spend analysis is a critical element in any company’s efforts to improve the results of its purchasing activities –
especially for larger and more complex businesses or those undergoing
mergers and acquisitions
© 2011 Forrester Research, Inc. Reproduction Prohibited
Spend analysis is the first stage in the eight-stage ePurchasing process
1. Spend analysis 3. Supplier
identification
4. Sourcing
5. Contract life-cycle management
6. Procurement
7. Order fulfillment (services procurement)
8. Electronic invoice processing and presentment
2. Supplier assessment
New category: Supplier risk and performance management
Supplier network services
© 2011 Forrester Research, Inc. Reproduction Prohibited
Three approaches to spend analysis
1. Reports of transaction systems (ERP, procurement, etc.) Pros: Cheap, leverages existing systems Cons: Data quality generally poor and incomplete
2. Manual analysis of POs, invoices, receipts, etc.
Consultants help sort and categorize POs and invoices Pros: Cost-effective one-time snapshot of spending Cons: Expensive to repeat
3. Automated spend analysis
Specialist software vendors provide automated tools Pros: Fast, repeatable, complete Cons: Training system to improve accuracy; cost
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Who needs automated spend analysis?
Single ERP A few ERPs Multiple ERPs
TECHNOLOGY COMPLEXITY
Definitely yes!
Probably yes!
Possibly yes.
Multiple markets, multiple
industries
Single market,
single industry
BUSINESS COMPLEXITY
Enterprises in multiple markets and multiple industries with multiple ERPs benefit the most
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Who needs automated spend analysis?
Enterprises engaged in mergers and acquisitions
Acquiring company’s
spend categories
Acquired company’s
spend categories
Merged companies’
spend categories
Many corporate acquisitions
and mergers are justified on
the basis of cost savings
Consolidation of spending
and increased discounts from
higher category spend are
two important sources of
cost savings
Spend analysis tools allow
companies to assess quickly
the size and areas of
potential savings
© 2011 Forrester Research, Inc. Reproduction Prohibited
Automated spend analysis
Benefits
Identifying opportunities to consolidate spending and get volume discounts
Sarbanes-Oxley compliance
Assessing compliance with and results of past sourcing activities
What’s involved
Defining a product taxomony, generally starting with UNSPSC
Importing file of PO/invoice/receipt data
System cleanses, normalizes, categorizes and enriches data
Detailed reports and analytical tools
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Other sources of value
Improved employee and supplier compliance
with sourcing policies
Improved master data management
Improved employee satisfaction and work
performance through simplified purchasing of
needed services
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Demand for automated spend analysis tools is growing
Number of companies with automated spend analysis tools
Annual vendor revenues for automated spend analysis tools
US$ millions
Source: Forrester Research, Inc., based on vendor data from 14 vendors
© 2011 Forrester Research, Inc. Reproduction Prohibited
What to look for in a spend analysis solution
Ability to cleanse, normalize, and categorize spend data from a variety of sources
Efficiency of analysis engine – how much data can it handle, how quickly can it generate results, what level of accuracy?
Structure of analysis engine:
– Rules-based engines work best on direct and indirect materials
– Artificial intelligence engines are best for services
In-house software or outsource service?
Experience in analyzing spend in your industry
Integration with sourcing tools
Portfolio of analytical reports and data views
If you’re a multi-national, language and currency support
© 2011 Forrester Research, Inc. Reproduction Prohibited
April 2008 “Market Overview 2008: Automated Spend Analysis”
Different vendors use different spend classification algorithms
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General issues in spend analysis
Setting up the right taxonomy of spend categories – Start with UNSPSC – But probably will need to customize
Determining frequency of analysis – Once a quarter to once a month is optimal – Once a year is too infrequent – Once a week or once a day is too frequent!
Determining who sees results – Aggregate results to CPO, CFO – Category results to relevant business units – Detailed results to sourcing project teams
Integrating with eSourcing – Take outputs of the analysis of a spend category and
port them directly into a RFx for that category
© 2011 Forrester Research, Inc. Reproduction Prohibited
International issues in spend analysis
Multiple language support – Mutlinational companies operate in many countries with many
languages
– Ability of tool to handle invoices, POs, and receipts in many languages is critical
Cross-border mergers and acquisitions – European M&A involves regulatory constraints that limit ability
to consolidate and rationalize ERP systems
– Increases importance of a spend analysis tool to consolidate spend data from across all units
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Recommendations
For large or diverse companies, automated spend analysis is a critical element in spend management
Choose an automated spend analysis tool that meets your requirements and budget
Create your spend category taxonomy before doing analysis
Start with semi-annual analysis, then move to quarterly, then to monthly
Act on the information! Avoid analysis for analysis sake
© Ciena Confidential and Proprietary
Deploying Spend Analytics in a Post-Merger Environment
Seth Balsam Director, Global IT Procurement September 21st, 2011
© Ciena Confidential and Proprietary
Ciena: a global leader in the optical networking industry
Global leader in high-capacity networking
Global leader in network/service automation and mesh switching
Global leader in OTN
Emerging leader in Carrier Ethernet and converged packet-optical and networking
Technology leadership
#1 share in metro and long-haul optical in North America1 and #3 share worldwide1
#1 share in fiber-based Ethernet access2
Only supplier with commercially available 100G solutions
Built the market’s largest optical mesh networks
Market leadership
A global supplier serving 80% of the world’s 20 largest network operators3, leading enterprises, and government agencies
1 Dell’Oro optical market share estimates as of calendar Q3 2010 2 Heavy Reading Q2 2010 market estimate 3 Ciena analysis based on network operator annual revenue
© Ciena Confidential and Proprietary
Ciena doubled in size with acquisition of Nortel
With this acquisition came the pressure to identify savings and synergy
opportunities as quickly as possible
METRO ETHERNET NETWORKS
Fiscal 2008 revenue of US $902 million
~350 customers worldwide
2,110 employees worldwide
leader in practical innovation with strengths in network automation, switching and optical/Ethernet convergence
Fiscal 2008 revenue of US $1.36 billion; first 6-mos 2009 US $556 million (unaudited) (acquired assets only)
~400 customers worldwide
~2,300 employees worldwide
leader in network innovation with strengths in high-capacity optical transport and connection-oriented Ethernet
© Ciena Confidential and Proprietary
Ciena’s indirect team is new to the sourcing group
What Was Going Well
• Improved organizational “fluency” and awareness around procurement • Strong degree of cooperation from most stakeholders • Vendor response to “new Ciena” • Synergy expectations
What Was Not Going So Well
• Lacked spend visibility • Demand for savings associated with merger synergies • Need to focus sourcing efforts on dollars & savings • Too much manual effort around data extraction and review
© Ciena Confidential and Proprietary
Struggling with spend analysis, the merger compounded the situation
• No central data repository
• Oracle extraction efforts were “blunt force” efforts, no legacy Nortel SAP data was included in the deal
• Indirect data wasn’t a focus until shortly before the deal was announced
• Data wasn’t cleansed or structured
• High degree of manual effort to determine basics (top vendors, top categories, total spend)
• Push to identify merger synergies fast
• Huge demand for analytics
• Budget made available
• Willingness to try new solutions
• On-demand solutions met the price point
• Nothing to lose, everything to gain
© Ciena Confidential and Proprietary
Search for appropriate tool was bounded by ease-of-use and timing requirements
Specific reporting formats and categories required
Ability to scale quickly, cost effectively once application gained adoption within organization
End-user friendliness guaranteed adoption
• Quick deployment – 1st time use had to be short; Ciena resource requirements to be minimized
• Minimal investment required
• Low risk
© Ciena Confidential and Proprietary
RESULTS
Credibility, Leverage for
Supplier Negotiations
Enhanced Data Insight
• First time the combined organization had easy-to-manipulate spend data at their fingertips
• Post-Merger leverage: Insight into how legacy organizations were using common suppliers
• Drill-Down functionality allowed granular analysis
Implementing Spend Analytics allowed us to disaggregate spend across suppliers & categories
Customized Reporting Improved
Adoption
© Ciena Confidential and Proprietary
Credibility, Leverage for
Supplier Negotiations
Enhanced Data Insight
• Analyst support helped accelerate adoption across direct and indirect organizations
• Category-based reports popular – “roll-ups” or “bookmarks” based on UNSPSC allow specific commodity views
• Added surprise: Adoption by spend owners outside of procurement
Implementing Spend Analytics allowed us to disaggregate spend across suppliers & categories
Customized Reporting Improved
Adoption
RESULTS
© Ciena Confidential and Proprietary
Credibility, Leverage for
Supplier Negotiations
Enhanced Data Insight
• True, cross-organizational, cross-commodity spend views allowed us to talk credibly with suppliers about post-merger spend
• Ability to track committed spend vs. actual
• Rogue spend identification eased
Implementing Spend Analytics allowed us to disaggregate spend across suppliers & categories
Customized Reporting Improved
Adoption
RESULTS
© Ciena Confidential and Proprietary
Lessons learned
1. Work with a partner that will be flexible and supportive as you start the journey. Imperfect data and process knowledge require a perfect partner.
2. Ensure underlying data query is accurate, especially when extraction is coming through a reporting tool.
3. A dedicated resource helps speed adoption through report design and tool discovery. Sometimes, “adult supervision” is indeed required....
4. The one-time upfront manual review effort of uncategorized transactions is required for good results, but pays huge dividends.
5. While 80:20 is good, remember that 90:10 is better: Categorization rules made for larger spend amounts also apply to smaller items – some providers don’t leverage this fact. Make sure to tailor your SLAs accordingly.
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Procurement Enablement
Data visibility exists as the key ingredient to a best-in-class procurement
operation
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Data – The Communicator in Unique Deployments
BPO Deployments
Communication is the primary differentiator between successful
and unsuccessful Procurement BPO efforts
Spend Analysis is an accelerant in BPO scenarios, but also a
common source of information shared by in-house and remote
teams
Multinational Deployments
When combined with other data (sourcing, resource planning
data), as with Iasta’s CPO Dashboard, a spend analysis platform
allows collaboration
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Means vs. Ends
Most of the “Means” of Spend Analysis are similar…
Raw data is cleansed, rationalized, or enriched
Data transformation occurs in software to ensure iterative
refresh success
Data is delivered and experienced by end user through
interactive reporting
…but the “Ends” often differ.
Procurement Transformation
Category-Specific Savings
Regional/Departmental Politics!
Data Control
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Question 1
We have both an ERP system & BI (business intelligence) system that
provides spend reports. Why can’t these suffice?
The key reason comes back to data and the level of data gained from ERP / BI
vs. automated spend analysis solution.
Typically the data in an ERP system is going to be at the level of detail needed
for a general ledger. For example, how much have you bought in computer
equipment? But knowing how much you bought on computer equipment is not
very useful if you want to go out and do sourcing.
Automated spend analysis gives you the ability to drill down to give much more
detailed information to explain what you bought, when you brought it, who
bought it, and for how much.
Good spend analysis providers can also bring in data from purchasing
scorecards, such as important contract data, supplier risk, etc.
There are a lot of powerful spend analysis solutions available in the marketplace
that give you the ability to bring in multiple systems with
multiple dimensions to bring in much more power.
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Question 2
What was the most difficult part of the deployment and how long did it
take to implement?
I think we had our spend analysis dashboard up and running in about 6-7 weeks
from the time we had our data extracts complete and handed off to Iasta.
The most difficult part was when we needed to make a pass from that famous
category 99 – which is the question mark category. We had to pick up all of the
stuff the machine didn’t get because it wasn’t clearly articulated what was
purchased. We wound up taking that category and splitting it up across all
commodity managers to go through it manually to make sure we captured
everything. I would say that was the tough part, even though while the system
was up and running so I wouldn’t add that to the deployment timeline.
Even though it was a manual process for some category mangers to go through
and clean up those last bits and pieces to get more granular rules in place, once
you do it- it’s done. The data becomes the Holy Grail.
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Question 3
What advice do you have for companies who do a POC (proof of
concept) before implementing a spend analysis solution?
Every company has different data – so it’s extremely important for us to get
involved with client / prospect to understand the data and help identify the
categories that they are looking into exploring for new opportunities.
Iasta takes the time to meet with the client to develop the reports they would
like to see during the POC demonstration, including target categories.
This process helps us become much more intimate with the data and that’s
important for a successful POC.
To have a successful POC the customer must still be involved, and not throw
data at a vendor without context.
Be realistic, a POC is designed to show the process of how your data will be
classified and how adjustments will be made to make sure it is accurate. It has
a limited time scope so that you shouldn’t expect all your data to be perfectly
classified in 2 weeks.
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Question 4
How can you justify ROI (return on investment) for a spend analysis
implementation?
Through the cost savings achieved from gaining supplier and spend visibility,
compliance, risk management, and a sourcing pipeline developed through the
classification and reporting of your spend analysis partner.
Iasta works with its clients to make spend dada actionable, benchmarking past
sourcing experience against current client data to determine prime categories to
source, identify supplier rationalization opportunities, isolating price variances
and off-contract spend, and so on.
Spend analysis helps companies increase the amount of “spend under
management.” According to industry analysts, this is a leading indicator of a
successful sourcing and procurement strategy. Best in class organizations
have 85% of total spend under management and realize 60% of
formally negotiated savings while other organizations only recognize
5% of negotiated savings (Aberdeen Group, 2011).
That is a huge impact to ROI.
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Question 5
How do you recommend teams build a solid case for spend analysis?
Gather references
Review case studies
Participate in a proof of concept
Read analyst research
Ensure the solution can bring in 3rd party data and other data, such as sourcing
project details gained from Iasta’s CPO dashboard. Other data to bring in
includes:
Supplier performance management
Contract compliance
Risk management
Benchmarking
Once the POC is complete and you have gathered this information, put together
a presentation for key stakeholders that includes opportunities discussed in the
POC and learned their your research. Overall, demonstrate the value that spend
analysis will bring to your organization.
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Question 6
How long does it typically take to deploy a spend analysis solution?
Best-in-class spend analysis partners can deploy a solution in a timeframe of
4-10 weeks when focused on providing clean, sustainable data to the client.
Best practice is to use a combination of classification software and data
professionals to bring the data to a certain state out of the box and then
audit the work of the software to ensure accuracy from implementation
through refreshes.
Iasta will create business rules for any audited data that will be stored in
the software to ensure that future classifications are automatic, quick, and
consistent.
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Question 7
How does “good” data impact the deployment process?
All companies can benefit from undergoing a cleansing and classification
process, no matter how clean the data may seem.
In terms of deployment, the more information given in a clean format will most
likely spend up the process.
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Question 8
In Ciena’s case, user adoption of its spend analysis solution spread
quickly to other business units. What advice do you have for companies
looking to collaborate with other business units / stakeholders using
spend data?
The key is to start out small in procurement, get some wins and gain confidence
throughout the organization.
Then, you can slowly gain user count and train the users to build usage across
departments.
Strive to maintain procurement as a Center of Excellence and bring in other
business units with additional tabs / reporting information that is segmented by
unit, stakeholder, department, etc.
Use bookmarks, shared reports, and so on to keep driving adoption and
collaboration.
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