Procurement, The 3rd Generation: Integrated Spend Management – Early integration = creating more value July 10, 2008
Posted by Jari Tavi in : Differentiation, Procurement , trackback
It seems like the discussion about how to implement the Spend Management gets more heated and thus this topic deserves an update.
As I wrote in my earlier blog entry I believe in a little (or maybe a quite) different approach than the “traditional” spend management solution providers, namely I believe in the early integration – the most traditional providers either focus on “planned spend” by utilizing PO-based estimation while the other group of vendors believes in “late integration” to existing data from multiple sources. In my opinion, the “early integration and rapid analysis” model has proved to work pretty well and I will explain my opinion a bit further here.
One of the key differences between traditional and new thinking is that in my opinion, the approach should have early validation, enrichment, cleansing and classification of spend related data instead of building highly complex spend enrichment packages around existing solutions. I do understand that it is not that simple as it sounds as most of the Purchase-to-Pay solutions have not been designed for this from the outset, but that is exactly the reason why there is room for non-SAP Purchase-to-Pay and spend solutions. When this is a core focus of a vendor, it has (and must have) more out of the box thinking to be competitive and able to position its solution as an add-on to SAP (or other ERPs) instead of going in head-to-head competition with ERP’s. So instead of trying to “replace” ERP MDM, I feel that it is more efficient to create early stage P-MDM (Process Master Data Management) that integrates well with existing or future ERP MDM implementations. This reduces the need for external validation, enrichment and classification tools.
Using the traditional model the stake holders will miss a significant opportunity to get true visibility over processes unless companies engage in yet another additional (costly) effort to create context for their spend management.
What does the context mean? It means that in addition to seeing the actual detailed categorized spend you should be able to see root-cause analysis about how you ended up in such a situation. You need to see the decision chain starting from selection of the vendors, awarding the contracts and initiating the actual procurement activities with requisitions, PO approvals, goods received inspections, payment related activities and exceptions etc. We should always remember that PO is only the “plan” what we wanted to do, and the full process with the whole exception tree until the final payment is the “evidence” of how we acted and performed against the plan. the traditional method of spend analytics will be in a dead-end soon if it does not or is not able to offer the context because it will not be able to address new requirements for supplier spend management best practices:
- Without the full visibility, you cannot fully exploit the opportunity to innovate and improve (Source: Gartner, Business Process Improvement practices)
- Regulatory and corporate values based compliance with green and other corporate reputation building initiatives (spend with vendors of choice meeting your criterion)
- Requirements to award part of the business to minority owned business as expected by current best practices (and in some cases by legislation as well)
- Ability to balanced supplier analytics (including price, SLA, compliance and other terms like sustainability and continuous improvement of quality and performance of the operations as whole)
- Corporate values and ethics as part of corporate spend management promoting the true deployment of the plans and commitments in this area
What makes me make the bold statement that traditional ERP’s and traditional spend analytics cannot keep up with this development? Why can’t they keep up with building a true Purchase-to-Pay holistic approach? There are two main reasons:
1. Non-focus business: Current Purchase-to-Pay processes are still too much “silo driven”. Software companies are selling “silo” software for sourcing, another one for contract lifecycle management and third one for financials. Instead of that, software should integrate over the value chain and should enable companies to create a holistic Purchase-to-pay blue-print to be implemented one piece at a time over the longer time and the order of implementation should be decided by the customer based on the maturity and capabilities of the organization.
2. Non-holistic approach: As the applications are too much in silos and they have not been designed to integrate over the whole value chain including all of its processes, the holistic approach is being seen too complex to implement with traditional approach. This is quite a challenge to be solved as it would require major refactoring to existing software using the traditional model and approach.
IMHO: There will be a huge change in the whole purchase-to-pay approach over the next five years. I still recall when Basware started to introduce the holistic approach to purchase-to-pay in 2002 with an international scope a year later when many analysts and company representatives said that’s nice idea… But! Well, today most of the RFP’s from large or mature smaller enterprises include more and more holistic approach to the whole integrated purchase-to-pay value chain, and yes, in my opinion, that is the way to go!
The Next Practices of spend management are already here! – 3rd Generation e-Procurement!