Spend Analysis:

Working Too Hard for the Money
August 2007

Spend Analysis
Page 2

Executive Summary
While enterprises are clearly able to recognize and communicate the benefits ofutilizing spend analysis technology, they have not yet bridged the gap to action.
Sixty percent of organizations currently rely on manual tools to collect andanalyze spend data, resulting in limited spend visibility and the inability to
improve cost savings.

Best-in-Class Performance
Aberdeen evaluated over 700 enterprises in July and August of 2007 anddistinguished Best-in-Class enterprises by the percentage of enterprise spend
under management. Best in Class enterprises in this study are notable for theirsuperior performance and credit spend analysis solutions for delivering thefollowing benefits:•

12.7% savings due to sourcing efforts based on spend analysis data•

9.1% reduction in manual correction of spend cleansed and classified•

73% rate of compliance to contractual agreements

Competitive Maturity Assessment
Best-in-Class performers shared many common characteristics with respect totheir spend analysis strategies. Best-in-Class companies are:•40% - 94% more likely to establish executive support for spend
analysis initiatives•

40% more likely to utilize spend analysis reports that provide details
at the transaction level•

30% more likely to have enterprise-level visibility into spend

Spend Under Management
The classic measure of
procurement’s impact upon an
enterprise is the percentage of
non-payroll-related spend that
falls under management of thisgroup, what is commonlyreferred to as spend undermanagement. Aberdeen
research has shown thatenterprises have been able toachieve a 5% to 20% costsavings for each new dollar of
spend brought undermanagement.

•

Establish executive support by demonstrating the ROI of a spend
analysis investment“If you take away spend analysis
capability from a company, you
might as well turn the lights out
on the procurement department.
Then all they’ve become is atransactional processing groupthat doesn’t add much value tothe organization.”•

Know what you can and can’t do – establish a baseline for spend
analysis capability- Vice President, Large
Property and Casualty
Insurance Enterprise•Move beyond sourcing cost savings – contract compliance will also
positively effect the bottom line

Required Actions© 2007 Aberdeen Group.
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Spend Analysis
Page 3

Table of Contents
Executive Summary ..............................................................................................................2
Best-in-Class Performance ............................................................................................2
Competitive Maturity Assessment ..............................................................................2
Required Actions .............................................................................................................2
Chapter One: Benchmarking the Best-in-Class.............................................................4
Top Drivers for Action ..................................................................................................4
Maturity Class Framework............................................................................................7
Best-in-Class PACE Model ............................................................................................8
Chapter Two: Benchmarking Requirements for Success ........................................ 10
Competitive Assessment ............................................................................................ 11
Organizational Capabilities and Technology Enablers ......................................... 12
Building the Spend Analysis Business Case ............................................................ 13
Chapter Three: Required Actions................................................................................ 17
Laggard Steps to Success ............................................................................................ 17
Industry Average Steps to Success........................................................................... 17
Best in Class Steps to Success................................................................................... 18
Appendix A: Research Methodology ........................................................................... 19
Appendix B: Related Aberdeen Research .................................................................. 21

FiguresFigure 1: Users of Spend Analysis Data...........................................................................4
Figure 2: Top Pressures Driving Focus on Spend Analysis.........................................5
Figure 3: Top Challenges for Spend Analysis .................................................................5
Figure 4: Percent Breakdown of Data Sources by Enterprise Size...........................6
Figure 5: Top Actions for Spend Analysis.......................................................................6
Figure 6: Spend Analysis Processes – Importance vs. Ability.....................................7
Figure 7: Spend Analysis Automation ..............................................................................8
Figure 8: % Savings from Sourcing Efforts After Spend Analysis...............................8
Figure 9: Auto Classification and Cleansing of Spend Data..................................... 10
Figure 10: Top Criteria for Success of a Spend Analysis Program ........................ 10
Figure 11: Contract Compliance After Spend Analysis Initiatives ......................... 11

TablesTable 1: Spend Analysis Benchmark Performance........................................................7
Table 2: The Best in Class PACE Framework ...............................................................9
Table 3: Competitive Framework.................................................................................. 12
Table 4: Incremental Performance Improvements Driven by Spend Analysis.... 15
Table 5: PACE Framework Key ..................................................................................... 20
Table 6: Competitive Framework Key ......................................................................... 20
Table 7: Relationship Between PACE and Competitive Framework.................... 20© 2007 Aberdeen Group.
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Chapter One:Benchmarking the Best-in-ClassS

pend analysis (and the visibility it enables) provides the necessary
foundation for procurement organizations seeking to make better, more
informed sourcing decisions. Savings are typically achieved by (1)identifying opportunities to aggregate spend and negotiate superior contracts,(2) identifying and reducing non-compliant or “maverick” spend, and (3)improving procurement operations and supplier performance. Despite theseclear benefits, one-third of enterprises do not have a formal program inplace to manage spend analysis for the enterprise. While many still work to
manage their spend data and gain some modicum of visibility into andunderstanding of their expense base, they lack the basic framework thatformalizes the various activities involved in review and management of spend
data. It is therefore not surprising that the primary means of analysis are manual– 60% of enterprises utilize manual tools and services to collect and analyze
spend data, limiting visibility and ultimately leaving money on the table.

Fast Facts√ 60% of enterprises utilize
manual tools for collection
and analysis of spend data
√ The top challenge to aneffective spend analysis
program is data quality –identified by 42% oforganizations√ 38% of enterprises indicatedthat leveraging technology
for spend analysis is a top
strategy

Although procurement departments have been tasked with the primary
oversight of spend analysis programs, the awareness and importance of these
initiatives is also bubbling upstream as executive leaders leverage spend analysis
data to make key organizational decisions (Figure 1).
Figure 1: Users of Spend Analysis Data
59%
54%

“Although we are still in the pilot
phase for our spend analysis
program, it was monumental
getting executive support. Without
it, we would have been wasting
our time.”

25%

CPO/VP
Purchasing

Category
Managers

CFO

11%

10%

COO/PresidentCEO- Director of Projects –Procurement, International
Consumer Packaged GoodEnterprise

Source: AberdeenGroup, August 2007

One of the key reasons executives in the C-suite feel the need to swim deeper
in the spend data is the notion of leakage, as addressed in Aberdeen’s January
2007 “Advanced Sourcing and Negotiation” benchmark report. While
procurement departments and sourcing teams have proven adept at identifying
savings opportunities and implementing cost reduction measures, a gap often
arises between identified and realized savings. Awareness of this gap at all levels(including enterprise leadership) then provides a springboard for corrective
action to capture the 14%-24% of savings that is currently unrealized.

Top Drivers for Action
The fact that more corporate executives are utilizing data from spend
analysis initiatives underscores the significant market pressures to drive© 2007 Aberdeen Group.
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Spend Analysis
Page 5more profits from the business. Faced with this ever-present challenge,
CEOs and CFOs are seeking out as many avenues as possible to positively
impact the bottom line, and are looking to their procurement departments
to contribute more to this end. The profile of procurement has therefore
been elevated and the function is valued as significantly more strategic –they are being called upon to deliver results through cost savings on theenterprise spend managed (Figure 2).
Figure 2: Top Pressures Driving Focus on Spend Analysis
Identify savings
opportunities

47%

Prioritize spend
categories

29%

Increase spend
under management

Improve negotiation
leverage“If I can take the data from myspendanalysistoolandunderstand where it comes fromand tie it to performance, then I
caneasilyaddresstheopportunities to drive savings andreduce spend.”-CPO, Large North
American Insurance
Company

27%

23%

Source: AberdeenGroup, August 2007

Compounding the hurdles faced by organizations to fully leverage spend analysis
activities and deliver results are the internal challenges faced. While
procurement departments are working feverishly to generate cost savings,
identify key categories of spend, and manage more of the enterprise’spurchasing dollars, they are also hamstrung by the resources at their disposal.
What is making their jobs most difficult is the poor quality data on which they
are crafting integral sourcing and purchasing decisions (Figure 3).
Figure 3: Top Challenges for Spend Analysis
Poor data quality

42%

Too many data sources

Lack of standardized processes

Insufficient system automation

36%

31%

28%

“Our challenge is with the quality
our data. We use two primary
ERP sources and were hoping we
could manage at least 80% of our
spend through them. Although wehave a defined set of spend
categories, it’s been difficult totrack spend because of ourmanual process for cleansing data
– the consistency is not there andthe data often comes out muddy.”- Strategic Sourcing
Specialist, Large North
American Oil / Gas
Enterprise

Source: AberdeenGroup, August 2007

While poor data quality is a treacherous challenge that must be overcome inorder to produce effective analyses of spend data, the problem is closely linked
to the number of data sources that house the spend information. Primarily aproduct of company size, multiple sources of spend data is an issue that cannot
be avoided because the greatest visibility will be gained if the data is made© 2007 Aberdeen Group.
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Spend Analysis
Page 6

available from every source possible. It is an especially difficult hurdle for largeorganizations to overcome – 46% indicate that they draw from at least six
sources of data for spend analysis activities (Figure 4).
Figure 4: Percent Breakdown of Data Sources by Enterprise Size
60%
50%
40%

Large

30%

Mid-size
Small

20%
10%
0%
1

2 to 56 to 10Morethan 10

Don't
Know

Source: AberdeenGroup, August 2007

In response to the pressures faced and the challenges that must be overcome,many organizations are actively looking at technology to provide key data onenterprise spend. At the same time, these organizations are also working todevelop standardized processes for spend analysis and repeatable
methodologies to directly leverage this output into strategic sourcing efforts(Figure 5).
Figure 5: Top Actions for Spend Analysis
Adopt technologies to increase spend
visibility

38%

36%

Standardize spend analysis processes

Standardized processes to drive
sourcing from spend analysis
Create spend intelligence baseline(data sources, data quality, savings
opportunities)

27%

23%

Source: AberdeenGroup, August 2007

While organizations recognize the advantages that can be gained fromtechnology deployment for spend analysis, they have still not bridged the gap
between theory and practice. Across the primary steps in the spend analysis
process, enterprises are generally unable to fully leverage their spend analysis
solutions and fail to achieve competencies equivalent to the importance theyplace on key process areas. (see Figure 6 which portrays respondent self-ratings
on a scale of 1-lowest to 5-highest).

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Figure 6: Spend Analysis Processes – Importance vs. Ability
4.22

Data analysis

2.68

Data
management

4.07
2.64
3.91

Reporting

2.44
3.53

Supplier content

2.49
Current Ability

Perceived ImportanceSource: AberdeenGroup, August 2007

Maturity Class Framework
Top-performing enterprises effectively administer a spend analysis program byemploying technologies that automate multiple facets of the spend analysis
process, and enable organizations to more effectively leverage theirprocurement teams to manage more enterprise spend. Aberdeen distinguishedBest-in-Class enterprises by a common key procurement measure: percentage
of enterprise spend under the management of the procurement organization.
Table 1 summarizes the average performance of enterprises within the different
maturity classes for this study.
Table 1: Spend Analysis Benchmark Performance
Maturity Class

Average Performance

Best in Class: Top 20% of
aggregate performers• More than 90% of enterprise
spend is under management

Industry Average: Middle 50% of
aggregate performers• 51 to 90% of enterprise spend isunder management

Laggard: Bottom 30% of
aggregate performers• Less than 50% of enterprise spend
is under management
Source: AberdeenGroup, August 2007

Best-in-Class enterprises demonstrate that spend analysis can be leveraged togreatly improve business performance when the right technologies are matchedwith efficient processes. The degree of technology utilization and automation
play significant roles in the advantages that Best-in-Class organizations enjoy.
While all enterprises exhibit a mix of automated and manual tools for spend
analysis, the Best-in-Class are 40% less likely to engage in fully manual
processes and are twice as likely to deploy an enterprise-wide, fully
automated solution than all other companies (Figure 7).

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Spend Analysis
Page 8Figure 7: Spend Analysis Automation
22%
20%

13%

BIC
10%

Fully manual

All Others

Enterprise wide, fully
automated

Source: AberdeenGroup, August 2007

Higher levels of spend analysis automation help drive the superior levels ofspend under management achieved by Best-in-Class enterprises. This enables
these industry leaders to realize greater cost savings across different areas ofenterprise spend (Figure 8).
Figure 8: % Savings from Sourcing Efforts After Spend Analysis
12.7%

12.6%
12.1%
11.7%

11.6%

10.9%

Overall Spend

Indirect Spend
BIC

Direct SpendAll Others

Source: AberdeenGroup, August 2007

Best-in-Class PACE Model
Aberdeen has shown that there is a clear relationship between the pressurescompanies identify and the actions they take, and their subsequent competitive
performance. All participants should examine their prioritized PACE selections
and determine whether there are valuable perspectives to be gleaned bycomparison with the PACE priorities of Best-in-Class companies (Table 2).

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Table 2: The Best in Class PACE Framework
Pressures

Actions

Capabilities

Enablers• Need to• Adopt• Reporting at supplier, • Standardized online
identify
technologies
category, andreporting on
savings
to improvetransaction level
enterprise spend
opportunities spendtransactions systems• Executive support forvisibility
spend analysis initiatives • Automatedthroughcollection of spend• Visibility acrossspend analysis
data from multiple
enterprise into spend• Standardize
sourceson commodities andprocesses for services• Configurable
spend analysis
reporting and• Automated data
• Develop
collection from multiple analysis tools
standard• System thatsourcesmethodology
performs automated• Category management
for initiating
cleansing andexpertise ofsourcingclassification of data
procurement team
activities• Sourcing /• Ability to identify
based onprocurement
spend analysis sourcing opportunities
based on spend analysis outsourcing services
Source: AberdeenGroup, August 2007

Aberdeen Insights: Spend Analysis - Keeping the Focus
As procurement leaders blaze down the spend analysis trail, it is important forthem to maintain focus on the key issues that need to be addressed:
1) Spend visibility – Do I have it?
2) Savings generation – Can I deliver?
3) Savings maintenance – Can I maintain results?
If the answer is “No” to any one of these questions, then spend analysis can be
pursued to provide the answer. If the answer is “No” to all three, then it isimperative that spend analysis be implemented as a key corporate strategy. The
value of spend analysis, though, lies only partially in the data management.
Information is useful but is wasted without the proper plan of action. Once the key
to the locked closet (spend visibility) is attained, it is incumbent upon the
procurement team to develop an effective plan of action to prioritize and thensource the categories that will provide the greatest savings impact to theorganization (savings generation). The responsibility does not end after a sourcing
event has resulted in a finalized contract as spend analysis tools provide the ability
to track compliance to negotiated agreements. Procurement organizations should
then actively monitor purchasing activity to ensure that contractual savings arebeing realized (savings maintenance).

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Spend Analysis
Page 10Chapter Two:
Benchmarking Requirements for SuccessT

he difficulties faced by an organization when effectively performing spend
analysis and then leveraging the information to deliver savings are often
eased by technology utilization. Best-in-Class spend analysis consists ofstrong technology use and centralization of processes and policies to enable
heightened spend visibility. The quality of data used for sourcing efforts is ofutmost importance and begins with proper cleansing and classification ofenterprise-wide spend information (Figure 9).
Figure 9: Auto Classification and Cleansing of Spend Data
76%
69%

51%

BIC

√ Best-in-Class enterprises areat least 37% more likely toengage in automatedclassification and cleansing ofspend data as a first step inthe spend analysis process√ Contract compliance is 30%
higher for Best-in-Class
organizations than for All
Others after spend analysis
initiatives√ Best-in-Class companies are
31% more likely to haveenterprise-level visibility into
enterprise-wide spend

55%

Data classification

Fast Facts

Data cleansing
All Others

Source: AberdeenGroup, August 2007

These first steps in the spend analysis process are critical and set the stage fortrue spend visibility. Gaining visibility into enterprise spend allows procurement
organizations to identify the best savings opportunities available and design anaction plan to drive greater savings rates and ultimately place more spend underthe management of procurement, which is the second-most common criteria
for success of a spend analysis program (Figure 10).
Figure 10: Top Criteria for Success of a Spend Analysis Program
Cost savings on commodities andservices purchased

55%

Spend under management

Enterprise-wide spend oncommodities and services

47%

35%

Source: AberdeenGroup, August 2007

While spend analysis provides procurement departments with the initial
ammunition to get ahead in the cost savings battle by driving sourcing decisions(i.e. which categories to address based on newly realized spend visibility), it also
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Spend Analysis
Page 11

provides a foundation for sustaining these savings by providing an avenue toactively monitor compliance and reduce maverick spending (Figure 11).

Figure 11: Contract Compliance After Spend Analysis Initiatives
73%

56%

BIC

All Others“We’ve been using tools tonormalize and aggregate ourspend data. Although the programis in its early stages, we’ve beenable to successfully tie most of ourcontracts to our spend; our people
are good about not buying offcontract.
This
type
of
infrastructure and foundation will
be instrumental in the future.”- Purchasing Systems
Director, Large North
American Manufacturer

Source: AberdeenGroup, August 2007

Competitive Assessment
Survey respondents fell into one of three categories: Best-in-Class, Industry
Average, or Laggard.
Companies were characterized in five major areas: (1) process – the level ofstandardization and scope the sourcing group has defined for their current
processes; (2) organization – the structure, skills, and capabilities of theorganization as well as its general alignment with the strategic direction of theenterprise; (3) knowledge – the accessibility and visibility of spend data andinformation, and the ability to leverage it across the enterprise; (4) technology– level of automation and how well technology is leveraged to enhance spend
analysis processes; and (5) performance – the ability to identify, track and thenimprove upon key performance indicators such as spend under management,
sourcing cycle times, cost savings from sourcing efforts, etc.
Table 3 shows some of the processes, capabilities, technologies, and strategies
employed by Best-in-Class, Average, and Laggard companies within thecompetitive framework.

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Table 3: Competitive Framework
Best-in-Class

Knowledge

LaggardEstablish executive support for spend analysis initiatives

Process

Organization

Average

70%

57%

36%

Enterprise-wide ability to perform spend analysis (self-rated)• 3.0 (out of 5)• 2.5 (out of 5)• 2.8 (out of 5) rating
rating of current
rating of currentof current spend
spend analysis
spend analysis
analysis capabilities
capabilities
capabilities
Provides spend analysis reporting at the supplier, category
and transaction level
67%
55%
38%
Functionalities of spend analysis solutions in use

Technology

Performance• 58% use
standardized
reporting• 48% perform
automated datacollection frommultiple sources• 44% useconfigurable
reporting tools
for data analysis• 35% perform
automated dataclassificationand cleansing• 26% integrate
spend analysis
and e-sourcing
systems• 23% integrate
spend analysis
and contract
mgmt systems
to trackcompliance• 43% use
standardized
reporting• 36% perform
automated datacollection frommultiple sources• 38% useconfigurable
reporting tools fordata analysis• 34% perform
automated dataclassification andcleansing• 25% integrate spend
analysis and esourcing systems• 14% integrate spend
analysis andcontract mgmt
systems to trackcompliance• 27% use
standardized
reporting• 22% perform
automated datacollection frommultiplesources• 18% useconfigurable
reporting tools
for data analysis• 16% perform
automated dataclassificationand cleansing• 14% integrate
spend analysis
and e-sourcing
systems• 12% integrate
spend analysis
and contract
mgmt systems
to trackcomplianceHave visibility into enterprise-wide spend across all spend
types
63%
56%
36%
Source: AberdeenGroup, August 2007

Organizational Capabilities and Technology Enablers
Aberdeen’s global supply management research has shown time and again thatthe deployment of process automation tools enables procurement
organizations to place more spend under management. As shown in this report,© 2007 Aberdeen Group.
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Spend Analysis
Page 13and earlier Aberdeen research efforts, companies that place more spend undermanagement typically experience a host of other advantages as they relates tocost savings, process efficiency, and the ability of procurement departments todeliver greater strategic value across the enterprise. Some of those advantages
include:•Best-in-Class enterprises are 46% more likely to have their spend
analysis initiatives supported at the executive level, which subsequently
increases the likelihood of effective utilization of the results to deliver
the cost savings sought from procurement by this same leadershipgroup.

•

Best-in-Class enterprises are 40% more likely to provide reporting
down to the transaction level, resulting in savings rates that are 9%
higher than all other enterprises.

•

Best-in-Class enterprises are 60% more likely to use solutions tocapture spend data from multiple sources, thus enhancing spend
visibility and resulting in 80% more spend placed under the
management of procurement than in other enterprises.

•

Best-in-Class enterprises are nearly 24% more likely than all others
to use integrated spend analysis and e-sourcing solutions. This enables
sourcing decisions to be made more efficiently and results in Best-inClass sourcing cycle times that are 33% shorter than their peers.

•

Best in Class companies are nearly twice as likely to integrate spend
analysis tools with contract compliance tools, thus leading to levels ofcontract compliance that are 30% higher than all otherenterprises (which also facilitates the ability to sustain savings).

Building the Spend Analysis Business Case
While it is no secret among procurement professionals that the benefits ofinvesting in a spend analysis initiative and building out a formal spend analysis
program outweigh inaction, many of the benefits have been traditionally viewed
as qualitative or ‘soft.’ This Aberdeen benchmark shows that, quite to thecontrary, the benefits of a spend analysis initiative are both quantifiable andsignificant in the primary areas that procurement organizations measure theirperformance, most notably cost savings or reductions. While the absolute valueof a spend analysis initiative is apparent in the rates of cost savings, the truer
measure is one of improvement. The question commonly asked is “has anything
really changed?” Is there a return on the investment in spend analysis?
To quantify the benefits of a spend analysis initiative, the incremental changes
in performance must be reviewed. The nearly 800 enterprises surveyed reportthat “spend under management” for all enterprises, a key performance metricfor procurement, on average, improved 34% (or from 46% to 62%) as resultof spend analysis activity.
By improving the amount of spend under management, enterprises are able toleverage the expertise of these departments and ultimately deliver anincremental increase in cost savings.

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Page 14

Spend Analysis Impact – Spend Under Management:
For example, an average procurement organization with $500 million of
spend under management would see an improvement of 34% or an
additional $170 million brought under management. Aberdeen research has
shown that enterprises have been able to achieve a 5% to 20% cost savingsfor each new dollar of spend brought under management.
Business Case: $500MM under management• 34% increase in spend under management - $170MM• 5% (low) savings estimate applied to new spend - $8.5MM$8.5MM incremental benefit

The ability to identify, prioritize and execute strategic sourcing efforts is built
upon the foundation of spend visibility. In this benchmark, the averageincremental increase in savings from strategic sourcing efforts credited tospend analysis initiatives was 75% (or from 6.7% to 11.7%).

Spend Analysis Impact – Strategic Sourcing
For example, an average procurement organization with $500 million of
spend under management would see savings rates from its strategic sourcing
efforts improve by 75%.
Business Case: $500MM under management• 30% addressable spend in any year - $150MM• 40% of spend is strategically sourced - $60MM• 6.7% savings before Spend Analysis - $4.02MM• 75% incremental savings with Spend Analysis - $3MM
$3MM incremental savings
Spend analysis deployment has also proven to be an effective means ofimproving contract compliance, as the improvement in spend visibility enables
category managers to gain insight into the on- and off-contract transactions
taking place. Although not specifically a contract management or compliancetool, spend analysis solutions can establish a means of auditing buyer behavior
to detect “maverick” (non-compliant, off-contract) spend.
Spend analysis reporting can be leveraged by procurement professionals to
identify purchases made with those suppliers not contracted, leading tocorrective action and subsequent modification of behavior. Contract
compliance is important because these agreements are negotiated to provide
more favorable discounts to enterprise buyers based on agreed upon volumelevels and even contract exclusivity, resulting in absolute or higher incremental
savings over purchases made off-contract. The average incremental increase incontract compliance was 34% (or from 44% to 59%).

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Spend Analysis
Page 15

Spend Analysis Impact – Contract Compliance:
For example, an average procurement organization with $500 million of spend
under management would see contract compliance rates improve by anaverage of 33%.
Business Case: $500MM under management
Compliant spend before Spend Analysis – $220MM• Compliant spend after Spend Analysis – $295MM• 33% of additional spend brought into compliance – $75MM• 10% benefit from contract compliance – $7.5MM$7.5MM incremental benefit•

In addition to the “hard dollar” savings that result from improved sourcing
efforts, there are other financial and efficiency improvements that can berealized. One such area is sourcing cycle times – enterprises experienced a 22%
improvement in this area. By shortening the sourcing cycle, procurement
professionals are free to perform other strategic activities within the group to
benefit the organization.

Table 4: Incremental Performance Improvements Driven by
Spend Analysis – All Enterprises
Performance Metric

Incremental Change

Percent increase in spend under management

34%

Percent increase in savings from sourcing efforts
based on spend analysis

75%

Percent improvement in compliance withnegotiated agreements

33%

Reduction in sourcing cycle times

22%
Source: AberdeenGroup, August 2007

Aberdeen Business Case Conclusion
Aberdeen’s Impact Examples above leverage this and earlier research efforts
and present an estimate of potential returns. Use the Impact Examples above or
the values in Table 4 to calculate your own case for investment in Spend
Analysis solutions. If deployed and managed effectively, the results from yourinvestment will be significant to the department and to the enterprise as every
dollar of savings generated by procurement drops directly to the bottom line.
We believe that these estimates should be shared with your executive leaders,
whose pressures to deliver increasing profitability are exactly aligned with thebenefits of these programs.

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Spend Analysis
Page 16

Aberdeen Insights: To Tech or Not to Tech?
Spend analysis drives results. Period. No matter the methods or processes inplace, there is no denying the benefits derived from gaining greater visibility into
enterprise spend. But can the effects of technology be quantified? Are there any
additional benefits to automating spend analysis? Absolutely!
Enterprises that utilize manual tools for spend analysis show an incremental
increase in cost savings from sourcing efforts of 3.2% after a formal spend
analysis program has been launched. Incrementally improving technology
utilization also incrementally improves savings. However, the pinnacle isreached by those companies that truly embrace technology for spend analysis as
they demonstrate an incremental increase in cost savings from sourcing of
7.4%.
Full
PartialManualAutomation
Automation
Incremental savings
3.2%
5.3%
7.4%
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Spend Analysis
Page 17

Chapter Three:
Required ActionsAs enterprises continue to rigorously pursue bottom-line results in ahighly competitive business environment, they are forced to seek out
alternative avenues for bolstering corporate performance. Many haveturned to procurement to close the gap between these expected andsubsequently realized fiscal results. As a result, Best-in-Class organizations havearmed their procurement departments with spend analysis solutions. These
solutions enable this group to drive the identification of critical savings
opportunities and empower them to deliver on these cost savings targets
through key sourcing decisions and the enhanced ability to monitor compliancebased on increased visibility into enterprise spend. Based on our research
results, Aberdeen recommends the following strategies for improved results:

Laggard Steps to Success•

Gain support from executive team – it’s about the ROI.
Executive support of a spend analysis program will facilitate end user
adoption and also open the door to the corporate wallet necessary forinvestment in spend analysis tools. Laggard enterprises are over fourtimes more likely to be challenged by a lack of executive support. It istherefore critical to demonstrate the potential savings and ROI for spend
analysis.

•

Establish standardized processes for spend analysis across theenterprise.
Deploying process automation tools for spend analysis activities canenable a broader transformation. But, in order to optimize program
performance, enterprises must develop processes that are repeatable andsustainable. Consistency of spend analysis procedures will allow
enterprises to measure and benchmark their effectiveness; Best-in-Class
organizations are 16% more likely to standardize spend analysis
activities across the entire organization than all other companies.

•

Develop commodity expertise within the procurement group.
Spend analysis is ineffective if those reviewing the data are not competentin the utilization of this information. Key sourcing decisions must be
made to capitalize on the savings opportunities identified through spend
analysis. The responsible party within procurement must have at least a
modicum of expertise and training in guiding the sourcing for a particular
category. Procurement personnel are 35% less likely in Laggard
companies than in Average or Best-in-Class companies to possess
commodity expertise.

Fast Facts√ Establish executive support
by demonstrating the ROI of
a spend analysis investment√ Know what you can andcan’t do – establish abaseline for spend analysis
capability√ Move beyond sourcing costsavings – contract
compliance will also
positively effect the bottom
line

Industry Average Steps to Success•

Establish an organizational baseline for spend analysis.
To fully leverage a spend analysis initiative it is vitally important todetermine the status of your organization’s capabilities. This includes areview of the quality of data, an inventory of the different data sources tobe used, an assessment of the current level of spend analysis automation,and establishing goals for the spend analysis program. Best-in-Class© 2007 Aberdeen Group.
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Spend Analysis
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enterprises are 20% more likely than the Industry Average to havedetermined a baseline competency for spend analysis.
•

Enhance reporting capabilities.
Enterprises well equipped for spend analysis should be able to supply avariety of reports from a variety of perspectives. The most common
spend reports are at the supplier (least detailed), category, andtransaction level (most detailed). Best-in-Class companies have a 32%
higher rate of spend visibility at the transaction level than Industry
Average companies.

Best in Class Steps to Success•

Leverage spend analysis to improve contract compliance.
While hard dollar savings can be drawn directly from sourcing efforts
based on spend analysis activities, additional financial gains can be realized
by improving contract compliance. Improving visibility into enterprise
spend enables procurement to better determine on- and off-contract
activity, allowing for proactive measures to be taken to improve
compliance and capitalize on previously negotiated savings.

•

Integrate spend analysis tools with sourcing solutions.
Effective sourcing decisions can only be made if the appropriate level ofvisibility is attained and the “spend story” is known, as told throughspend analysis. Closely coupling spend analysis and sourcing activities will
ensure that key savings decisions are being made for the right categories
during the sourcing process, and that those decisions are being madewith confidence based on the data provided.

© 2007 Aberdeen Group.
www.aberdeen.com

Telephone: 617 723 7890
Fax: 617 723 7897

Spend Analysis
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Appendix A:
Research Methodology

In July and August 2007, Aberdeen Group examined the use of utilization oftechnology for spend analysis, the experiences, and intentions of more than
700 enterprises in a diverse set of industries.

Responding procurement and finance executives completed an online surveythat included questions designed to determine the following:•

The strategies around spend analysis and how their business operations
can be impacted.

•

The structure and effectiveness of existing spend analysis processes,organization, and technologies.

•

Performance metrics for the effectiveness of sourcing and procurement
activities resulting from spend analysis.

Aberdeen supplemented this online survey effort with telephone interviews
with select survey respondents, gathering additional information on spend
analysis strategies, experiences, and results.
The study aimed to identify emerging best practices for spend analysis andprovide a framework by which readers could assess their own management
capabilities.
Responding enterprises included the following:•

Job title: The majority of the research sample included respondents withthe following job titles: C-level executive (11%), vice presidents (7%),
director (23%), manager (35%), consultants and other (23%).

•

Job function: Procurement (59%), logistics / supply chain (11%), businessprocess management (7%), information technology (6%), finance (5%), other(12%).

•

Industry: High technology (13%), financial services (12%), industrial
equipment manufacturing (10%), and a distribution across 29 otherindustries.

•

Geography: 59% of the research respondents were from North America,
29% were from Europe, Middle East and Africa, and 12% were from AsiaPacific.

•

Company size: 56% of respondents were from large enterprises (annual
revenues above US $1 billion); 27% were from midsize enterprises (annual
revenues between $50 million and $1 billion); and 17% of respondents
were from small businesses (annual revenues of $50 million or less).
Solution providers recognized as sponsors of this report were solicited after
the fact and had no substantive influence on the direction of this benchmark
report. Their sponsorship has made it possible for Aberdeen Group to makethese findings available to readers at no charge.

© 2007 Aberdeen Group.
www.aberdeen.com

Telephone: 617 723 7890
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Spend Analysis
Page 20

Table 5: PACE Framework Key
Overview
Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, andenablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows:
Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g.,
economic, political and regulatory, technology, changing customer preferences, competitive)
Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align thecorporate business model to leverage industry opportunities, such as product/service strategy, target markets, financial
strategy, go-to-market, and sales strategy)
Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand,market positioning, viable products/services, ecosystem partners, financing)
Enablers — the key functionality of technology solutions required to support the organization’s enabling businesspractices (e.g., development platform, applications, network connectivity, user interface, training and support, partnerinterfaces, data cleansing, and management)
Source: AberdeenGroup, August 2007

Table 6: Competitive Framework Key
Overview
The Aberdeen Competitive Framework defines
enterprises as falling into one of the following threelevels of practices and performance

In the following categories:

Best-in-Class (20%) — Practices that are the best
currently being employed and significantly superior to
the Industry Average, and result in the top industry
performance.

Organization — How is your company currently organized
to manage and optimize this particular process?

Industry Average (50%) — Practices that represent
the average or norm, and result in average industry
performance.
Laggards (30%) — Practices that are significantly
behind the average of the industry, and result in below
average performance

Process — What is the scope of process standardization?
What is the efficiency and effectiveness of this process?

Knowledge — What visibility do you have into key data andintelligence required to manage this process?
Technology — What level of automation have you used tosupport this process? How is this automation integrated andaligned?
Performance — What do you measure? How frequently?
What’s your actual performance?
Source: AberdeenGroup, August 2007

Table 7: Relationship Between PACE and Competitive Framework
PACE and Competitive Framework How They Interact
Aberdeen research indicates that companies that identify the most impactful pressures and take the most transformationaland effective actions are most likely to achieve superior performance. The level of competitive performance that acompany achieves is strongly determined by the PACE choices that they make and how well they execute.
Source: AberdeenGroup, August 2007

© 2007 Aberdeen Group.
www.aberdeen.com

Telephone: 617 723 7890
Fax: 617 723 7897

Spend Analysis
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Appendix B:
Related Aberdeen Research
Related Aberdeen research that forms a companion or reference to this report
include:•The Advanced Sourcing and Negotiation Benchmark Report: The Art and Scienceof the Deal, January 2007•

The CPO’s Strategic Agenda: Managing People, Managing Spend, November
2006•

Direct Materials Sourcing: Living in a Material World, May 2007•

The E-Procurement Benchmark Report, August 2006•

The Spend Intelligence Benchmark Report, June 2006
Information on these and any other Aberdeen publications can be found at
http://www.aberdeen.com/channel/procs.asp.

Aberdeen’s 2007 Global Supply Management Research Agenda is also available.
Subscribe to the Global Supply Management RSS FEED at:
http://www.aberdeen.com/2-0/rss/procurement.xml

Authors: Andrew Bartolini, Research Director, Global Supply
Management (andrew.bartolini@aberdeen.com)
William Browning III, Research Analyst, Global Supply Management(william.browning@aberdeen.com)
Aberdeen is a leading provider of fact-based research and market intelligence that delivers demonstrable
results. Having benchmarked more than 30,000 companies in the past two years, Aberdeen is uniquely
positioned to educate users to action: driving market awareness, creating demand, enabling sales, anddelivering meaningful return-on-investment analysis. As the trusted advisor to the global technology
markets, corporations turn to Aberdeen for insights that drive decisions.
As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global
direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer
optimization" process of Harte-Hanks (Information – Opportunity – Insight – Engagement – Interaction)
extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For
additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn
more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com© 2007 Aberdeen Group.
www.aberdeen.com

Telephone: 617 723 7890
Fax: 617 723 7897