(Aberdeen Group) Spend Analysis - The Nexus of Spend Management by Constantine G. Limberakis, November 2011 PDF

Spend Analysis
The Nexus of Spend Management
November 2011
Constantine G. Limberakis
Spend Analysis: The Nexus of Spend Management

Page 2
Executive Summary
Due in part to the number of solutions that contain spend information in
organizations today, a continuing struggle for procurement professionals is
obtaining a 360-degree view of spend data. Those that can distinguish
themselves as Best-in-Class not only extract, cleanse, classify and analyze
their spend data from multiple sources, but also leverage spend analysis as a
predictive measure to improve spend compliance and reduce supplier risk
through market and supplier data. This research report examines the crucial
set of processes that encompass spend analysis by exploring the pressures,
strategic actions and capabilities of 132 organizations surveyed globally in
September 2011.
Research Benchmark
Aberdeens Research
Benchmarks provide an indepth and comprehensive look
into process, procedure,
methodologies, and
technologies with best practice
identification and actionable
recommendations
Best-in-Class Performance
Best-in-Class organizations are noted for their ability to capture spend for
analysis and identify opportunities for improvement. Three key performance
criteria used to distinguish these top performers include:
96% of enterprise spend captured in spend analysis efforts

(compared to 50% for Laggards)
9% cost avoidance savings identified as a part of a spend analysis

initiative (compared to 5% for Laggards)
.1% of payments duplicated (compared to .5% for Laggards)
Competitive Maturity Assessment

Survey results show that the firms enjoying Best-in-Class performance also
shared several common characteristics, including:
33% more likely to have automated data collection from multiple

sources within the enterprise than all other organizations
25% more likely to have standardized procedures for data

extraction, cleansing and classification, and analysis and reporting
21% more likely to use have a common enterprise-wide

classification schema for commodities and services spend
Required Actions
In addition to the specific recommendations in Chapter Three of this
report, to achieve Best-in-Class performance, companies must:
Standardize formal spend intelligence / spend analysis processes and

methods across the organization
Automate the integration of spend data from ERP systems and

procurement related systems into a spend analysis platform
Improve user access and the ease of use for spend analysis tools
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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
Business Context ..................................................................................................... 4
The Maturity Class Framework ............................................................................ 7
The Best-in-Class PACE Model ............................................................................ 8
Best-in-Class Strategies for Spend Analysis ....................................................... 8
Chapter Two: Benchmarking Requirements for Success ................................. 11
Competitive Assessment ...................................................................................... 12
Capabilities and Enablers ...................................................................................... 13
Chapter Three: Required Actions ......................................................................... 18
Laggard Steps to Success ...................................................................................... 18
Industry Average Steps to Success .................................................................... 18
Best-in-Class Steps to Success ........................................................................... 19
Appendix A: Research Methodology..................................................................... 20
Appendix B: Related Aberdeen Research ........................................................... 22
Figures
Figure 1: Priority Assigned to Spend Analysis program ....................................... 4
Figure 2: Top Pressures for Spend Analysis Initiatives ......................................... 5
Figure 3: Spend Analysis Automation in Spend Analysis ...................................... 6
Figure 4: Strategic Actions for Improving Spend Analysis ................................... 8
Figure 5: Importance of Strategic Vendor Involvement ....................................... 9
Figure 6: Usage Classification Codes for Products and Services ..................... 10
Figure 7: Common Process Steps for Spend Analytics ...................................... 13
Figure 8: Deployment of Spend Analysis ............................................................... 15
Figure 9: Adoption of Spend Analysis Enablers .................................................... 16
Figure 10: Enrichment of Third-Party Supplier Data .......................................... 17
Tables
Table 1: Top Performers Earn Best-in-Class Status.............................................. 7
Table 2: The Best-in-Class PACE Framework ....................................................... 8
Table 3: The Competitive Framework................................................................... 12
Table 4: The PACE Framework Key ...................................................................... 21
Table 5: The Competitive Framework Key .......................................................... 21
Table 6: PACE and the Competitive Framework ................................................ 21
2011 Aberdeen Group.

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Chapter One:
Benchmarking the Best-in-Class
Spend analysis, when performed correctly, provides the capability to
increase visibility into spending, promote insightful sourcing decisions and
identify cost saving opportunities. However, the success of any supply
management program is largely dependent upon the ability to properly
access, organize, and analyze spend data. This requires a unique combination
of process and technology to get spend analysis done right.
Business Context
One of the most important strategies for any procurement organization is
spend analytics. In combination with sourcing, contract management and
purchasing, it provides a window to improve spend behaviors and a direct
means for increasing spend under management. As a proof point to its
importance, recent Aberdeen research, Dynamic Procurement: The CPO as
Collaborator, Innovator and Strategist, indicated 89% of Best-in-Class
organizations had enabled spend analysis compared to 63% for Industry
Average, and 46% for Laggards. Moreover, organizations using spend
analysis on average captured 24% more spend under management than
those not using it, a metric determined by two out of three respondents as
a top criterion for measuring the effectiveness of spend analysis.
Fast Facts
Category managers made
the highest percentage of
primary users for spend
analysis at 38%
A little more than one out of
three CPOs or VPs of
procurement considered
themselves primary users of
spend analysis technology
Only 4% of CFOs
considered themselves a
primary user of spend
analysis
Figure 1: Priority Assigned to Spend Analysis program

Best-in-Class Metrics
n = 132
Spend Under Management:

Often debated and discussed as
a qualifying metric in the world
of spend management, the
definition of spend under
management is the percentage
of all non-payroll, tax, tariff and
fee-related spend that falls
under management or the
influence of the procurement
organization.
Source: Aberdeen Group, September 2011
As a result of such findings, it is clear that spend analysis demonstrates the

foundational reality for driving performance and establishing cost savings.
Given such benefits, it is therefore not surprising that spend analysis catches
the attention of C-level executives, where a quarter of primary users of
spend analysis based on this study are considered to be CPO or VPs of
purchasing. Furthermore, due to the savings opportunities that can be
captured through its activities, spend analysis programs remain a high
priority for most procurement organizations. For example, 67% of 132 of
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survey respondents indicated that spend analysis is a high or top priority for
their enterprise procurement program. Interestingly enough, this statistic
jumps to 88% when looking at C-level executives exclusively.
Challenges In Spend Analysis

Considering spend analysis is high on the priority list for procurement, it
proves to be dynamic exercise for most organizations. Effectively leveraging
spend analysis requires integration of disparate data sources, clearly-defined
data processes and the use advanced technology. But getting spend analysis
right is not just about technology; it also requires coordination from several
areas of business entities like IT, supply chain and finance, but starts with
leadership from procurement. As procurement organizations face increased
global market challenges in this current economic environment,
procurement leaders cannot run the risk of missing savings opportunities
and therefore must be able to address the key pressures surrounding spend
analysis initiatives within their organization.
Fast Facts
Poor quality of spend data
coming from external spend
and ERP systems was
indicated by 65% of the Bestin-Class compared to 47%
for all other organizations
Figure 2: Top Pressures for Spend Analysis Initiatives

Fast Facts
Poor quality of spend data from
Procurement & ERP systems
Lack of standardized spend

intelligence/spend analysis
processes and methods is
the top barrier to spend
analysis, indicated by 54% of
respondents
51%
49%
Inability to identify and forecast

savings opportunities
40%
Pressure to place more

spend under management
Enablement of automation
for spend cleansing,
classification and data
enrichments lags behind that
of data extraction by 26% on
average
36%
Labor intensive process for

managing and collecting data
33%
Inability to identify and prioritize

top spend categories
Lack of measurable insight into
success of cost reduction initiatives
24%
0%
10%
20%
30%
40%
50%
60%
Illustrated in Figure 2 and first demonstrated even as far back in Aberdeen

Research in 2007 with Spend Analysis: Working Too Hard for the Money, our
research continues to show that a core issue surrounding spend analysis is
the poor quality of spend data (i.e. coming from ERP, procurement, and
sourcing systems) that results directly in an inability to identify and forecast
savings opportunities.
Use of technology to
automate data intensive
processes (spend data
extraction, cleansing,
classification) was noted as a
critical success factor by 46%
of respondents
With 50% of organizations using between three-and-four systems generating

spend data, the quality of data becomes an exacerbated challenge
particularly given the ongoing use of manual spreadsheets or traditional data
warehouses that are limited in the ability to accurately classify, normalize
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and enrich spend data. In this regard, 32% of respondents indicated they are
still using basic spreadsheets as the primary approach to spend analysis.
Looking for Leadership in Spend Analysis

The answer directly tied to these challenges is the need for investment in
innovation as demonstrated by Best-in-Class organizations. For instance,
Aberdeen research, Spend Analysis: Transforming Data Into Value, found that
Best-in-Class organizations are 50% more likely than Laggards to automate
spend analysis processes and 124% more likely to have automated spend
data collection from multiple sources. As a result of converting automation
into opportunity, Aberdeens report, Spend Analysis: Pulling Back the Cover on
Savings identified that organizations leveraging a fully-automated system
for spend analysis experience an average savings of 11% from sourcing
efforts.
Furthermore, advancements in gathering supplier data into spend analysis is
demonstrating to be a tool necessary for managing suppliers. By loading
supplier information into spend data systems, organizations can establish an
improved basis in monitoring supplier behavior, assessing supplier risk and
measuring supplier performance. Spend analysis is therefore becoming
critical for the creation of linkages between spend management, industry
risk, and financial visibility through integration of supplier and spend data.
Based on The Year of the Supplier: Perspectives on Supplier Management in
2011, Best-in-Class companies report using spend analytics for managing
suppliers 25% more than their peers.
Figure 3: Spend Analysis Automation in Spend Analysis
Automated
60%
Manual
Outsourced
"Having the ability to extract

top supplier spend by general
ledger account or commodity
classification over the past
three years has had a great
impact on identifying category
opportunities through our
spend analysis initiative.
54%
51%
49%
50%
40%
51%
38%
30%
30%
25%
21%
20%
10%
10%
9%
11%
~ SVP, Chief Sourcing Officer

Midwest Regional Bank
2%
0%
Data Extraction
Cleansing
Classification
Enrichment
As demonstrated in Figure 3, even for those organizations already leveraging

spend analysis as a strategic enabler, it is clear that more investment in
automating areas such as data cleansing, classification and enrichment are
needed for increasing accuracy of spend opportunity identification. In fact,
46% of respondents claim the use of technology to automate data intensive
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processes as the most critical to the success of their spend analysis

program. Yet today, findings point to the fact that many organizations lack
the ability to manage spend data initiatives in house. In these areas it is
becoming evident that outsourcing spend analysis to turn-key spend data
management (i.e. consulting / software based solution providers) has
become more common due to a lack of data analysis skills internally for
managing certain processes inherent in spend analysis such as data cleansing
and data enrichment. Based on this study, it was found that 17% of
organizations outsource data cleansing and 18% outsource data enrichment.
The Maturity Class Framework

Understanding spend analysis within organizations requires a multidisciplinary approach that considers understanding many data facets and
processes that can measure and benchmark performance. Organizations
that effectively use spend analysis are marked in their capability of capturing
spend from multiple sources and in their ability to demonstrate savings as a
result of its use. The findings of this benchmark demonstrate that a variety
of capabilities are necessary for improving or implementing a spend analysis
program. Aberdeen identified the following three key performance metrics
to distinguish the Best-in-Class from Industry Average and Laggard
organizations:
Spend captured in spend analysis efforts (factor focusing on

automation / ability to manage from multiple sources)
Cost avoidance savings based on spend analysis efforts (factor

focusing on efficacy of spend analysis on working capital)
Duplicate payments (factor demonstrating efficacy of spend analysis

on P2P processes)
Table 1: Top Performers Earn Best-in-Class Status

Definition of
Maturity Class
Mean Class Performance of

Spend Analysis
Best-in-Class:
Top 20% of aggregate
performance scorers
96% spend captured in spend analysis efforts

9% cost avoidance savings based on spend analysis
.1% duplicates of annual payments
Industry Average:
Middle 50%
of aggregate
performance scorers

Laggard:
Bottom 30%
of aggregate
performance scorers

Best-in-Class Metrics
Spend captured in spend
analysis Amount of spend
captured in spend analysis
efforts from various sources
that includes direct and
indirect spend
Cost avoidance savings
Cost avoidance is the
capturing of cost reduction
opportunities resulting from
intentional action,
negotiation, or intervention
Duplicate payments
Examples of duplicate
payments include payments
being made twice using two
different payment types or
individuals in multiple
departments making
payments and not using rigid
standards to avoid duplicate
payments

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The Best-in-Class PACE Model

Leveraging a modern spend analysis initiative that incorporates these
performance metrics describes aspects of analytics as shown in the PACE
Framework in Table 2.
Table 2: The Best-in-Class PACE Framework
Pressures
Actions
Poor quality Standardize formal

of spend data spend analysis
process and methods
Automate integration
of spend data with
spend analytics
Improve user access
/ ease of use for
spend analysis tools
Capabilities
Enablers
Ability to collect spend data

from multiple sources
Standardized procedures for
data extraction, cleansing and
classification for spend analysis
Established executive support
for spend analysis initiatives
Common visibility of goods
and services spend across the
enterprise
Data extraction
Data enrichment
Data cleansing
Data categorization
Advanced spend analysis reporting
Performance monitoring and management
Integration with e-sourcing
Integration with contract management
Integration with e-procurement
Source Aberdeen Group, September 2011
Best-in-Class Strategies for Spend Analysis

Figure 4 demonstrates that Best-in-Class organizations are not as focused
on standardization (11% less) and automation (11% less) than their peers. So
while all other organizations (the Industry Average and Laggards combined)
continue to focus on fundamental areas critical for spend analysis relative to
their maturity such as standardization and automation, Best-in-Class
organizations by a margin of 19% are focusing more on improving user
access and the ease of use for spend analysis tools. Moreover, Best-in-Class
organizations are pursuing strategies that further promote the use of spend
analysis within the organization through the pursuit of higher user adoption
and usage of spend analysis, this strategy ultimately provides more
opportunities for identifying savings through strategic sourcing, contract
compliance and invoice reconciliation focused tactics.
Figure 4: Strategic Actions for Improving Spend Analysis
Best-in-Class
Fast Facts
All Others
Standardize formal spend

intelligence/spend
analysis processes and
methods
15% of organizations have 20

or more data systems
feeding spend analysis
61%
50%
Automate integration of
spend data with spend
analytics
Most organizations, 46%

average between two and
five data systems feeding
spend analysis
53%
42%
Improve user access and

ease of use for spend
analytics tools
35%
54%
0%
10%
20%
30%
40%
50%
60%
70%

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Impact of the Technology Provider
Keeping in mind that spend analysis is a technology-intensive enabler within

spend management, strategic approaches involving the underlying vendor or
solution provider is an important consideration for organizations involved in
spend analysis initiatives. Based on this concept, key factors contributing to
the success of spend analysis programs suggest that technology vendors or
service providers can also play an important role in the success of an
existing or new spend analysis initiative. When asked to rank on scale of 1
5, (1- limited impact, 5- high impact) best-practice development averaged
the highest with a score of 3.01 followed closely by enablement services
(2.89) and commodity experience (2.84) (i.e. demonstrated as part of the
spend analysis deployment or services). Organizations looking for
improvement need to consider vendors as a part of their strategic plan.
Figure 5: Importance of Strategic Vendor Involvement
Best Practices
Development
3.01
Enablement
Services
2.89
Commodity
Expertise
2.84
2.60
Training
Social / Community
Networking
-0.25
2.19
0.25
0.75
1.25
1.75
2.25
2.75
3.25
Aberdeen Insights Data Classification Challenge

The UNSPSC Example
Pressures to standardize are exemplified in the goal of using a universal
schema for products and services. This idea is a logical one for increasing
the ability to share product and services information between buyers and
suppliers and one critical for building knowledge around spend. For
example, standardized around a widely used classification scheme for
catalog items, the United Nations Standard Products and Services Code
(UNSPSC) provides an open, global multi-sector standard for
classification of products and services. UNSPSC is a five-level hierarchy
coded as a 8-digit number. The five levels define Segment, Family,
Class, Commodity, and Business Function.
Example:
42 Segment Medical equipment and accessories and supplies
31 Family Wound Care products
22 Class Suture and related products
01 Commodity Suture
continued
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Aberdeen Insights Data Classification Challenge

The UNSPSC Example
The benefits to the approach include leveraging a common format that
can help with the standardization of data to a universal structure and can
be used to clean up items masters and increase visibility into line items
with greater detail.
Figure 6: Usage Classification Codes for Products and Services
100%
90%
80%
70%
88%
Best-in-Class
All Others
78%
60%
50%
40%
33%
30%
20%
20%
8%
10%
0%
Internally
developed
UNSPSC
2%
eClass
8% 11%
8% 7%
SIC
NAICS
However, one of the challenges in any standardization approach for data

classification is that one size does not always fit all, adding to the
complexity of trying to automate classification. As demonstrated in Figure
6, despite the goal of creating a universal standard around common
libraries such as UNSPSC, many organizations continue to use internally
developed / custom classification schemes.

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Chapter Two:
Benchmarking Requirements for Success
Best-in-Class organizations today demonstrate an ability to encompass
traditional areas of spend analysis such as visibility and reporting, but are
also demonstrating leadership in their ability to integrate the seven systems
(on average) containing spend data and twice as likely to integrate external
data on markets and suppliers that are crucial for generating value in their
spend analysis system.
Case Study: Leading Medical Device Company
As one of the best-known and most respected healthcare brands in the
world, this medical device company demonstrates how globally-respected
organizations are leveraging spend analysis. Currently in their third year
of using spend analytics and about 3.5 years of data in the system, the
centralized global sourcing and procurement team leverages their spend
analysis to help manage over a billion in spend. To facilitate spend analysis
the company loads their data into the SaaS based spend analysis tool, the
same platform used for strategic sourcing and contract management.
Fast Facts
73% of the Best-in-Class
have visibility at the supplier,
category and transaction
level
have the ability to collect
spend data from multiple
sources
54% of the Best-in-Class can
identify strategic sourcing
opportunities based on
spend analysis
Procurement uses spend analysis for data visibility, aggregation and

enrichment. They start the process of spend analysis by loading global
data from over 20 source systems that include various financial and
production based ERP systems. To get their data to the cloud, the
company performs manual extracts from all the various systems and then
does a pre-cleanse / pre-consolidation effort before giving it to a solution
provider. Although establishing automatic extracts is possible and is a
potential consideration for the future, the company has found that
consolidating files manually is more economical and ensures the quality of
the data enrichment process.
Moreover according to a one of the managers of Procurement Process
and Technology, Our spend analytics application has proven to be a
tremendous resource in helping our Category Teams move past the
tactical execution of low complexity opportunities into a more strategic
view of category and supplier management. We are no longer just doing
reports, but rather conducting complex analytics on enriched data to
leverage corporate relationships, commodity indicators, global
consolidation, and market intelligence.
Based on the experience of using spend analysis thus far, the company
has been able to generate average savings over 15% hard cost savings
through the use of spend analysis. Overall the company feels that as result
of the spend analysis effort they are much better prepared to react to
changes in the industry and regulatory environment. Furthermore, through
their spend efforts, spend analysis has helped them to identify sourcing
opportunities across the different businesses through cross functional
collaboration and has helped develop global category strategies that tie with
the corporate goals and objectives.
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Competitive Assessment
Aberdeen Group analyzed the aggregated metrics of 132 organizations to
determine whether their performance ranked as Best-in-Class, Industry
Average, or Laggard. In addition to having common performance levels, each
class also shared characteristics in five key categories: (1) process (the
approaches they take to execute spend analysis operations); (2)
organization (corporate focus and collaboration among stakeholders); (3)
knowledge management (contextualizing spend data and exposing it to
key stakeholders); (4) technology (the selection of the appropriate spend
analysis tools and the effective deployment of those tools). These
characteristics (identified in Table 2) serve as a guideline for best practices,
and correlate directly with Best-in-Class performance across the key
metrics.
Table 3: The Competitive Framework
Best-in-Class
Process
Organization
Knowledge
Technology
Performance
Average
Laggards
Reporting visibility into enterprise spend across all

categories
73%
50%
20%
Reporting visibility at the supplier, category and
transaction level
73%
60%
40%
Ability to collect spend data from multiple sources
67%
50%
40%
Established executive support for spend analysis initiatives
72%
58%
47%
Commodity management expertise within procurement
and/or sourcing departments
63%
49%
41%
Common enterprise-wide classification schema for
commodities and services spend
63%
52%
24%
Common visibility of goods and services spend across the
enterprise
56%
36%
29%
Spend Analysis Technologies / Technology Services:
91% Data
58% Data
38% Data
Extraction
Extraction
Extraction
61% Data
46% Data
24% Data
Cleansing /
Cleansing /
Cleansing /
Normalization
Normalization
Normalization
50% Data
38% Data
21% Data
Enrichment
Enrichment
Enrichment
48% Data
38% Data
32% Data
Classification
Classification
Classification
Ability to prioritize opportunities for savings within a
spend category
50%
38%
29%
Ability to identify opportunities for supplier rationalization
46%
33%
32%

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Capabilities and Enablers

Best-in-Class organizations have demonstrated a strong reliance on specific
process, organization, knowledge, technology enablers, and performance
factors to effectively improve spend analysis initiatives that lead to results.
Aberdeen research for Spend Analysis: Transforming Data Into Value
demonstrates spend analysis can lead to a direct increase in spend under
management from 20% to 35%. While the competitive framework provides
an overview of capabilities in general for spend analysis, the following
includes a deeper analysis of the comparative capabilities demonstrated by
the leadership of Best-in-Class organizations.
Process: Consistent Data Collection and Reporting
"Implementing spend analysis

has allowed us to automate
processes with standardized
classification of the categories
and supplier offerings, and use
dashboard metrics for
reporting granularity.
~ Senior Purchasing Specialist
Specialty Chemical
Manufacturer
Based on the survey, 53% of respondents noted a lack of standardized spend

analysis processes and methods as a main barrier to initiating or improving a
spend analysis program. With 70% of respondents using spend analysis,
organizations are continuing to focus on identifying ways to make
improvements to the spend analysis process cycle, as shown in Figure 7.
Figure 7: Common Process Steps for Spend Analytics
Define
Spend
Scope
Extract
Spend
Data
Extracting Spend Data
Cleanse,
Categorize
& Enrich
Create
Spend
Profile
Analyze
Spend
Data
Identify
Opportunity
One of the initial stages of the spend analysis cycle, extracting spend data
from multiple sources is a critical process step for achieving true visibility
into all the areas of spend. As described earlier, organizations are using a
number of systems that describe spend data. And with 41% of respondents
indicating that too many data sources, and data compatibility, are key
barriers to improving spend analysis, it is clear that improving the process of
data integration for extracting data into spend analysis is a must. It is also
apparent that ERP solutions represent 76% of all data sources extracted for
spend analysis systems and 38% of all integration functionalities used in
spend analysis. As a result, there is a clear need for adopting processes and
technologies that are certified on enterprise platforms for providing more
seamless integration into spend analysis systems.
If consistency is not managed, not only will savings opportunities be missed
even after data cleansing, classification and enrichment downstream in the
cycle, but analysis on spend may not reflect the true picture of spend within
an enterprise, particularly if processes for extracting data from multiple
sources are not resolved. Considering data extraction is a key process goal,
Best-in-Class organizations demonstrate that they are 21% more likely than
all other organizations to collect spend data from multiple sources.
Increasing Spend Visibility

Another key process differentiator is the ability to achieve spend visibility,
which expands beyond just reporting and across the organization through
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Data Level Definition

Level 1: Supplier-level visibility
(i.e., you know total spend
against a supplier, and supplier
master names, and corporate
hierarchical structure are
cleansed and consolidated)
Level 2: Category-level
visibility (i.e., you know what
you are buying in broad
categories such as IT,
hardware, software, etc.)
Level 3: Commodity-level
visibility (i.e., you have itemlevel visibility into purchases
within a given category and
have the ability to aggregate
your category spend into
smaller sub-categories
according to a standardized
system of classification)
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advanced reporting capabilities. An example of this is getting a quick

snapshot view for reporting on the supplier, category or item level, where
all maturity classes averaged 50%. However, a clear difference was
established in enterprise visibility of spend. For example, Best-in-Class
organizations are 33% more likely to achieve visibility into enterprise-wide
spend across all categories (goods and services). As a result of this, the
Best-in-Class were 1.25 times more likely to achieve Level 3 visibility into
their spend data and suppliers, which translates into higher item-level
visibility into purchases within a given category and the ability to aggregate
category spend into smaller sub-categories according to a standardized
system of classification.
This advantage was also demonstrated in the ability to achieve drill-down
visibility into suppliers, where the Best-in-Class were 21% more capable.
However, the importance of spend visibility, of course, is in the ability to
identify strategic sourcing opportunities and prioritize opportunities for
savings within a spend category; Best-in-Class companies are 11% more
likely to have this capability than all other organizations.
Organization: Executive Support and Building Expertise

Perhaps more than any other aspect of establishing effective spend analysis
initiatives, it is organizational factors that dictate the perception and the
mindset of its value for other business units. Much of the success of any
program is getting buy-in from all the players connected to spend data
such as finance, treasury, and supply chain as well as from C-levels that
would sponsor initiatives as part of a wider program. Based on the capability
of creating a consensus for understanding the value of spend analysis, the
Best-in-Class were 19% more likely to have established executive support
for spend analysis initiatives than all other organizations.
Another critical aspect is the organizational focus on building the proper
resources for creating expertise in the field. For example, 32% of all
respondents indicated they had insufficient skills necessary to execute a
spend intelligence program (i.e. lack of commodity knowledge, insufficient
data analysis skills). Best-in-Class organizations also demonstrated an
advantage in their capability of establishing organizational-wide knowledge,
where 63% indicated having commodity expertise within sourcing or
procurement departments compared to 46% for all other organizations.
Knowledge Management: Establishing Common Standards

Establishing visibility is a critical aspect to spend analysis. From a knowledge
management standpoint, creating common spend visibility starts with creating
common definitions of spend data and how they will be used for identifying
opportunities. This starts with the consideration of creating enterprise-wide
classification schemas for products and services spend through the use of
commodity codes being leveraged within the organization.
Commodity codes are used in finding use in workflow as they control how
requisitions move through the system. Therefore the choice of custom
classification codes (or standardized ones such as UNSPSC, SIC or NAICS)
have an important impact on how e-procurement systems in place link
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Page 15
information related catalogs, contracts and ultimately purchase orders and

invoices. As discussed earlier in this study, it is evident most organizations
are leveraging internally developed/home grown classification schemes and
33% of respondents indicated a key strategic action was establishing a single
classification schema across the enterprise.
From a knowledge management perspective, Best-in-Class organizations also
demonstrate a higher usage of internally developed standards than other
organizations, 88% versus 78% for all other organizations. What this
indicates is the need for coordination within the organizations and all the
stakeholders of spend data for using a common language and common
definitions particularly with higher custom use that relate to special business
or organizational requirements at hand. This also assists in the ability to
establish common visibility of goods and services spend across the
enterprise, an advantage of the Best-in-Class compared to all other
organizations, 56% versus 33%.
"Having the ability to extract

top supplier spend by general
ledger account or commodity
classification over the past
three years has had a great
impact on identifying category
opportunities through our
spend analysis initiative.
~ SVP, Chief Sourcing Officer
Midwest Regional Bank
Technology: Deployment Approaches and Enablers

Perhaps more than other solution areas in spend management, spend
analysis is almost exclusively dependent on technology for its use. How
organizations are using it based on existing technology investments provides
insights for those looking into spend analysis initiatives on the optimal way
to deploy or implement a spend analysis platform. In this regard, Figure 8
shows those using a spend analysis solution most are using spend analysis on
a stand-alone basis (32%) followed by usage of spend analysis from an ERP
platform (23%) and usage as part of a sourcing suite (18%). Based on these
structures of deployment, those using spend analysis typically already have
e-procurement (53%), contract management (45%), e-sourcing (44%).
Looking overall at deployments, 68% of organizations indicated they are
using on-premise or installed software versus 32% using SaaS. Moreover, in
looking at the top two means of deployment, for those leveraging their ERP
systems the usage of on-premise spend analysis was much more
predominant at 94%, where as those using a stand-alone system the break
down was much more even, at 52% for on-premise and 48% for SaaS. This is
an indicator that existing investments in ERP for spend management have a
strong influence in determining the approach or even platform of choice for
spend analysis at this time.
Figure 8: Deployment of Spend Analysis
Stand-Alone Spend
Analysis Platform
5%
9%
Part of an ERP system

32%
Part of a Strategic
Sourcing suite
13%
Custom-developed
application
Part of an EProcurement/SRM suite
18%
23%
Part of a Supplier
Management Solution

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In examining spend analysis as an application alone, there are five key areas
of functionality that can be identified where organizations have adopted
technology. Based on Figure 9, it is apparent the Best-in-Class have a high
deployment (91%) of data extraction components of spend analysis, an area
critical for the ability to eliminate discrepancies and duplicates. Best-in-Class
organizations are 27% more likely than Laggards to be automatically
extracting data and 30% less likely to have manual processes. However, the
level of spend analysis deployment tapers off for all maturity classes for
other spend analysis enabler areas such as spend visibility (53%) essential for
customizable reporting/dashboards, data enrichment (50%) for additional or
complimentary information on suppliers, and classification (48%) critical for
mapping data elements and mapping spend data to industry standard
classification systems.
Fast Facts
How organizations are
deploying spend analysis:
71% On-Premise / Installed
Software
29% SaaS / Subscription
With the exception of data extraction being highly automated, leveraging

technology providers also does not necessitate that all processes handled by
a technology provider are 100% automated. For example, some providers
send data intensive aspects of spend analysis off-shore or to third party
providers such as cleansing and enrichment (e.g. formatting errors, duplicate
suppliers, parent child, attribute formatting, diversity/risk enrichment). Yet
with improvements in technology, automated methods are rapidly becoming
more available on recognized spend analysis platforms for spend data
transformation that leverage artificial intelligence driven approaches.
Figure 9: Adoption of Spend Analysis Enablers
91%
Data Extraction
50%
61%
Data Cleansing
36%
53%
Spend Visibility
40%
Best-In-Class
All Others
50%
Data Enrichment
31%
48%
Data Classification
35%
0%
10% 20%
30% 40%
50% 60%
70% 80%
90% 100%
Performance Management: Improving Visibility for Action

Perhaps more than any other area, the goal of spend analysis is the
increased visibility that provides the means for improving spend and supplier
performance within a procurement organization.
One key area that distinguished Best-in-Class organizations in the
performance management capability is the ability to prioritize opportunities
for savings within a spend category (Best-in-Class 50% versus 34% for all
others). Prioritization within spend analysis is based on the ability to get
insights through enhanced automation of spend visibility and reporting (i.e.
drill down and multi-dimensional reporting) currently used by 60% of Bestin-Class respondents.
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The second is the ability to identify opportunities for supplier rationalization

(Best-in-Class 46% versus 32% for all others) which is a direct tie to
capabilities in analyzing spend combined with understanding supplier
performance and risk. In this regard, the Best-in-Class have a 44% higher
capability in the ability to measure supplier business critically (i.e. how
important a supplier is to a business), and 42% higher capability in analyzing
the overall strength and stability of a suppliers business.
Aberdeen Insights Supplier Enrichment Sources of Data
Understanding the supplier base is critical in minimizing risk as well as
decreasing costs. As a part of a holistic approach to spend management,
enriching supplier data provides a more holistic view of suppliers. Areas
of supplier data that are currently enriched focus on corporate
information / relationships, supplier information, supplier financials,
regulatory compliance and corporate social responsibility information.
Figure 10: Enrichment of Third-Party Supplier Data
Corporate Information
(Address, Tax ID, SIC Codes )
44%
Corporate Parentage
(Supplier parentage /corporate hierarchy)
33%
Corporate Compliance
(Diversity Data, EPA, OSHA)
33%
28%
Corporate Ownership
(Principal owner, Parent-Child, M&A)
25%
Financial Information
(Revenue, Financial Ratios)
Supplier Credit Information
(credit scoring, bankruptcy, litigation)
22%
Corporate Social Responsibility

(cultural, economic, environmental, social)
0%
15%
5%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Source: AberdeenGroup, September 2011
Yet while many organizations are currently enriching this information

within suppliers in supplier managed systems, ERP or procurement
systems, only 15% of organizations are actually integrating core supplier
risk and performance information into their spend analytics solution.
This clearly represents an opportunity for organizations to shift from a
tactical view of spend data to a strategic one. Furthermore, 27% of
respondents are strategically focused on enriching spend data with
externally provided supplier information such as financial, risk and or
other legal information within the next 12 months.

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Chapter Three:
Required Actions
Whether a company is trying to increase its performance in the capture of
spend analysis from Laggard levels at 55% to that of Best-in-Class at over
95%, organizations must evaluate their current spend analysis initiatives and
confirm the standardization of process and the use of technology are
consistent, yet advancing by continually looking for areas of spend analysis
optimization and improvement.
Laggard Steps to Success
Increase automated integration of spend data with spend

analytics. Improving this process will increase Laggards ability to
push spend data for spend analysis efforts which currently stands at
50% compared to the Industry Average at 59%.
Improve the ability to enrich spend data. Laggards are 1.2
times less likely than Industry Average organizations to enrich their
spend data. Spend analysis is increasingly becoming a transforming
source of information for not only building insight into spend, but
also intelligence around suppliers and the impact of that spend. This
includes the ability to track supplier parentage via corporate
hierarchies reports, which is in place at only 15% of Laggard
companies.
Establish enterprise-wide classification schemas. As
discussed earlier, establishing a common language is an integral part
of creating linkages through commodity codes that influence
everything from catalogs to purchase orders. Where only 24% of
Laggards are capable of this currently, 56% plan to improve in this
area in the next 12 months.
Industry Average Steps to Success
Automate data collection from multiple sources. Given the

number of spend data sources for spend analysis, establishing
automation for extracting spend data becomes essential for the sake
of efficiency and accuracy. Industry Average companies are 30% less
likely than the Best-in-Class to have implemented technologies for
integrating / extracting data into spend analysis.
Develop the ability to cleanse and classify data. Another key
facility identified in spend analysis efforts is leveraging cleansed and
classified data. This promotes the opportunity to identify
opportunities beyond manual processes for increased category
efficiency and the ability to identify duplicates such as payments or
suppliers. In this regard, the Industry Average are 19% less likely
than the Best-in-Class to have technology enablers in this area.
Increase visibility at the supplier, category and transaction
levels. Thirty-seven percent (37%) of Industry Average
organizations indicated a major barrier in the ability to identify and
prioritize top spend categories. Organizations that understand the

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Fast Facts
integrate spend analysis with
ERP solutions
p-cards
contract management
"Our first criteria for success

of spend analysis would be
spend classified to an
acceptable level for each
category manager. We have
our own custom classification
based on UNSPSC codes and
have been working to align the
automated UNSPSC
classifications to our custom
classification to get the view we
desire. "
~ Sourcing Analyst
Large Midwest bank-based
Financial Services Company
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Page 19
dynamic of spend at multiple levels promote the ability to identify

spending trends and the ability to distinguish preferred suppliers
through capabilities such as power-user capabilities, drill-down,
multi-dimensional reporting.37% of the Industry Average plan to
implement or add spend visibility tools in the next 12 months.
Best-in-Class Steps to Success
Improve understanding of supplier risk through the use of

spend analysis tools and dashboards. With only 17% of Best-inClass organizations having this capability in place, it is imperative that
organizations increase the investment in linking spend analysis and
supplier management capabilities. This suggests improvements are
needed for integrating and enhancing supplier data such as financial,
corporate and corporate social responsibility related information.
Develop a cross-functional review of spend data for
strategic planning. Only being executed in a third of Best-in-Class
organizations, improving the voice of the procurement organization
through cross-functional review of spend data is a key action,
particularly for CPO. By increasing involvement of spend analysis to
groups outside of procurement, organizations are better prepared
to make strategic decision on their spend and enhance their ability
to influence key stakeholders (such as the CFO).
Increase the usage of third-party economic data. As a means
to improving insights for how economic and world events impact
existing data, the Best-in-Class need to improve their usage of third
party economic data that includes commodity prices, inflationary
data, exchange rates and market indices. On average less than a
quarter of Best-in-Class organizations are integrating this type of
data into their spend analysis systems.
Fast Facts
ERP solutions
p-cards
contract management
Aberdeen Insights Summary

Spend analysis has come a long way over past decade. Initially focused on
transaction oriented insights, best-practice spend analysis today is
providing a more holistic view of spend through increased aggregation of
spend data and automation. Every organization has a different start and
end point with regard to technology; spend analysis is no different. In this
regard, the goal of spend analysis is to understand how spend is being
managed within an organization.
Therefore increasing visibility into spend starts with standardizing formal
spend intelligence (cleansing, categorization, enrichment) processes and
methods across the organization, increasing automated integration of
spend data from ERP systems and procurement related systems, and
improving user access and the ease of use for spend analysis tools.
For those more advanced in their spend analysis initiative, taking the next
step involves increasing the integration of supplier data with spend data
and considering how predictive analytics, an emerging area, can provide
greater insights into how economic and natural events impact the
performance and approaches to spend management.
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Page 20
Appendix A:
Research Methodology
In September 2011, Aberdeen examined the use, the experiences, and the
intentions of 132 enterprises using supplier management in a diverse set of
industries. Aberdeen supplemented this online survey effort with interviews
with select survey respondents, gathering additional information on
strategies, experiences, and results.
Responding enterprises included the following:
Job title: The research sample included respondents with the

following job titles: Executive (CEO, President, Chairman, Owner,
Other) (5%), EVP/SVP (2%), CPO (7%), CIO (2%), Vice President
(7%), Partner/Principal (2%), Director (12%), Manager (40%),
General Manager (2%), Staff (6%), Other (15%).
Department / function: The research sample included respondents
from the following departments or functions: Procurement /
Purchasing (70%), Logistics/Supply Chain (6%), Operations (2%),
Finance/Administration (7%), Logistics Supply Chain (6%),
Corporate Management (7%), Product Development (2%)
Industry: The research sample included respondents 24 various
industries which included Aerospace, Automotive, Chemicals,
Computer Equipment, Construction, Consumer Packaged Goods,
Education, Financial Services, Food/Beverage, Government, Health
(Medical & Dental), Industrial Equipment, IT Consulting, Metals,
Oil/Gas.
Geography: The majority of respondents (53%) were from North

America. Remaining respondents were from Europe (25%) and AsiaPacific region (16%) and Middle East & Africa (3%), and other (3%).
Company size: 52% of respondents were from large enterprises

(annual revenues US $1 billion or above); 32% were from midsize
enterprises (annual revenues between $50 million and $1 billion);
and 16% of respondents were from small businesses (annual
revenues of $50 million or less).
Known Headcount: 60% of respondents were from large enterprises

(headcount greater than 2,500 employees); 25% were from midsize
enterprises (headcount between 251 and 2500 employees); and 15%
of respondents were from small businesses (headcount between 1
and 250 employees).

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Study Focus
Responding executives
completed an online survey
that included questions
designed to determine the
following:
The evolution of spend
analysis from its beginnings
of tactical approaches to
strategic
Usage of automation as part
of the spend analysis solution
Ability manage and
standardize processes
Ability to have visibility into
spend
Understand the amount and
type of spend going through
spend analysis systems
Understand the features and
functionality being used in
spend analysis
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Table 4: The PACE Framework Key

Overview
Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities,
and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as
follows:
Pressures external forces that impact an organizations 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 the
corporate 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 organizations enabling business
practices (e.g., development platform, applications, network connectivity, user interface, training and support,
partner interfaces, data cleansing, and management)
Table 5: The Competitive Framework Key

Overview
The Aberdeen Competitive Framework defines enterprises
as falling into one of the following three levels of practices
and performance:
Best-in-Class (20%) Practices that are the best
currently being employed and are significantly superior to
the Industry Average, and result in the top industry
performance.
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.
In the following categories:

Process What is the scope of process
standardization? What is the efficiency and
effectiveness of this process?
Organization How is your company currently
organized to manage and optimize this particular
process?
Knowledge What visibility do you have into key
data and intelligence required to manage this process?
Technology What level of automation have you
used to support this process? How is this automation
integrated and aligned?
Performance What do you measure? How
frequently? Whats your actual performance?
Table 6: PACE and the Competitive Framework

PACE and the Competitive Framework How They Interact
Aberdeen research indicates that companies that identify the most influential pressures and take the most
transformational and effective actions are most likely to achieve superior performance. The level of competitive
performance that a company achieves is strongly determined by the PACE choices that they make and how well they
execute those decisions.

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Page 22
Appendix B:
Related Aberdeen Research
Related Aberdeen research that forms a companion or reference to this
report includes:
The Year of the Supplier: Perspectives on Supplier Management in 2011;

May 2011
Linking Spend Analytics and Contract Management to Public

Procurement; April 2011
The State of Strategic Sourcing; April 2011
Effective eProcurement: Assessing Options for the New "Economic

Normal"; November 2010
Spend Analysis: Visibility for Intelligent Decision-Making; July 2010
Strategic Sourcing: The 2010 Guide to Driving Savings and Procurement

Performance; March 2010
Spend Analysis: Transforming Data Into Value; September 2009
Spend Analysis: Pulling Back the Cover on Savings; October 2008
Spend Analysis: Working Too Hard for the Money; August 2007
Information on these and any other Aberdeen publications can be found at

www.aberdeen.com.
Author: Constantine G. Limberakis, Senior Research Analyst, Global Supply

Management, (constantine.limberakis@aberdeen.com)
For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class.
Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide
organizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why
our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of
the Technology 500.
As a Harte-Hanks Company, Aberdeens research provides insight and analysis to the Harte-Hanks community of
local, regional, national and international marketing executives. Combined, we help our customers leverage the power
of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional
information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call
(800) 456-9748 or go to http://www.harte-hanks.com.
This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies
provide for objective fact-based research and represent the best analysis available at the time of publication. Unless
otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be
reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by
Aberdeen Group, Inc. (2011a)

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Spend Analysis

The Nexus of Spend Management

Spend Analysis: The Nexus of Spend Management

96% of enterprise spend captured in spend analysis efforts

9% cost avoidance savings identified as a part of a spend analysis

.1% of payments duplicated (compared to .5% for Laggards)

Competitive Maturity Assessment

33% more likely to have automated data collection from multiple

25% more likely to have standardized procedures for data

21% more likely to use have a common enterprise-wide

Standardize formal spend intelligence / spend analysis processes and

Automate the integration of spend data from ERP systems and

Spend Analysis: The Nexus of Spend Management

2011 Aberdeen Group.

Telephone: 617 854 5200

Spend Analysis: The Nexus of Spend Management

Figure 1: Priority Assigned to Spend Analysis program

Spend Under Management:

Source: Aberdeen Group, September 2011

As a result of such findings, it is clear that spend analysis demonstrates the

Telephone: 617 854 5200

Spend Analysis: The Nexus of Spend Management

Challenges In Spend Analysis

Figure 2: Top Pressures for Spend Analysis Initiatives

Lack of standardized spend

Inability to identify and forecast

Pressure to place more

Labor intensive process for

Inability to identify and prioritize

Source: Aberdeen Group, September 2011

Illustrated in Figure 2 and first demonstrated even as far back in Aberdeen

With 50% of organizations using between three-and-four systems generating

Telephone: 617 854 5200

Spend Analysis: The Nexus of Spend Management

Looking for Leadership in Spend Analysis

"Having the ability to extract

~ SVP, Chief Sourcing Officer

Source: Aberdeen Group, September 2011

As demonstrated in Figure 3, even for those organizations already leveraging

Telephone: 617 854 5200

Spend Analysis: The Nexus of Spend Management

processes as the most critical to the success of their spend analysis

The Maturity Class Framework

Spend captured in spend analysis efforts (factor focusing on

Cost avoidance savings based on spend analysis efforts (factor

Duplicate payments (factor demonstrating efficacy of spend analysis

Table 1: Top Performers Earn Best-in-Class Status

Mean Class Performance of

96% spend captured in spend analysis efforts

70% spend captured in spend analysis efforts

55% spend captured in spend analysis efforts

Source: Aberdeen Group, September 2011

2011 Aberdeen Group.

Telephone: 617 854 5200

Spend Analysis: The Nexus of Spend Management

The Best-in-Class PACE Model

Poor quality Standardize formal

Ability to collect spend data

Best-in-Class Strategies for Spend Analysis

Standardize formal spend

15% of organizations have 20

Most organizations, 46%

Improve user access and