Procurement

Analytics
Demystified

In Procurement Analytics Demystified,

Sievo’s source-to-screen experts
reveal the hidden world of advanced
spend analysis from data extraction to
collaborative classification to spend
analysis.

sievo.com
 Welcome to Spend Analytics Demystified.

Get yourself immersed and lost in the complex world

of advanced spend analysis. In this three-part series,
Sievo’s source-to-screen experts share the secrets
using practical examples. Backed up with deep
domain craft in the subject, they share the several key
learnings on how one can truly maximize data and use
it as a competitive advantage in this ever-evolving
dynamic world.

Grab a cup of coffee.

New to procurement analytics? Start by watching this 8-minute

introduction. Clicking on the picture will lead you to the video.
What is Procurement Analytics?

Procurement analytics is the process of collecting and analyzing procurement

data to form meaningful insights and aid effective business decision making.
This typically involves collecting data from a number of different source
systems, classifying data to standard or use-case specific taxonomies and
displaying data in a visualization dashboard or within business intelligence
tools.

Business cases for procurement analytics

Procurement analytics has the potential to improve operational efficiency

across the entire sourcing and supplier management lifecycle. Common
business objectives for procurement analytics include:

Cost reduction – identification of savings opportunities and measuring savings

projects impact on the financial bottom-line.

Risk management – identification and mitigation of supplier or market risks

within procurement operations.

New opportunity identification – explorations of new or more strategic ways

to manage suppliers or categories based on historic procurement data.

Improve cash flow – highlight ways to improve operational cash flow, for
example, through payment term optimization.
Examples of procurement analytics
Across different procurement organisations there may be different
applications of procurement analytics. Some of the most common examples
include:

Spend analytics – the analysis of procurement spend data from internal or

external data sources.

Contract analytics – the analysis of supplier contracts and their meta-data,

such as payment terms and expiration dates.

Supplier analytics – the analysis of performance of individual suppliers or

comparison of supplier performance.

Savings lifecycle analytics – the analysis of savings projects and their impact
on the financial bottom-line.

Spend forecasting – the forward-looking analysis of procurement spend data

and its impact on profitability.

Procurement benchmarking – the comparison of a procurement

organizations’ performance to peer or market benchmarks.

Four types of procurement analytics

The field of procurement analytics has emerged from the need to understand
past procurement performance and guide future decision making.

Descriptive Analytics – where procurement data is analyzed to describe

what has happened in the past.

Diagnostic Analytics – where procurement data is interpreted to

understand why something has happened in the past.

Predictive Analytics – where trends and patterns in data is used to

forecast future procurement performance.

Historically, procurement analytics has focused on understanding past

procurement spend and supplier performance, but increasingly focus is
shifting towards automated and prescriptive decision making.
Four types of procurement analytics

The field of procurement analytics has emerged from the need to understand
past procurement performance and guide future decision making.

Descriptive Analytics – where procurement data is analyzed to describe what

has happened in the past.

Diagnostic Analytics – where procurement data is interpreted to understand

why something has happened in the past.

Predictive Analytics – where trends and patterns in data are used to forecast
future procurement performance.

Prescriptive Analytics – where predictive models based on procurement data

aid decision making.

Historically, procurement analytics has focused on understanding past

procurement spend and supplier performance, but increasingly focus is shifting
towards automated and prescriptive decision making.
Why is analytics so important for procurement?

A common misconception is that analytics in procurement only relates to

spend analysis. In reality, analytics touches all activities from strategic
sourcing to category management and procure-to-pay processes. Here are
just some key reasons why analytics in important across different
procurement functions.

Analytics in category management

When effectively used, analytics give category managers superpowers.
Procurement analytics allows category managers to identify savings
opportunities, segment and prioritize suppliers, address supply risk
opportunities and facilitate innovation.

Analytics in strategic sourcing

The best business strategies are informed by data. In strategic sourcing,
analytics helps identify the best times and areas to run sourcing events and
requests for proposal. It can identify which suppliers to include in sourcing
projects and provide rich information into supplier’s quality and risk
positions.

Analytics in contract management

Analytics provide value across contract lifecycle management. It can alert
when contracts need to be renegotiated, or provide data for supplier
negotiations. What’s more, analytics can identify maverick spend to help
compliance and improve contract coverage.
Analytics in procure-to-pay
Procurement analytics can also provide much value in the transactional
side of procurement. With analytics, you can measure purchase order
cycles and improve payment terms. You can evaluate payment
accuracy, discover rebate opportunities, identify mistaken payment and
reduce fraud.

Analytics in sustainability and CSR

Increasingly, companies are realizing the value of analytics in assessing
sustainability and corporate social responsibility and related risk within
the supply chain and procurement. Analytics can uncover the
environmental or social impact of procurement decisions and identify
opportunities for more sustainable alternatives.
CATS: a quick method to diagnose Procurement
Analytics needs

The common goal of most procurement analysis solutions is to be a ‘single

source of truth’ where procurement teams can make informed decisions
with data they can trust. If the data is not reliable, you may run into a “bad
data in, bad data out” situation, where costly mistakes are made based on
unreliable analysis.
While most procurement organizations have similar aims for reliable data
visibility, they all have unique resources and challenges to achieve the goal.

You can assess the complexity of your needs on four key dimensions:

Connectivity – do you need to bring together multiple sources of data from

within and outside of your procurement organization?
Adaptability – can the solution fit into your team’s sourcing processes,
culture, organization structure and workflows?
Transparency – do you need to see and understand how spend is
organized? Can you trust the data?
Speed – how often do you require updated analysis and how actively is it
used in your organization?

As a rule of thumb, the higher your needs for connectivity, adaptability,

transparency and speed (or CATS) the more likely you are to need
procurement analytics.

If you don’t require many connections between different source systems and a
high level of transparency to the analysis process, you may be able to start with
a one-time analysis done in Excel or with help by a consulting partner.

If you have a complex organization or global supplier networks, or you require

regularly updated data, you may benefit from dedicated procurement
analytics software.
Sources of Procurement Data

Procurement organizations often face the challenge of heterogenous data

landscapes. As many businesses are formed from more than one business
unit, financial processes may vary on a regional or international basis or
across businesses. Increasingly, procurement analysts are starting to leverage
data from outside of their own procurement organizations, combining the
most valuable aspects of internal and external data.

Internal data assets are hosted or originated within corporate applications.

It is common for businesses to utilize more than one transactional database,
such as enterprise planning systems (ERPs) or accounting software.
Procurement analysts may also utilize data provided directly by suppliers or
different business units through Excel, or tap into data from the general
ledger or other financial records.

External data assets are any data sources that come from outside of the
companies own financial databases. These may be public systems, such as
information on suppliers, commodity prices or currencies readily available on
the Internet. External data sources also include 3rd party proprietary sources,
such as supplier industry codes, credit ratings or supplier risk profiles.

In the past, independent analysts working with Excel have been limited with
the ability to utilize external data sources. Cloud-based procurement
analytics software and application programming interfaces (APIs) have
enabled more automated, faster and more flexible uses of procurement data.
Build Spend Intelligence or Buy Procurement
Analytics?

With the increased availability of business intelligence (BI) and cloud

computing technology, there has been an increase in procurement analysis
solutions.

Most procurement organizations are faced with the common “build or buy”
question related to procurement analytics. On one hand, you can choose to
build your own reporting system in either Excel or a BI platform like PowerBI
or Tableau. Alternatively, you can choose to buy dedicated procurement
analytics software. Let’s go through each option.

Business Spend Intelligence

Business Spend Intelligence (BSI) is the process of statistical procurement
spend analysis to support executives in making informed business decisions.
Often lead by data scientists or analysts, the process involves data mining,
data visualization and reporting. Spend Cubes are a common example of
business spend intelligence, where data is presented across three axis to
answer three key questions for procurement: who is buying, what is being
bought and who is bought from. BSI can be delivered either by specialized
consultants, a centralized BI function or by analysts within the procurement
organization, and is typically seen as a one-of exercise conducted in Excel or
as a continuous reporting within a BSI tool.

Example: Procurement analysis dashboard in Microsoft PowerBI

Enterprise Procurement Analytics
Compared to self-made business spend intelligence reporting solutions,
procurement analytics is often seen as a continuous activity where data is
used to influence key procurement goals or strategies. Procurement
analytics is not limited to past spend data. Instead of reactive reporting,
procurement analytics involves the discovery, interpretation and
communication of meaningful patterns in procurement data. Analytics can
be embraced by different roles within procurement organizations from
category managers and analysts to C-level executives.

Example of procurement analytics software: payment term dashboard in Sievo

Category Analysis

Category analysis is the process of grouping goods or services into categories

for analysis and opportunity identification. Category analysis can be
conducted on a high-level view, or through drill-downs into specific
categories.

Analytics in category management

In procurement, category analysis is often closely related to category
management where an organization’s spend and supplier relationships are
managed by a category manager or team of experts.

Category managers can utilize procurement analytics reports to review

spend or supplier trends over time, or to identify new opportunities to
improve category performance.

Category level metrics can include:

- managed spend per category

- number of suppliers in category
- average payment time per category
- how many suppliers manage 80% of category spend

Example of Category Analysis

Procurement teams can also map out a high-level category analysis to identify
which categories of spend to prioritize based on quantitive and qualitative
metrics.

On the next page is an example of a category analysis based on a subjective

analysis of spend per category. The size of the ball relates to the total managed
procurement spend per category.
In this example, the organization is most likely more focused on direct
sourcing activities. For this reason, raw materials, finished goods and
components are analysed as strategic categories with more detailed
granularity. For this manufacturer, indirect categories such as travel,
marketing and professional services are likely to be less strategic categories
requiring less data granularity.

Whether they are manufacturers or service companies, each organization

will have their own priorities for category analysis.
Business Cases for Procurement Analytics

Procurement analytics has the potential to improve operational efficiency

across the entire sourcing and supplier management lifecycle. Common
business objectives for procurement analytics include:

Cost reduction – identification of savings opportunities and measuring

savings projects impact on the financial bottom-line.

Risk management – identification, measurement and mitigation of supplier

or market risks within procurement operations.

New opportunity identification – explorations of new or more strategic

ways to manage suppliers or categories based on historic procurement data.

Cash flow improvement – highlight ways to improve operational cash flow,

for example, through payment term optimization.

Many organizations recognize that procurement is a critical business

contributor. Typically 40 – 70% of all costs are procurement related, and these
costs are often a volatile source of competitive advantage. Effective
organizations leverage data to more effectively manage supplier
relationships, growth and even bring new innovations to life. More data has
been created in the last two years than in the previous history of mankind,
bringing new challenges for procurement analytics. Advancing analytical
technologies accelerate the process from data to insights and unlock new
opportunities.
Procurement Analytics Case Examples

Procurement organizations of all shapes and sizes can have a business case
for adopting procurement analytics. Each organization may have a different
need based on organizational maturity and supplier landscape complexity.
See procurement leaders explain the value of procurement analytics in their
own words from three sectors: telecoms, FMCG and manufacturing.

Clicking on the pictures below will take you to the videos where you can
watch them in high-definiton.

Telecommunications case for procurement analytics:

Telenor Procurement Company.

Fast moving consumer goods (FMCG) case for

procurement analytics: Hero Group.
Manufacturing case for procurement analytics: Elevate
Textiles.
Procurement Metrics and KPIs

Procurement metrics or key performance indicators (KPIs) provide

organizations with quantifiable values to measure performance and guide
procurement strategies. Metrics can also be used to benchmark
procurement’s performance to peers or to prove contribution to
company-wide goals and targets.

The 10 most important procurement metrics and

KPIs you should be measuring

Which procurement metrics should you be tracking? Here are the 10 most
important ones for best-in-class procurement organizations.

1. Spend under management

Spend under management is the total amount of spend that is actively
managed by the procurement organization. This figure can include every
region and category that procurement is working with, or can be divided into
separate metrics that represents a specific region or category. Spend under
management is an important metric for a procurement organization
because it reflects maturity and control over spend. Example: “as a
procurement team, we’ve increased our spend under management from
60% to 67% over the past 12 months.”

Common tool used: Spend analysis

2. Spend vs. budget
Spend vs. budget tracks the realization of spend in procurement and
compares it to the budgeted spend overall or per business unit. Tracking
realized spend against budgets is the foundation of spend management and
ensures alignment with key stakeholders such as finance. When evaluating
spend vs. budget, success is not necessarily measured by a decrease in cost
but by budgeting accuracy.

Common tool used: Savings lifecycle

3. Total cost of ownership

Total cost of ownership (TCO) is the cumulative cost of all spend purchases.
TCO takes into account every cost that is incurred during the procurement
phase, and includes all direct and indirect costs of a product or system. It’s
not limited to just the purchase price, but includes transaction fees,
warehousing and other incidental costs. TCO is a valuable metric for
procurement because it provides a cost basis for the total economic value of
an investment.

4. Cost Savings
Cost savings is measured by the cumulative amount of savings gained. These
are then broken down by category for focused measurement. They are
followed over a time period to see how cost saving targets are met. Cost
savings could be achieved through aggregating spend across business units,
taking out longer term contracts or introducing more competition, ordering
in larger quantities, implementing vendor managed inventory systems,
standardizing and rationalizing the spend, or using combinations of these
different levers.

Common tool used: Savings lifecycle

5. Cost avoidance
Cost avoidance is used to describe any actions that help a company avoid
absorbing inevitable additional costs. These costs could be due to inflation,
shorter payment terms, exchange rate fluctuations, requirements for
additional features or services, etc. Negotiating with cost avoidance
measures helps in keeping future costs down. Cost avoidance will not be
reflected in budget or financial statements, but can be used as a measure for
procurement performance.

Common tool used: Savings lifecycle

6. Average payment terms

Average payment terms measure the average time (in days) invoices are paid
by, calculated using every single instance of payment term information.
Improving or harmonizing payment terms among and within suppliers is a
key way of improving working capital. While the improvement in working
capital will not be reflected in financial statements, you can calculate savings
based on proxies such as the cost of borrowing. Example: by increasing
average payment terms from 30 to 35 days across our managed contracts we
were able to save $50,000 in interest charges.

Common tool used: Spend analysis

7. Number of suppliers
The number of suppliers informs how many distinct suppliers are being
utilized in the procurement organization, or in a specific category. Reducing
the number of overlapping suppliers in a category can result in efficiencies or
cost savings. Increasing the number of suppliers in key categories may be
advantageous to reduce supply risk.

Common tool used: Spend analysis

8. Contract coverage
Contract coverage measures the amount of spend that is covered by a
contract. In contrast, maverick buying highlights the possible loss of value
that occurs when buying off-contract. Increasing the amount of spend that is
covered by contracts (or procurement approved purchase orders) can result
in savings, while also reducing compliance risk.

Common tool used: Contract management

9. Exchange rate exposure

Exchange rate exposure measures the changes currency fluctuations and
conversions have on the overall spend. The long-term impact of exchange
rates can be measured and isolated from realized savings measurement.
Example: Over the last financial term, the procurement team’s contribution
of $1,5m spend reduction was offset by an increase of $700K costs from the
increasing value of the US dollar.

Common tool used: Spend analysis or Savings lifecycle

10. Vendor accountability

Vendor accountability measures suppliers’ performance and how they are
responsible for handling errors and claims. Examples of vendor performance
measurement include defect rate, lead time and the cumulative amount of
incidents per supplier. The goal of vendor accountability is to ensure that the
overall best product or service is delivered, and the development of more
strategic supplier relationships.

Common tool used: Spend analysis

Once you’ve identified your key procurement metrics it’s time to develop a
procurement performance dashboard. One method to utilize procurement
metrics is through a balanced scorecard.
Balanced Scorecard for Procurement

A balanced scorecard is a strategic performance management framework to

identify and improve various functions including financial and non-financial
metrics developed by Robert S. Kaplan and Dave P. Norton. For procurement,
a balanced scorecard helps managers and teams keep track of execution of
activities and the consequences arising from these actions.

While there are some industry-level best practices, each company is likely to
have it’s own scorecard of metrics related to their own business goals. In the
balanced scorecard model the key focus areas to include are:

Financial Perspective – a small number of high-level key financial measures

for the procurement organization that can be tracked and reported in a way
recognized by finance.

Customer Perspective – while procurement doesn’t typically have external

customers, this could include measures of customer satisfaction or
responsiveness to internal stakeholders.

Learning and Growth – assessment and measures of the skills within the
procurement organization and how new talents are brought in and retained in
the organization.
Internal Processes – measures of the efficiency of the procurement
organization. How quickly and accurately tasks are done and how they can
be streamlined or automated.

Setting up metrics can be difficult, as the amount of information provided

has grown over the years. Some procurement organizations highlight metrics
with no actionable value. These so called “vanity metrics” do not provide real
information to assess how the organization is performing or a connection to
a business’ measured financial success.

Another mistake in performance management is having too many metrics in

place. Too many trackable items can be detrimental as it leads to overanaly-
sis. Overanalysis can lead to loss of meaningful performance, as there is a lack
of an overall vision, and too much focus on tracking individual metrics rather
than working on what will drive improvement in the big picture.

The most important element to any procurement scorecard is clear and

realistic targets. In other words, not just measuring specific metrics but
developing clear goals for where each metric should be headed. It is a good
practice to have ambitious goals, but unrealistic goals may demotivate the
procurement organization and hurt the business.

Procurement Analytics solutions often provide ready-made templates to

track procurement metrics and develop procurement scorecards.
Three Steps of
Procurement Analytics
Procurement analytics brings visibility into spend and supplier performance,
and helps untap the potential savings and opportunities. But even though
spend data exists in the systems, getting sense of it is often far from
straightforward. It requires three steps before it uncovers the data insights on
hand. Think about it like oil. It comes from crude oil, raw and unfiltered. The
only way to see its potential is to filter and refine it until it becomes gasoline,
which is a usable product that powers the whole world as we know it.

STEP 1: DATA EXTRACTION

It starts with extracting the data from all possible sources, and consolidating
it into one central database. Once it gets extracted, it is ready to be enriched
and cleansed. Data extraction is the process that makes outdated and messy
sources of information into a clean and consolidated format that can be
easily understood and ready for analysis.

STEP 2: DATA CLEANSING, CATEGORIZATION AND ENRICHMENT

Next, data has to be classified into clear and defined categories. To make
spend analysis effective, a precise data classification is needed, as it makes
the heterogeneous spend data easier to address and manage across the
organization. This process harmonizes all purchasing transactions to a single
taxonomy to enable customers gain visibility to global spending.

STEP 3: REPORTING AND ANALYSIS

After the data has been classified, it is now ready to be analyzed. Spend
Analysis gives you that spend visibility to deliver insightful analysis for
accelerated opportunity identification, smarter sourcing decisions and full
control on your spending. An access to an accurate spend analysis is the key
for massive savings and potentially realizing the opportunities.
Step 1: Data Extraction

We all know that nowadays, data is everything. In fact, most efforts are focused
on harvesting the data, but without much understanding which data has the
most significance. No matter how important it is, unless you can extract the right
data for your analysis purposes, you will get garbage in and garbage out. Pulling
out large amounts of data out of myriad of sources without a standard interface
can be quite a tedious task.

In a big company in a real business world, data extraction is a challenging task,

which requires tremendous human and capital investment. On top of that,
most systems weren’t built for the intensive load an extract will put on them,
especially internal databases that need to continue serving users during the
data pull. Because of the unexpected amount of stress put on the servers,
considerably big performance problems can occur during the process. The
amount of data to extract and the amount of maintenance required result to
pulling out data records out of systems longer than the time it is expected to.

The good news is, there’s always a better way to do things. The Sievo Data
Extractor is designed to connect and extract the most complicated and
extensive procurement data from all kinds of data sources and deliver it for
further analytical processing.
Here are 5 things on how the Sievo Data Extractor works its magic:

1. Even if extraction can be done in-house, using Data Extractor incredibly

shortens the lead time as it takes away the erroneous manual work. It has a pre-
configured template for extraction to take the correct data with possibility of
additional data fields. The challenge of spend data extraction lies in the fact
that you need to collect data from multiple modules of an ERP, in a way that you
get a coherent view on spend. Building this logic is trickier than it seems at the
outset, but luckily Data Extractor has prebuilt capabilities of doing this for most
ERPs. Because the tool cuts away a significant amount of time and effort, there
is no need to involve too many people in the whole process, like for example
heavily involving internal IT which generally means longer lead times.

2. The tool represents an easy way to extract data from multiple systems with
complete data security. Many companies like to have a full control over sensitive
data, but this tool guarantees a secured way of extracting data, delivering it for
further processing with a possibility for customers to still keep control.

3. Installed to a client’s computer within minutes, and with its compatibility to

practically any ERP, procurement and finance systems, it seamlessly captures all
the data and pushes it to the Sievo cloud. Correct extraction paves the way for
conducting quick data cleansing and analysis.

4. The tool allows us to monitor all processes, in cases of exceptions. We have all
the tools to proactively fix the issues, and our unrelenting experience allows us
to know how to react to errors such as connections not working or only partial
data sets extracted. This results to more reliable processes and up-to-date
reports with less support needed from the customer.

5. Once the data gets extracted, it is now ready to get enriched and cleansed .
After the transformation logic, what you’re left with is a clean, consolidated and
filtered format which then makes the rest of the process easier and faster.
In a nutshell, with its trusted and ready-made plug and play templates, the Sievo
Data Extractor Tool does the heavy lifting. With massive amounts of data on
hand, the best chance of success is to work with the company who does not
only have the technical expertise, but also understands the procurement data
and has perfected this process. And Sievo systems have the ability to deal with
all kinds of idiosyncrasies and challenges that make the extraordinarily dirty
data, outdated and messy sources of information into an easy-to-comprehend
format ready for analysis.

You may of course deliver the data to us, but why opt for that when we’d be
happy to take them from you. With this powerful tool in our hands, all this can
be done without compromising security.

Pasi Viljanen
Head of Procurement Big Data
Step 2: Collaborative Classification

Effective spend analysis is not possible without precise data classification.

Without classification, everything is cluttered and unorganized. Many of the
large enterprises Sievo works with have many ERPs, each having its own
structure, material numbers, accounts and a lot more. Let’s take the example
of a laptop. In a larger organization, this one item can be called differently
depending on how it has been sourced in tens of different ways, it can be Dell
X260, Power Laptop, or perhaps Ordenador in Spanish.

Unifying heterogeneous spend data into clearly defined categories makes

them easier to address and manage across the whole organization. Even
with the example of the pen, knowing exactly how many pens are bought by
different departments and subsidiaries of a company and at what price gives
procurement the upper hand in negotiations with new vendors. So, in essence,
classification is about harmonizing all purchasing transactions to a single
taxonomy enabling customers to gain visibility to the global spending in order
to make better sourcing decisions.

Once you’ve properly classified your data, results are presented in intuitive
reports and dashboards right away. The harmonized data can then show
potential savings and opportunities.
The answer to accurate classification is not a black box

Complex data classification solutions are not always simple to implement, but
they can be improved over time. What stands out with Sievo’s data classification
tool is that it’s not a black box—it is transparent. Customers can see how
information has been classified and make exceptions to the classifications
where they feel necessary. For example, if one category is classified wrongly,
it can be changed effectively as needed. Sievo empowers users to add data
categorization based on their own business logic and they can easily classify
data through intuitive add-ons and different levels of categorization. They can
slice and dice data to smaller managable junks on any attribute. Hierarchical
classification decisions enable them to manage and pinpoint exceptions both at
scale and in detail.

The visibility for the customers makes the whole process collaborative as
the customers can freely participate and make exceptions if necessary. Once
classified, the information goes standard across the organization and users can
see based on what data characteristics the classification has been done.

The key to success is collaborative classification

According to Spend Matters, Sievo’s collaborative classification engine is

one of the most distinct spend classification platforms in the market today.
Not only does it break down spend into categories and sub-categories, the
classification can also be assigned to customer category experts. This results
in expert system implementation where the knowledge of the expert is
capitalized in ensuring deeper level classification within a category or sub-
category and resulting to higher level of accuracy.

For organizations with billions of dollars of spend, this level of collaboration is

revolutionary. No one person can be expected to know the full organization’s
spend inside-out, but individual category managers can contribute to a more
accurate level of classification, and the end result can be ground-breaking.
The best practice in spend classification suggests at least 90% accuracy to
identify spend opportunities, however reaching 95% or better accuracy level
is crucial for savings tracking and management. As the further breakdown
occurs for a deeper level reporting and tracking management, Sievo’s
collaborative classification approach allows spend to be mapped down to
the last dimension 100% error free.
The future is human + machine collaboration

Even when category experts can improve classification close to the 100% error
free level, there is still the question of prioritization. How many hours of an
expert’s time is worth spending improving the classification of less strategic,
long tail spend?

The answer to this comes from a relatively new field of computer science called
machine learning.

At Sievo, we’re developing an approach of human + machine collaboration,

where the advanced knowledge of procurement experts is complemented by
our own proprietary machine learning solutions. In practice, we continuously
train computers to learn and adapt the classification techniques performed
by humans. The more data computers see classified, the more they learn. This
approach is currently tested with a limited number of clients, but we believe in
the future we can reach even greater levels of precision on data classification by
using the best skills of both humans and computers – the next stage in a truly
collaborative classification experience for procurement organizations.

Janne Sakko
Senior Product Owner
Step 3: Spend Analysis

You’ve probably heard that data is the new oil. So has your CPO.
Congratulations! Your company has realized the great value that your data
storages bring. Be it supplier rationalization, identifying key vendors, Product
Order coverage or supplier performance, your organization has endless
possibilities in unleashing the potential value contained in your data.
When we talk about analytics, we think about the detailed examination data
and applying proper statistical methods to unravel new insights that support
decision-making.

Perhaps you have heard about “data-driven decision making”. During your
data analysis project, the extracted data is refined like oil, as it is standardized,
cleaned and properly categorized with your provider’s collaborative
classification process. When the data has been refined, you are ready to fuel
up the analysis engine to navigate towards valuable insights. After all, refined
oil is used to fuel up the combustion engines and our combustion engine is the
analytics.

To steer the engine to a right direction, here are 8 key analytics insights that are
key for competitive procurement success.
Spend overview

Viewing the spend overview gives you a summary of how your spend is
performing compared to other points in time, such as last year, last quarter and
so on. What are the trends and are mavericks causing our spend to be higher
than usual?

To know how you are spending and for what reasons is to know how much cost
you are incurring, both in indirect and direct categories. The basis of all spend
analytics is seeing how your spend compares to particular timeframes. This basic
function has its roots in the stock markets, but it has found in use in procurement
analytics. KPI Visualizations indicate the trends of your spend and are dynamic,
responding to your drill-downs and data slice-and-dice operations.

Spend distribution by supplier

Pareto principle, created by Vilfredo Pareto, is a cornerstone representation

on how to represent spend. The Pareto principle shows you how much your
suppliers have an effect on your spend and if certain categories are in the hands
of a few, or one, supplier. The effect that a sole supplier can have on a category
is immense as it can take out all the leverage from negotiations. Relying on one
supplier in a category has to be carefully thought out, as it can remove your
advantage from negotiations.
Having a solution that offers you analytics capabilities that offers a view to
categories, geography and time-periods is crucial. Creating this type of analysis
from scratch is timeconsuming, but fortunately out-of-the-box solutions exist in
the market.

Visualizing the spend-flow

Procurement analysis comes in many shapes, sizes and forms. The amount
of dimensions open up different possibilities to get insights on how your
organization is performing with its spend function. However, this is not an easy
task to execute correctly, as the visualization options make the possibility of
presenting data too easy.

This usually ends up in a table and chart heavy dashboard, that can be hard
to decipher unless you are a seasoned data analyst. The best way to get this
information out is to create a visualized spend process. A flow-process allows
you to present your data story in a way that is easily understandable outside
your data analyst team.

Price opportunities

Procurement analytics is an artform that helps your company to unlock hidden

potential lying in your data. A big potential lies in the pricing of your direct
spend materials. Diversifying the purchasing to multiple suppliers produces
pricing data that enables you to benchmark giving you information on where
the best supplier price is. This can be taken into even more detail with peer
benchmarking, where your spend data is compared with data from your
supplier, expanding your possible spend saving opportunities.
Using price alone is not the best metric, so any opportunity related reports
should be completed with other factors like on-time delivery, quality and
opportunity fill rate.

Using the information provided by the system helps you in negotiating with
sub-optimal suppliers so it is possible to match the best supplier price without
sacrificing other supplier KPIs.

Everybody loves a waterfall

Communicating your cost reductions that stem from your savings program
implementation is a key aspect of analyzing your spend. If your cost reductions
can be tied to your executed savings plans, it provides great benefits for your
business. The cost reductions do not always bring benefits however, as they
can be tied into changes in the seasonality, price fluctuation and currency
shifts. Knowing where to attribute the spend change gives you a chance to do
a gap analysis, making way for a powerful way of explaining the results to your
stakeholders. The best way to do this is using the waterfall chart.
Purchasing is usually tied to a process, but how many are actually adhering
to it? The first step is to compare the spend and how it ties to the process.
If a particular invoice has been paid and you can see it linked to a particular
purchase order, then that spend is in control. This is not a deep enough
coverage, as many organizations tie their Purchase Orders to just one field.

It is better to figure out if the PO is matched properly to an invoice. This way,

you can be assured that your process is stable and does not have any blind
spots. You are able to identify maverick spending and address it correctly as
this information can be sliced and diced to category, business unity and even
supplier level.

Supplier segmentation

The variety of suppliers creates a need for optimization, so segmenting the

suppliers by different variables is the key on going forward. One example is
looking at your biggest suppliers and their growth in spending and comparing
it to the previous year, showing you a matrix of high-low groth and high-low
spend. This data can then be cross referenced with your category data.
Geo-spatial analytics

Although a lot of analytics providers offer a geo-spatial analysis capability, a

very few of them offer actual value to the user. A quick improvement for creating
value would be using different colors and data point sizes when mapping the
data. It could be for example the supplier location spend value (size) and then
spend growth for supplier compared to the prveious year (color). This gives you
a way to show instantly where a problematic spend is occurring. You could also
do an analysis by a particular material and see where the material is sourced
from and consider different supply chain optimizations.

These are just a few ways on how to create insight driven analytics and practice
has proven that there are tons more ways to analyze the data. Remember,
the more you simplify your approach, the more effective you will be in
communicating the insights found in your procurement data. The moment you
deliver simplified and palatable analytics insights for the purpose of aiding
stakeholders in making decisions is the key moment when your procurement
function gains competitive advantage. Data is being produced in vasts amount
daily and it can be easy to get buried in all of that. The variety of spend analytics
vendors offer you many different ways of getting insights, but only a few can
deliver the insights that precisely work for the user groups in your organization.

With Sievo, you can be assured that the data is in good hands. Sievo helps you
to understand your procurement data better.

Heta Ruikka
Vice-President, Product Management
Team Lead, Analytics
RFP Template for Procurement Analytics

Are you looking to evaluate your options for procurement analytics? It may be
time to create a request for proposal (RFP.)

Writing a comprehensive RFP is challenging and requires effort. At Sievo,

we’ve received and answered hundreds of RFPs from leading procurement
organizations around the world. Recently, we conducted a research into the
30 best RFPs we’ve received containing hundreds of different types of
questions. Based on our experience, we wanted to share four key points to
consider to write a best-in-class RFP. At the end of this post we have also
provided a template with example RFP questions.

1. Preparing for an RFP

Define your scope

There are many procurement analytics software providers that all focus on
different areas. As a rule of thumb, procurement application vendors can be
divided into best-of-breed and full-suite providers. Best-of-breed vendors,
such as Sievo, focus on a specific niche, for instance analytics, whereas
full-suite providers aim at having all procurement applications under one
platform. To narrow down the scope and to include only relevant vendors in
your RFP process, it is a good idea to research to market and consider what
services and solutions you would need. Shortlisting vendors and booking
demo sessions with a few is a good way to get a basic understanding of their
solutions.

Align internally

Include all stakeholders in your organization that have needs from the
software. For instance, Procurement, IT, and Finance should internally align
their requirements for the software. Including relevant people in your
organization helps in formulating useful RFP questions. If you don’t know
what you need from your software, it is difficult for the vendor to guess what
type of solution your organization is looking for. They might provide you with
too much or too little and irrelevant information, which is time consuming for
you to review.

2. Structuring an RFP
Give relevant background information

It’s important to provide the vendors with background information for them
to understand your current situation, your organization’s needs, and the
challenge you are trying to solve in addition to the purpose of the RFP, and
other things that are relevant for your project, such as the timeline you have
outlined. Stating necessary technical details at an early stage will prevent
roadblocks in later stages of the project. Giving the vendors as much relevant
information as possible at this point saves you some time, since you won’t
have to answer the same questions they would ask you individually.

Depending on the software provider, some information vendors would often

need from your organization to provide a pricing estimate include some or all
of the following:

- Amount or ERPs/source systems

- Number of users
- Annual spend
- Internal and external spend
- Addressable/non-addressable spend
- Direct/indirect spend

- Amount of taxonomy levels required

- Description of categorization
- Number of invoices and purchase orders

Provide clear instructions

The deadline for a response to the RFP and the preferred format in which the
vendors should submit their response should be determined, such as an
Excel spreadsheet or a PDF file sent via email. It is also a good idea to define
the length of the response you wish to get, for example by word count.
Standard format RFP responses enable you to make comparisons across
vendors and also the vendors know how detailed their answers should be.

Share the next steps in the RFP process

It’s a good idea to share with the vendors how their responses are assessed
and which criteria are used. Let the vendors know how the selection process
will continue, for instance, if the best two-three vendors based on their RFP
responses are selected to a next phase in the process.

3. RFP questions do’s and don’ts

Section your question areas

If you send your RFP questions in an Excel file, it is worth considering to make
separate sheets for each question area. In procurement analytics software
RFPs the question areas could include some or all of the following:

- General questions
- Data management
- Analytics and usability
- Implementation
- Continuous use and service
Pose clear questions, get clear answers
Asking clear and specific questions allow for concise and informative
answers. Do your best to formulate the questions in a way that all vendors
answer the same question and understand it in the same way. Underline
the importance of question areas where you’d like detailed descriptions and
where vendors can elaborate on their answers in contrast to questions with
simple yes or no -answers. Additionally, tell if sending appendices as a part of
the response is allowed.

Instead of asking your potential vendors to “describe your solution” you might
want to ask something like “can you extract data from multiple
different ERP systems within our organization”. It is difficult for the
vendors to know how detailed their answer should be if you ask them to
describe their solution. Fitting a detailed description might also be
challenging to fit it into an Excel cell and you might end up receiving an
appendix of 50 pages explaining all the technical details of their offering.

Question Template
Based on these key points we have created a question template that you can
use when making your own RFP. You can download the free template here.
About Sievo
Sievo is a leading procurement analytics SaaS-based solution company that
provides spend visibility, but also goes way beyond that. We help our clients
identify opportunities, translate these opportunities into projects, embed
created value into budgets and ensure that savings truly hit the bottom line. We
speak the language of procurement and also translate numbers into the financial
view.

Our solution is used by thousands of users in best-in-class procurement

organizations, such as Deutsche Telekom, ISS and Kellogg’s. With our clients, we
don’t stop at backward-looking reporting but deliver more by creating forward-
looking forecasts and comprehensive analytics. We combine internal information
with external data sources. With Sievo, human input and machine learning
technologies are integrated together. In short, we translate procurement data
into dollars.
About Sievo
Sievo is a leading procurement analytics SaaS-based solution company that
offices in Europe
provides spendand US.
visibility, but also goes way beyond that. We help our clients
identify opportunities, translate these opportunities into projects, embed
created value into budgets and ensure that savings truly hit the bottom line. We
speak the language of procurement and also translate numbers into the financial
view.

Our solution is used by thousands of users in best-in-class procurement

SIEVO
organizations, such as Deutsche Telekom, ISS and SIEVO
Kellogg’s. With our clients, we
don’tGLOBAL
stop at backward-looking
HEADQUARTERSreporting USbut deliver more by creating forward-
HEADQUARTERS
looking forecasts and comprehensive analytics. We combine internal information
with external data Sievo Sievo
sources. With Sievo, human input and machine learning
technologies are integrated
Mikonkatu 15 A together. In short,
20 we translate
W Kinzie St procurement data
into dollars. Chicago, IL 60654
FI-00100 Helsinki
Finland US
General inquiries: General inquiries:
offices in Europe and US.
+358 207 890 340 +1 (312) 489 8271
contact@sievo.com contactUS@sievo.com
sievo.com sievo.com

SIEVO SIEVO
GLOBAL HEADQUARTERS US HEADQUARTERS
Sievo Sievo
Mikonkatu 15 A 20 W Kinzie St
FI-00100 Helsinki Chicago, IL 60654
Finland US
General inquiries: General inquiries:
+358 207 890 340 +1 (312) 489 8271
contact@sievo.com contactUS@sievo.com
sievo.com sievo.com