Where Does the Money Go?

Spend-management software helps companies get a leg up on their procurement strategies.


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It’s been a bumpy ride for the software category known variously as spend management, supply management, sourcing management, supplier-relationship management, total-cost management, spend analysis, and, from way back (circa 2000), E-procurement. That so many labels can be applied to the same concept hints at the difficulties this category has had in fully defining itself. Those problems include a mix of dot-com hype, technological complexity, and entrenched ways of doing business—which have proved resistant to change regardless of what technology makes possible.

Despite those challenges, the basic concept of using technology to ease the many processes involved in buying goods and services, and to ultimately reduce costs in a number of ways, remains powerful enough to inspire vendors and customers to forge ahead. While the market for spend-management software, currently about $1.75 billion, was essentially flat in 2004, analysts expect a 3 percent rise this year and say that this figure is misleadingly low because vendor competition and new, lower-cost options such as hosted services mean that corporate adoption will be higher than revenue alone indicates.

Spend-management software relies on linguistic analysis algorithms to extract, cleanse, and classify, (by product, supplier, and other criteria) the messy data contained in invoices, purchase orders, contracts, and other purchasing records. The goal is to automate the way toward a closed-loop of spending analysis: determine from whom the company buys goods and services; narrow (or improve) the supplier base and negotiate better terms; manage contracts efficiently; and analyze the actual corporate spend.

In the past, such analysis meant bringing in a herd of consultants to thrash through the paperwork and produce a one-time snapshot of spending. That’s a far cry from an embedded and largely automated process. But experts say that the ability to drill down into a company’s spending habits is essential to cost-cutting efforts because most of the obvious targets (layoffs and elimination of or reductions in various forms of discretionary spending) have already been hit.

“For people who live in the world of ERP and general ledgers, it’s very hard to get your arms around spend information,” says Jim Frankola, CFO of Ariba, a pioneering spend-management software company that in some ways can serve as a proxy for the entire industry (in September 2000, its stock price topped $1,400 a share; today it stands at $13, which is nearly double what it was last August). At his previous company, Frankola once tried to ascertain what the firm spent on shrink-wrap. Information on those purchases was scattered across multiple systems, and coming up with the total figure—which might have helped in negotiating a discount—required plenty of digging.

Bill Gunn can relate. Hired two years ago by Gap Inc. to head up its nonmerchandise procurement organization, Gunn takes advantage of the daily business-intelligence feature in the company’s Oracle ERP system to “have at our fingertips the supplier spend data that used to take three or four months to gather.”

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