Where Does the Money Go?

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

With more than 3,000 Gap, Old Navy, and Banana Republic stores nationwide, Gunn’s company has what he describes as “a real hidden asset in our nonmerchandise supply chain,” which includes the vast network of suppliers that play a role in opening and maintaining all those stores. With a fourth, as-yet-unnamed brand aimed at women over 35 in the works, Gap wants to manage those suppliers as efficiently as possible. The spend-management capabilities in the Oracle software, Gunn says, address all facets of the process, including the critical but often-overlooked back-end analysis.

“In the past, we’d contract for certain pricing and related terms,” he says, “but we had no way to know whether those agreements were adhered to. Most agreements have plenty of variables that can affect the ultimate spend, so it’s not enough to negotiate terms up front that satisfy you. You have to follow through and see how the spending actually played out.”

“There’s no clearer or more direct lever to improve financial performance than to focus on spend or procurement,” says Tim Minahan of the Aberdeen Group, a Boston-based IT consulting firm. “While every additional dollar in revenue a company earns entails significant costs in sales and overhead, every dollar saved drops straight to the bottom line.”

Once you back out the cost of the software and associated process and organizational changes, of course. But those changes often provide an impetus for spend-management software investments. Nate Lentz, CEO of Verticalnet, a provider of supply management software and consulting services, says that often as a result of acquisitions, many companies now want to centralize spend efforts rather than negotiate and source at a divisional level. “When they do spend analysis across the corporation, they discover an enormous opportunity to leverage their scale for both direct and indirect materials,” he says. Or as Faheem Ahmed, head of market strategy for supply-relationship management at ERP vendor SAP, says, “Purchasing is moving from being tactical to being strategic.”

Companies interested in spend-management software have no shortage of products from which to choose, but those products tend to fall into distinct categories. Some provide a broad technology platform that can accommodate virtually any purchase a company might make. Others address a distinct category of spend, be it raw materials or services such as contract labor. And some are narrower still, focusing only on a specific expenditure such as telecommunications, travel, or facilities maintenance.

While some analysts maintain that spend-management software is a big-ticket item of interest only to companies with at least $1 billion in revenue, there are new, smaller vendors that charge as little as $10,000 to start (as opposed to a tab of $1 million or more on the high end), and they usually offer their services in a hosted model, requiring virtually no changes to a customer’s infrastructure. Monthly charges may be based on a flat fee, volume of transactions that pass through, or other criteria.

Many analysts say that to take full advantage of spend management, companies may have to piece together several packages or services, although there has been plenty of M&A activity in the space as some vendors work toward more-complete offerings. Others are content to combine software and services with consulting help in specific areas in which even a savvy purchasing department might lack the requisite knowledge to craft the best contracts.

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