Where Does the Money Go?

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

That was the case at Wachovia when, following its 2001 acquisition of First Union, which brought its total number of branches to 2,700, an idea to track electricity, gas, and water bills suddenly clicked. “We’d talked about how smart it would be to do this,” recalls Ginny Schlosser, CFO of corporate real estate at Wachovia Bank and former CFO of corporate real estate at First Union, where the idea first took root. The merger, combined with soaring electricity costs at the time, gave the project life.

The bank opted for a software/consulting service from Cadence Networks that not only gives it the clear picture of total spend it needs to negotiate better electricity rates, but also helps it trace wasteful usage, including the location of leaky water lines. The bank now plans an additional step: to reduce energy and water consumption through employee education and other initiatives.

It’s not unusual for spend-management systems to yield double-digit savings—about 15 percent, according to industry watchers. They also cull out the maddening waste that so exasperates many thrifty CFOs—for example, a $75 difference in room rates at the same event in the same hotel. Armed with solid, up-to-the-minute data, companies can identify waste, eliminate rogue spending, negotiate better deals, and in general make better decisions.

Irritability Factor

But there are problems. As the CEO of one spend-management company says, “There’s a growing sense of irritability over what these expensive applications promise and what companies actually get from them. Indeed, another Forrester study found that 35 percent of respondents whose companies had invested in procurement and sourcing technology said the benefits were below expectations. Companies face three challenges: deciding what software (or combination of software) best meets their needs, getting suppliers to cooperate, and making the organizational and process changes within their own companies that are needed to move away from business as usual.

Also hanging over the greater adoption of spend-management software is the bad taste left in many people’s mouths by the earlier foray into E-procurement, which tended to focus less on analyzing spend data and more on reducing transaction costs.

Managing the relationships with suppliers is also tricky. As Minahan warns, “You can only negotiate a 15 percent discount from your suppliers for so long before you put them out of business—you’re sucking the fat out of the suppliers’ profit margins.” Zealous users of online auctions, trading webs and early E-procurement systems now take a more holistic view of the entire procurement cycle, versus focusing solely on negotiating costs.

GlaxoSmithKline knows this learning curve: in 1997, before it had become part of GlaxoSmithKline, pharmaceutical company SmithKline Beecham developed an internal procurement system dubbed SpendTrak that it believed put the company ahead of its competitors. “But SpendTrak only allowed us to do coding at a supplier level, not the granularity required to perform compliance reporting on preferred suppliers,” explains R. Gregg Brandyberry, vice president of procurement for global systems and operations at GlaxoSmith-Kline. The company could see how much it spent with IBM, for example, but it couldn’t get a quick read on a specific contract. “Especially on certain indirect goods and services,” says Brandyberry, “we wanted to make sure we weren’t overbuying, or that the specification was for what we actually needed.”

Beginning in 2004, GlaxoSmith-Kline installed Emptoris spend-analysis software and began to get granular, making sure that spending follows the terms of carefully negotiated contracts. The software also helps the company get a sense of the performance of vendors supplying various indirect goods, so that, as Brandyberry says, “We can ask ourselves, ‘Do we need to buy Superbrand X when another brand will do?’” Glaxo is now ascertaining whether the system can be expanded to encompass spending on a broad range of services.

“CFOs are getting smarter about this,” says Aberdeen’s Minahan. “As a result, the buying organization is taking a more holistic look at their supplier relationships.” Gone are the days when buyers focused intently on reverse auctions to drive down the prices of goods. “Now,” says Minihan, “CFOs are checking the P&Ls and asking, ‘Where do those savings show up?’”

Connie Winkler writes about technology management from Seattle.

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