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EVERYTHING YOU ALWAYS

WANTED TO KNOW ABOUT
YOUR SPEND DATA*
(*BUT WERE AFRAID TO ASK)

In Partnership with
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INTRODUCTION
In this short briefing paper, we will look at some of the ways in which spend analytics can
help organisations answer some of those tricky, complex, or even embarrassing questions
relating to procurement expenditure.

The paper is named in honour of the very funny 1972 Woody Allen film and the rather more
serious sex manual by Dr David Reuben, on which the film was very loosely based. But
we are not really suggesting organisations are truly “afraid” of the points we make here,
although in some cases there is a grain of truth in that proposition. In many cases, however,
the barriers to achieving value from spend data are more about the difficulty of extracting
the right information that is needed, or perhaps a lack of understanding of what is possible
through smart and creative use of the source data.

Systemised spend analysis has been around for at least 20 years now, going back to the MS
Excel-based “spend cube”, often offered in the early days by consulting firms as a prelude to
the cost-reduction programmes they sold to CFOs (chief finance officers) and sometimes
CPOs (chief procurement officers) so successfully. That graduated to more automated
analysis that pulled third-party payments data from purchase-to-pay, invoicing and ERP
systems, and tried to make sense of it through classification, analysis and reporting.
But the possibilities in terms of what is achievable are developing all the time, and artificial
intelligence (AI) and machine learning are helping organisations to extract more useful
information from that data. There will undoubtedly be more progress in this area and
more opportunities, but users also need to beware of snake-oil sales people promising the
machine-learning impossible.

So, in this paper, we will look at six interesting questions that relate to issues where spend
analysis can already provide value, and which are likely to see further advances as the
technology gets smarter, faster and more usable.

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1 WHAT ARE WE REALLY SPENDING BY CATEGORY?

Obtaining a view of spend for all the different spend categories, both direct and indirect, is
a fundamental aim of pretty much every spend analysis programme. Having that view is an
essential driver for achieving the most fundamental procurement activities and outcomes
from spend analysis; consolidating spend, supplier reduction and leverage strategies and
so on.

It is therefore perhaps surprising that this classification process is often not as good as
might be expected, and leads to misleading data about the categories. That can come
from deliberate misclassification by users, or the inherent difficulties of working out just
exactly what is being spent. At a recent conference, we heard of one supplier’s invoices
being classified as “utilities”, perhaps not surprising as the supplier was “Chicago Heat”.
But this was in fact connected with sponsorship of the US major league basketball team
of that name! Or the same supplier may work across multiple categories; IBM may provide
software, services, consulting, equipment … working out which spend category each item
or invoice falls into is not a trivial matter.

In other cases, classification difficulties arise from deliberate actions taken by budget
holders. So, for instance, in our experience, organisations spend more on consulting and
high-end contingent labour than is immediately obvious from a cursory analysis of spend
data. We have seen organisations that put in controls on engagement of management
consultants, only to find that mysteriously the spend on “training” or “managed services”
jumped significantly as budget holders disguised their activities to avoid control.  

The latest developments around artificial intelligence and machine learning within analytics
platforms are helping to overcome some of these issues. Systems that can extract
underlying data from invoices for example and “learn” will at least avoid making the same
mistakes repeatedly, as they use past experience to make more accurate current decisions.

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HOW MUCH FRAUD AND CORRUPTION GOES ON

2 IN MY ORGANISATION?
This is one of those issues where perhaps there sometimes is hesitation within
organisations in terms of understanding the true situation. Some people may actually
be “afraid to ask” in this case, because they are worried about what might be discovered.
But why would organisations not want to know about fraud and corruption? Maybe, if the
problem is not too widespread or expensive, some might think it is better to live in blissful
ignorance than face the unpleasant facts.

But clearly, that is a slippery slope for any organisation. And spend analytics can play a
significant role in identifying and preventing fraud. For instance, in 2014, a worker in the
National Health Service was successfully prosecuted for stealing £160,000 worth of printer
cartridges over a period of a few years. However, some basic spend analysis would have
showed that her department was ordering more cartridges than pretty much the entire rest
of the organisation put together. That should have been obvious and would have been had
the data been available and properly interrogated.

“Fraud and corruption in the procurement function -

such as illicit rebates, kickbacks and dubious vendor
relationships are all too common. While the risk can never be
fully eliminated, a company can implement controls to reduce
the likelihood of these occurring”.
— Deloitte report, “Preventing procurement fraud and corruption”

Another type of fraud arises where an internal person and a supplier conspire so that an
artificially high price is paid for goods or services, or higher quantities of goods or services
are invoiced than what is actually delivered to the buying organisation. The perpetrators
then share the ill-gotten gains. Spend analysis comparing prices across suppliers or
business units can pick this up, whilst analysis of spend trends might detect the volume-
related fraud.

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More sophisticated analysis can consider the details of payments made to bank accounts.
If a new account, one that has never received a payment previously, receives a large amount
of money, then that may be worth a look – this could be “invoice redirection” fraud, which
has grown rapidly in recent years. The latest developments in the payments industry can
enable organisations to identify such payments before they are made, another technology-
enabled step forward.

3 HOW DO I GET TO THE BOTTOM OF TAIL SPEND?

It feels like there should be a joke in that heading – not, unfortunately, one with a
Woody Allen level of sophistication though. Tail spend is defined as the element of an
organisation’s third-party expenditure characterised by a high volume of varied low-value
orders, placed with many different suppliers, and not part of a defined, significant spend
category. In terms of pareto, it is often less than 20% of spend going through more than
80% of the supply base (defined by the number of suppliers).

“According to data compiled by The Hackett Group, managing

tail spend better can lead to 7.1% savings on average.
Increased visibility into tail spend also can help identify areas
that should have already been strategically sourced.

Finally, cycle time gains will free up higher-paid category

managers from handling one-off requests — a significant
benefit in terms of labor cost”.
— Spend Matters US, July 2017

Management of tail spend has become a higher priority issue for many organisations in
recent years. In part that reflects the greater maturity of procurement; as the larger spend
categories have been addressed, and benefits delivered, attention gradually turns to those
less explored areas. Even if this does represent only 10% of spend, the theory is that

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because it has not been addressed strategically or in a coordinated manner, significant

savings may well be possible. Take 10% cost out of the 10% of spend and you have a whole
additional percentage point of margin on the bottom line.

Improvements in technology also play a part here. Getting to grips with this spend requires
good data and ideally tools that can streamline the buying process for these small
transactions. Savings will not accrue if every small purchase requires significant
effort and time.

But like so much in procurement, the starting point must be good data, which takes us back
to spend analytics. It is critical to understand exactly where the money is going in terms of
suppliers, and just as importantly, which products or services are being bought. If we are
going to look at where tail spend can be grouped together or rolled into an existing properly
sourced category, then we must have good visibility and clarity to understand the spend.

So, the advances in classification speed and accuracy driven by machine learning are
important again here. It does not make economic sense to apply manual intervention to
transactions of a few dollars, pounds or euros each. But if this can be automated with a
high probability of success, then it becomes feasible to take spend analysis down into the
tail spend and extract genuinely useful information which can support procurement effort
to address the spend.

4 HOW CAN I USE ANALYTICS TO MANAGE COMPLIANCE?

Compliance and its evil twin, non-compliance, come in many different shades and
textures. The high-level differentiation is between supplier compliance and stakeholder
(internal) compliance.

Just supplier compliance in itself has several aspects. Compliance to the terms and
conditions of the contract is one, with pricing perhaps the most important and most often
the source of problems. Procurement has negotiated a “great deal” – but is the supplier
actually charging the agreed prices? Issues can arise through genuine price changes or

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errors, or it could be poor behaviour by the supplier or even fraud (see above) either
from the supplier or with the connivance of internal staff. There can also be issues in terms
of whether the supplier is delivering the right product, meeting agreed delivery conditions
and so on.

“A recent study by industry analysts with Aberdeen suggests it

is unlikely that the savings and other benefits companies are
negotiating with suppliers are making their way
to the company’s bottom line.

Eight out of 10 companies in the study reported that less

than a third of their supplier transactions were found to be
compliant with contract terms.”
— Compliance Week, July 2016

Compliance from a regulatory angle is another huge topic in its own right. Increasingly
organisations need data to show that their suppliers are complying with legislation in
areas such as bribery, modern slavery or data protection. This is far from traditional spend
analytics, but it will take us into interesting issues around management of wider supplier
data and information.

Looking at the internal perspective, the issues are usually around compliance to
procurement policies and processes. That means use of particular designated suppliers
or contracts, or use of specific goods or services – for instance, an organisation might
designate a small range of acceptable laptops, with staff officially not allowed to order
outside that. Analytics that dig down into the detailed level of what is being purchased can
identify transgressions and transgressors and highlight such incidents.

But do note that non-compliance can be “the friend of procurement”, as we have pointed
out before. While that sounds paradoxical, the fact is that non-compliance by stakeholders
tells procurement something. It may suggest the stakeholder is acting corruptly, but it is

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more likely that the contracts or suppliers chosen by procurement do not meet the needs of
this individual or team. Or perhaps procurement has not communicated the policy properly.

The final example of compliance relates to payment terms. If the buyer has agreed 45 days
as standard payment terms, the organisation is losing out if it pays after 20. Similarly, if
a prompt payment discount has been negotiated, then the business needs to ensure it is
complying and meeting its commitments to the supplier. Analytics can identify issues and
opportunities on this front too.

HOW CAN ANALYTICS HELP UNDERSTAND PROVENANCE

5 AND DIFFERENTIATE SUPPLIERS?
In recent decades, globalisation has become established, trade between countries has
grown and supply chains have become increasingly complex. With those developments,
it has become increasingly difficult to understand exactly where products, components or
raw materials originate, particularly for manufactured products that may have multiple tiers
within the supply chain. Complex supply chains or networks, including the use of middle
men (such as agents and resellers) increase the challenge of knowing who our “real”
suppliers are.

This is a challenge that has not traditionally been a target area for spend analytics to
address. However, as the analysis becomes more powerful, and machine learning brings
another dimension, we are likely to be able to look more carefully at the true origin of what
is being bought. For instance, going back to the core information by looking at product
descriptions or specific product code numbers rather than just the reseller details can help
to identify the original manufacturer and origin of purchased items.

Closer to home, analytics can also help where organisations want to apply different
approaches to different supplier groups. So, some organisations (including in the public
sector) might want to pay invoices more quickly for local or smaller suppliers. Analytics
might help to identify the right suppliers, channel those relevant invoices in the appropriate
direction, then report on whether particular payment terms are actually being achieved
in practice.

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6 CAN I GET ACTIONABLE INFORMATION IN REAL-TIME?

Historically, most spend analytics has been resolutely backward looking. (Our colleague at
Spend Matters US, Pierre Mitchell, calls it “spent analysis” – the use of the past tense being
deliberate as well as witty).

Through traditional spend analytics, we examine what the organisation has already spent in
the past and any comparisons relate to events and purchases that have already happened.
Clearly, this has value, as already discussed, but also means that in a sense it is too late to
do anything about what has already occurred. But this is changing as technology moves
to acting in real time, and then there is additional potential to move further on and look into
the future, with predictive analytics.

“Most spend management looks at historical spending so

asking the right questions about the data we collect is what is
important. While spend analysis can certainly provide one set
of insights – it is only a partial view. We need to be able to use
this intelligence to provide greater insights into future spending
requirements, and enable procurement to provide the business
with views that support and inform strategy and generate
opinion on what is important going forward”
— Gerard Chick FCIPS, Spend Matters UK/Europe, March 2016

In terms of real-time analysis, this could mean for instance analysing invoices as soon
as they are received from the supplier. Spend and other invoice data such as pricing can
then be compared immediately with existing data, perhaps both previous invoice data and
potentially data from other internal sources (contracts, purchase orders, etc). This can
highlight incorrect invoicing, or give instant price comparisons between different suppliers
for the same item. We might even see that extended to using other external data sources to
draw out useful and actionable information.

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The next step takes analytics into looking forward and helping the organisation to predict
requirements, costs, or even identify future risks and required actions to maximise value.
We may see AI looking for opportunities amongst the spend data, relating that to the
organisation’s future plans perhaps to highlight areas where a different approach might
bring value.

Despite some of the hype, AI and machine learning cannot do everything an experienced
procurement executive does today. We suspect that opportunity assessment for instance
will still require human judgement for many years to come, to prioritise potential actions
if nothing else, but it is likely that analytics will certainly move into predictive mode rather
than having a purely backward-facing role.

CONCLUSIONS
Spend analytics is a well-established tool for procurement, and the associated technology
is also well-known and used, yet many organisations are still not making full use of the
potential to drive significant benefits for the organisation; hence the title of this paper!
Recent surveys have also shown that spend analysis and data analytics more widely are
also areas identified by the industry as having most potential to bring future benefits. That
is in part at least because of the potential for artificial intelligence and machine learning to
improve the speed and performance of the whole process.

Those new technologies, along with dramatic increases in affordable computing power,
are opening up new ways in which raw spend data can be turned into value-generating
“actionable intelligence”. Analytics as we have described can support not just spend
aggregation and basic category management, but advanced use cases in compliance
management, fraud detection, tail spend management and more.

Looking forwards, “spent analysis” will also become more real-time and more predictive,
assisting not only the analysis of past spend but helping to plan, predict and look forward
in procurement and across wider business activities. While executives need to be cautious
about some of the wilder claims for AI and associated technology, there is no doubt it will
play an increasing role in this area and indeed in many others.

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ABOUT THE AUTHOR - Peter Smith, Managing Director, Spend Matters UK / Europe

Peter has over 25 years’ experience in procurement and supply chain as a manager, procurement director,
consultant, analyst and writer. He is Managing Editor of Spend Matters Europe, and with Jason Busch, the
founder of Spend Matters in the US, has developed Europe’s leading web-based resource for procurement
and industry professionals. Peter worked as Procurement Director for the NatWest Group, the Department
of Social Security (the DSS), and the Dun & Bradstreet Corporation, and held senior positions in the
Mars Group during his management career. He has an MA in Mathematics from Cambridge University,
is a Fellow and was 2003 President of the Chartered Institute of Purchasing and Supply, and his first
(co-authored) book, “Buying Professional Services”, was published by the Economist Books in 2010.

ABOUT COUPA
Coupa Software (NASDAQ:COUP) is the cloud platform for business spend. We deliver “Value as a Service” by
helping our customers maximize their spend under management, achieve significant cost savings, and drive
profitability. Coupa provides a unified, cloud-based spend management platform that connects hundreds of
organizations representing the Americas, EMEA, and APAC with millions of suppliers globally.
The Coupa platform provides greater visibility into and control over how companies spend money.
Customers – small, medium, and large – have used the Coupa platform to bring billions of
dollars in cumulative spend under management. Learn more at www.coupa.com.

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