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Where the Money Goes
It's an unguarded but little-reported fact that large enterprises typically have very poor visibility into how and where they spend their procurement budget. Ask a given CFO to identify the business's top ten suppliers are and what was purchased from them the year prior, and you are likely to get a blank stare. This is especially true in the case of indirect procurement of operating supplies and services, almost always spread across departments and divisions where multiple methods of buying are employed. As a result, enterprises tend to have very high spending that is poorly accounted for, thousands of suppliers that are unmanaged for risk, and limited leverage to secure better pricing.
In financial services where mergers and acquisitions are the path to expansion, the problem simply multiplies over time. In September, 2001, when Halifax and Bank of Scotland merged to become HBOS plc, the U.K.'s largest mortgage and savings institution with 22 million customers and 440 billion pounds in assets, the subject of spending was of immediate interest. "At that time the company was looking at generating savings and we were only going to be able help in the procurement area if we knew each supplier, exactly what we were spending money with them and what we were buying in different areas of the business," says Sharon Reason, procurement specialist, systems, at HBOS. One fact was already clear. With 2.4 billion pounds in annual procurement spending, HBOS had a great deal to get its arms around.
Seeing Spending
One way to improve supplier visibility is to monitor procurement on a single buying platform tied back to transactional systems. This is not a viable alternative for a dispersed organization buying all kinds of goods and services from 20,000 suppliers. Another approach is to centralize dispersed procurement information. "The solution we came up to do this was to bring in all the data from the separate accounts payable systems into one place where we could deliver some nice reports back to the procurement team, so they didn't have to draft information from all over our operations," says Reason. The challenge would be to exploit synergies and drive cost savings across the HBOS brand through a single, timely and consistent view of procurement data.
Though supported strongly by business, the data gathering and reporting exercise would require a web of technology to make it work. U.K. system integrator Acuma had the information management strategy HBOS was looking for and originally introduced a supplier management relationship (SRM) system based on reporting and analysis from Business Objects, and Ascential extract/transform/load tools that populated procurement data into an integrated data warehouse from Kalido. The latter vendor was a linchpin in the HBOS strategy. "It allowed us to tap many feeds rather than just bolting a reporting tool on an ERP system," Reason says.
Lest this get too technical, analyst Mike Schiff of Current Analysis, who tracks vendors in the space, explains. "Kalido is pretty innovative because in the classic scenario, every division has their own vendor list and you bring it into the warehouse and then you have to standardize all the lists. Because of its structure, Kalido can store the vendor lists from each division by activity and date and pull them all together by establishing relationships." In practical terms this meant that HBOS would be able to examine procurement by time and region right back to the merger date, even if the regions or organizational structure had since changed. For the people whose job it is to make such things happen, they could avoid massive data manipulations, allowing data to be reconciled from wherever it came.
In 2003, HBOS used the data warehouse to gather a view of 10,000 line items for common supplies such as pens and business cards bought across the organization. This data, drawn from a common e-procurement system, provided an overview of spending and consumption, helping finance manage cost allocation more realistically. "On the Kalido side, we've been able to group account codes and commodity categories that the procurement team understands," Reason says.
HBOS probably didn't know at the time that it was at the front end of a trend. Gartner Inc. predicts that more than half of Global 2000 companies will use category management as the primary tool for spend management by the end of 2008. In a recent report, Gartner analyst Andy Kyte writes that in addition to focusing on "the deal" (vendor selection, negotiation, contract), procurement officers now require knowledge of commodity dynamics, like consumption, price and availability. Few organizations so far have made a requirement of unifying these priorities though they are likely to over time (see Sidebar: Stages of Purchasing Management). At HBOS for example, contract management presently resides on a separate system, though Reason says some teams have been able to address compliance by comparing department spending by supplier.
Data Quality and Supplier Risk
Reconciling line items in account payable systems brought some clarity but was only part of the problem. Like HBOS, many organizations take data from multiple divisions and consolidate it, never realizing they are combining the same data. "Ask yourself, what is a customer?" Schiff says. "For sales it's who you are selling to, for marketing it's a prospect, and field service could care less who it is." Back on the procurement side, when it comes to asking who the top 10 suppliers are, the problem re-emerges. For procurement managers and key purchasers, there were both different and redundant inputs to describe the things HBOS bought, from leaflets to legal services, from temporary staff to ATM machines.
As the project moved through phases, an interim goal was to understand supplier risk, and here HBOS turned to D&B (formerly Dun and Bradstreet). "After we had done a few phases of assembling data, we started looking where we could add extra value," Reason says. "We started collecting financial information from D&B in a regular feed, not just using their information, but bringing their data into ours, which let us report risk against our largest suppliers or in a particular commodity."
The risk assessment brought with it another D&B benefit in the area of data quality. Known familiarly as a credit rating information provider, one of D&B's primary services is to cleanse corporate data against its repository of some 90 million global business records. Using reports generated by HBOS, D&B de-duplicates supplier information against its global information base, which exposes redundant entries. "To us, it doesn't matter what system a client implements, if the data inside isn't of good quality then the analysis and information will be degraded," says Damian Ross, a global customer manager at D&B.
Ross's clients usually find that the same customers or suppliers appear time and time again in their records because the information has been entered multiple times by different people in different areas and formats. After identifying the true supplier base, D&B establishes corporate linkages at a higher level, revealing entire tiers of suppliers owned by a common entity. "If our customers are able to consolidate that into a proper view of the corporate family tree, they can use it for far more effective negotiation of contracts at a higher level, which can drive some amazing savings for them," Ross says. "Also, they can consolidate the risk on those suppliers up to the global ultimate parents within the family tree." As it applies to credit or procurement, D&B's ratings are statistically predictive, allowing clients to better manage customer or supplier risk.
A Flexible Response
At HBOS, the target audience of the BI system is not the usual business analyst community, it's the finance team, the key purchasers and purchasing managers. Much attention is paid to letting these people concentrate on their roles, rather than working out where the data comes from or whether it's accurate. The system sits on the corporate intranet site where upon login, users choose from a list of reports pre-written in Business Objects. Upon input of a supplier name for example, a report is provided with multiple tabs for high-level information all the way down to all the invoice lines that have gone through that supplier. This lets users drill down to the information they need. "It just feeds our ability to speed the procurement cycle of projects, the pre-checks and so on," Reason says. "Sometimes there's too much information and you just want to go to the SRM system for the information you require and know that it's accurate."
Monthly meetings with IT and visible sponsorship from the procurement team keep the project on track. Since inception, the system has been extended to two HBOS subsidiaries. Three years down the road, with new top management in place and attendant changes in the procurement team, Reason sees the long-term strategy at HBOS holding firm. "It has been a great driver in an organization like ours that is changing all the time."
Jim Ericson is editorial director of DM Review, a SourceMedia publication. You can reach him at Jim.Ericson@sourcemedia.com.
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