GovPro Magazine, the official magazine of the NIGP.
Imagine you are part of a family of four and the recession means that your monthly budget has been squeezed. Gas and food prices have gone up, and your household income has stayed the same or gone down. Unfortunately, this isn’t difficult for many of us to imagine.
So you download a transaction history from your online banking site, and ask the rest of the family to save receipts for things that you bought with cash for a couple of weeks. It takes some time to organize the data, useful pieces of information are missing, and it’s not easy to categorize exactly what was bought, but it is manageable to record everything on a piece of paper or a spreadsheet. Then you get together as a family to discuss where you can buy things more cheaply, which store gives you the best membership card rewards, and what household items you could probably live without. Since money is one of the top things couples and families fight about, it’s not surprising that when it comes to deciding what to do to cut spending, the discussion often turns into an argument.
Now − multiply the number of people who can spend money by 1,000, throw in some complicated rules governing how money can be spent, remove direct access to the online banking site to download transactions, and you have the situation that many public sector organizations face today. That’s how I explain the difficulties of public sector spend analysis to people who have never worked in or experienced it before.
Like the household example above, spend analysis really has three distinct steps, requiring different skill sets, a balance of priorities, and the right resources, either internal or external, to complete the steps below:
If you trust the raw data that comes out of your financial management system, if it includes your purchasing card spend, and if it contains all the fields you need in order to get accurate visibility over your organization’s expenditure and contracts, you are in the minority of organizations and you can skip the rest of this step. For everyone else, the first step is to collect the data from its various locations, get it into the right shape, clean it up so that you trust it when making your decisions, and add any missing information that you need for your analysis. Doing this in a comprehensive, repeatable, and timely manner is a niche skill.
It’s only when you have data which you can trust, in the right shape, that you can begin analyzing it. Analyzing data really boils down to looking for patterns − and looking for outliers. Sorting, manipulating, and pivoting the data in different ways will raise new questions and bring to light new opportunities that you wouldn’t have been able to see without having all of the data in one place. You probably have preconceived questions such as, “Where have we exceeded our statutory spend limits, and need to get a contract in place quickly?” The results of analyzing spend should answer those questions, but also raise questions you had never thought to ask before. It takes a certain skill set to manipulate data in new ways to look for patterns, and it may be that you need to hire a data analyst, identify the member of your team with the best analytical skills (even if they aren’t the most experienced in procurement), or draft one in part-time from another department.
Once data transformation and analytics are accomplished, procurement professionals can really use their dominant skill sets: assessing all the available information, deciding what to do with the results of the analysis and prioritizing next actions to meet legal requirements, make savings, and increase procurement’s over-all efficiency.. The results of the data analysis can firstly be used to identify the low-hanging fruit, where productive changes can speedily be implemented, then to plan for medium-term opportunities and contracting requirements, and lastly, to develop a strategic sourcing strategy which incorporates long-term purchasing decisions as well as the structure and technology required by the organization to achieve those goals. The difficulty for many organizations is that they aren’t able to −or allowed to − spend any money or commit resources to going through steps 1 and 2 before they’re expected to jump directly to step 3. It’s like trying to navigate the best possible route with an incomplete map and only a scant few co-ordinates.
Why is now a good time for spend analysis?
In the current climate, public sector procurement teams are in a strong position to argue for the time and resources necessary to carry out a spend analysis exercise. There’s an increased focus on external spend as a means of coping with budget difficulties, and procurement teams are uniquely placed to play a strategic role in meeting those challenges. The resources, competencies, and experience level of the procurement team will dictate which projects can be undertaken, but if you are going to play a strategic role in your organization’s response to funding cuts, you first need to have a firm handle on where the money is going today.
As featured in the April/May 2012 edition of GovPro Magazine, the official magazine of the NIGP.