Service providers make way for software vendors
The Global Spend Analysis marketplace has witnessed hectic activity in the past one year, and is predicted to increase by over 200% in the next 2-3 years. Large Enterprises have realized the complexity of managing and analyzing ‘spend data’ that is dispersed within their enterprise. Huge investments made in electronic procurement and sourcing systems (tens of millions+) have failed to return the promised ROI, while transaction spend volumes languished between 15-35%.
The writing is on the wall – there is a spend data crisis brewing within the enterprise. Dirty data (cryptic, incomplete, wrong code etc) volumes are growing, in multiple commodity schemas, multiple languages, and multiple currencies, along with duplicate supplier names, unstructured contract contents, within multiple legacy, ERP, and procurement systems. Unless this problem is dealt with globally, the vision of enterprise wide savings discovery, spend compliance and control would remain a distant dream.
In the past years, many organizations chose to leverage the services of BIG 5 consulting companies (such as ATK, Bearing Point etc), supplier content providers (D&B, Austin Tetra), or niche Spend Analysis service providers (Tigris, Silver Oaks), to grab the low hanging fruits. Opportunity assessments followed up with aggressive sourcing actions resulted in savings of 5-10% for many organizations.
Spend Analysis was considered more of an art than science. The so called Spend Analysis providers were essentially Data management specialists (some called themselves hybrid solution providers) who used a mix of tricks from brute force excel based data coding to unsophisticated tools using scripts and rules engines. These service providers offered spend analysis programs that lasted years and cost multiple millions of dollars ($2-5 Million). For a while, the returns were easy to get – simple cleaning and consolidation of supplier data, offered the customer quick opportunities for negotiating savings.
While others were spending millions in services and consulting fees, some leading edge Fortune 100 companies chose to invest in a Spend Data Management software infrastructure. These organizations benefited from the ability to get automated and repeatable Spend Analysis and managed to get a global in-depth view of spend data (normalized to a single UNSPSC code schema). Few visionary leaders even adopted best practices such as automatic commodity coding at source (leveraging bleeding edge AI tools integrated at the point of requisition).
The benefits of in-depth (UNSPSC commodity level code) visibility were enormous. Additional 4-7% savings opportunities were discovered in many cases, but more importantly an effective system was put in place to monitor enterprise wide spend compliance and control.
Customers who were leveraging the services approach (and who were a vast majority) soon realized that supplier data cleansing (within a region) was just the “first” step towards global spend visibility; (even then the challenge of consolidating global suppliers defied all available solutions). Now increasingly aware of the benefits of spend analysis, they were prepared to take the next steps. They wanted global coverage, in-depth granular visibility, and analytics on-demand.
Clearly this was an inflection point for Spend Data Management software companies like ZYCUS, who were evangelizing the benefits of an automated repeatable spend analysis solution for a while.
While the market was just learning about the merits of AI based auto-classification, the service providers were coming under increasing pressure. The cost of providing Spend Analysis services grew with time, while revenues dipped because of competition. Many established Spend Analysis vendors were forced to look out for off-shore data processing, but the quality and delivery stood to suffer immensely. Even where costs could be managed, the value proposition to end customers was on the decline, because top-level visibility provided by quick and dirty manual data categorization left much to be desired. Without a core IP and long term vision, there was no way these organizations were going to be able to sustain themselves for the long haul.
Interestingly with the growing need for Spend Analysis, customers now also turned to ERP, procurement and sourcing software vendors, but none had a ready solution for this problem. The timing for acquisitions was ripe with the valuations of service companies being very attractive for potential bidders. After being up for sale for over a year, their management was possibly impatient to close a deal.
Anticipating the growth and criticality of Spend Analysis to their core business (i.e. selling sourcing software or managed solutions), many of these vendors decided to pursue an acquisition strategy. Since the Spend Analysis and sourcing software business were roughly equal in size, acquisition would also mean doubling of revenue for some.
While acquisitions are good to build an end-to-end marketing story, the success of any merger will come from the ability to deliver. The problems of a service approach (i.e. high cost of delivery and increased time to value), are going to plague the software vendors who will take time to figure out a profitable managed service delivery model. On the other hand developing core technologies (such as AI based classification) inherently have a high entry barrier, and going live on applications with a software tool could take multiple years. It will be interesting to see how these mergers pan out a year from now.
It is evidently clear that only those companies who have a comprehensive Spend Data Management vision and who are going to be able to deliver software based solutions are going to be in the game for the long haul.
The market will now have a choice of solutions from amongst the Big 5 consultants, sourcing software providers, and Spend Data Management companies such as ZYCUS.
The customer demands are going to be phenomenal – automated data extraction from multiple systems (SAP, Oracle, PeopleSoft etc), consolidation and normalization of data, categorization to one uniform taxonomy (UNSPSC / eCLASS), ability to handle multiple languages (German, English , French as a minimum), embedded analytic tools and spend portals. No one ERP system warehouse, BI tools or procurement software analytics is going to solve the puzzle. It will be years before global spend is consolidated within any one system, and till then investing in one automated Spend Analysis infrastructure will continue to make the most sense.
This infrastructure will manage transaction data, master data, supplier, catalog, parts and contracts data, and leverage the UNSPSC glue, to enable better sourcing, compliance and control of spend.
With the acquisition hoopla over, the market will possibly witness more meaningful strategic partnerships between sourcing vendors, BIG 5 consultants and Spend Data Management software vendors, in the future. A meaningful and strategic alliance between category leaders is going to provide compelling value over a marriage of convenience, and steer above the marketing hype.
Now it will get even more interesting... |
