Service providers make way for software vendors
Spend Analysis : Background
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.

Spend Analysis : Rewind
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.

Spend Analysis : Early Adopters turn to AI technology
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.

Spend Analysis : Point of inflection
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.

Spend Analysis : The market shake-out
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.

Takeaway
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.

Global Spend Analysis – the new game
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.

In March 2004, Zycus released a vision document titled 'Spend Analysis 2.0'. The paper presented a succinct history and future outlook of the spend analysis market. Spend Data Management was identified as a key driver for the adoption and success of broader SRM initiatives. We also predicted that the flurry of M&As witnessed in FY 03-04 between niche Spend Data Management (SDM) service providers and Strategic Sourcing Vendors were going to face humungous challenges in delivery.

A year later Spend Analysis 3.0 examines how those M&As fared in the real world, highlights emerging best practices in SDM, and makes a definitive assessment of the future roadmap.

Key Findings
The much hyped M&A's (Ariba-Softface, Emptoris-Zeborg, Verticalnet-Tigris) possibly delivered less than anticipated value. ARIBA acquired Softface a spend data management ‘software’ company, but migrated to a hosted option for data management, driven primarily by services. Emptoris acquired Zeborg (who offered Expensemap software), but they too adopted the hosted services model as well. They recently announced acquisition of Intigma possibly to bolster their off-shore data management capabilities. Verticalnet which had acquired Tigris, continues to offer spend analysis as a hosted service.

Software solutions in data management are usually less expensive than services over a 2-3 year time horizon. It is not clear why the vendors who acquired software companies moved into a managed services model. Anytime a service option is brought to the market, there are price pressures and delivery challenges. In our opinion these vendors reinforced their off-shore strategies recently, in an attempt to offset rising costs of spend data management services.

Pure-play Spend Data Management software vendors such as Zycus, are recognized as category leaders, and ideally positioned to partner with the leading SRM vendors (such as SAP and Oracle) and stack players in DW and Analytics space to enable creation of the next generation Spend Data Warehouse. Several customer wins and proven deployments at customer sites such as GE, Dupont, 3M, Federal Govt. of USA, ADP etc. are testimony to the fact that software products for spend data management (such as Zycus AUTOCLASS) are a reality and now ready to replace service offerings at most F-500 organizations. Recently Zycus AutoClass software got the "Powered by SAP NetWeaver" certification, and has the unique distinction of being the only product in its class to have such credentials.

Spend Analysis has moved beyond a one-off strategic sourcing kick-off activity and matured into a best practice for large organizations who need to track their spend management KPIs. To do this they need powerful analytics and a robust spend data store, that can be continually enriched with clean and classified spend data. This need has fuelled the demand in large enterprises to build an infrastructure or leverage existing IT systems, to allow for repeatable and automated spend analysis. Automated data classification software has emerged as key to enabling automated spend analysis.

Customers are realizing the value of owning a software tool for spend data classification. Once purchasing and IT align with common priorities, they are quickly able to draw a parallel to the best practices adopted in the customer data space, where a customer data management software (such as Trillium) is considered a de-facto standard fitting in the stack of ETL, Data Warehouse and Analytics. Many customers, who have leveraged Verticalnet, Emptoris and D&B solution for years, are exploring the usage of software tools.

The key issues in the customer's mind are: Lower total cost of ownership (TCO), repeatable and automated spend-analysis, and data security.

Who owns your 'spend data' anyway?
For large enterprises that have struggled to meet the challenge of aggregating spend data dispersed across multiple legacy and ERP systems, the answer was a no-brainer. No one really wanted to part with their 'spending analysis' data, and send it outside the enterprise to get it cleansed, classified and enriched. This was sensitive information for competition (similar to customer lists and sales contracts) and no-one was comfortable exposing it to a third party.

Supplier data enrichment was a non-critical function that could be farmed out to specialty supplier content providers such as D&B, but item-data essentially remained locked inside the enterprise. This data, representing things that you actually buy from a supplier (quantities and unit price) remained buried within data repositories such as SAP Business Information Warehouse, Teradata etc., while enterprises continued with their hunt for automated software tools that could help unlock the savings insight buried within.

Waiting for IT
Procurement chiefs realized the value of category management as core to their spend management strategy, as soon as they were done with the cleansing of their supplier base. Now they wanted ‘super-charged spend analytics’ to provide them with details of what commodities they were buying in each category, from whom, in what quantities and what price. They wanted contracts identified in each category, wanted to set targets and more importantly measure KPIs on a continual basis. Without category management, huge savings would remain unidentified and even projected savings (through fresh contracts) would continue to leak because of maverick purchases. To deliver category management, the prime requisite was to have a sound Spend Data Management strategy in place first. This called for setting up of a Spend Data Warehouse infrastructure that would deliver item-level visibility and would resultantly facilitate better category management.

Unfortunately this was not on many CIO's blueprint, and the ensuing tussle for budget prioritization, created a market opportunity for ad-hoc solutions from the pure-play strategic sourcing vendors. Many customer were trapped waiting for IT to reprioritize their budgets and resources to build a spend analysis infrastructure, and purchasing teams got a go-ahead to move independently and consciously to an interim hosted solution, so they could kick-start their spend management initiatives.

The road ahead
Many customers who opted for the hosted 'spend data management' model are now learning from the industry leaders that it pays to think long term. They realize they could have saved millions in service costs incurred over the years, or garner far greater insight from their purchasing data by diving deep within a category (a fact often overlooked because of high costs associated with item-level visibility).

Most customers who have now exhausted their hosted contracts for spend analysis, are not looking back at renewal. Many are migrating mid-way, through attractive upgrade option available from SDM software vendors such as Zycus.

Almost ALL of them are architecting the next generation spend data management infrastructure so they can make spend analysis a part of the corporate purchasing DNA. For some, the right timing is now, for others it is somewhere in the near future – but the choice of solution and road ahead is clear.