Reining In Maverick Buyers

'Spend management' software and services can regain centralized control over company expenditures and yield big savings.

They weren't bad guys. The 18% of Kennametal Inc.'s employees who ordered PCs or paper clips locally, outside the purchasing office's control, thought they were doing the right thing. But these so-called maverick buyers were big spenders -- too big.

"They weren't doing anything wrong but simply what they felt was the best way to source," says Jim Cebula, director of global purchasing and travel at the $1.8 billion Latrobe, Pa.-based tool maker, which has 50 manufacturing plants and 13,000 employees worldwide.

Intentions aside, the mavericks needed reining in because they weren't getting the volume discounts and efficiencies that come from consolidating spending with preferred suppliers under negotiated contracts. Kennametal didn't know how much it was spending, or on what, or with whom.

So the company began streamlining purchasing operations, bringing in "spend management" tools and services from Ketera Technologies Inc. in Santa Clara, Calif. "The spend [analysis] allowed us to understand where we hadn't concentrated our spend in a given category ... and who wasn't buying on contract," Cebula says.

Through gentle encouragement, Cebula now has 80% of employees buying off the nationwide office-supplies contract. And he can analyze purchases by category. For example, he could break out computer purchases and separate laptops from servers.

Kennametal experienced a 150% return on investment from its spend management effort in the first year, although Cebula acknowledges that will be hard to repeat. And instead of chasing lost invoices or maverick buyers, the company's purchasing staffers can now handle more value-added work, such as negotiating better prices or finding new suppliers.

In far too many companies, the traditional purchasing department handles only 20% to 25% of spending, with the rest handled by other departments, says Tahseen Ali, CEO of Verian Technologies Inc., a spend management software vendor in Charlotte, N.C. And the data about spending tends to be stored in various departmental silos, instead of being aggregated and properly managed.

The analytic portion of spend management software pulls expenditure data from financial and ERP systems and sorts it by category. (While it's possible to extract such financial data from existing systems manually, that's a lengthy, costly and error-prone process.) With this aggregated data, companies can reduce the number of suppliers and payment methods, identify off-contract spending and generally consolidate contracts on a corporate (and sometimes global) level.

Gaining Visibility

"Companies buy spend management or spend analytics to get visibility into what they're spending. The next step is to improve that process," says Michael Dominy, an analyst at The Yankee Group in Boston. Spend management is a subset of what Yankee Group calls "supplier relationship management," one of the fastest growing portions of IT budgets.

So why is spend management hot? "We're coming out of two to three years [of economic] downturn. Companies are looking for other areas to squeeze because if they can save $1 million, that goes right to the bottom line," says Michael Schmitt, chief marketing officer at e-procurement firm Ariba Inc. in Sunnyvale, Calif. These companies have already exhausted the quick-fix responses to the business downturn: cutting staff, selling off assets and reducing inventories.

At Vought Aircraft Industries Inc. in Dallas, maverick spending wasn't the only problem, although in one category, employees were purchasing from more than 25 sources when the company already had a preferred supplier. Even worse was that the maverick buyers were paying suppliers in different ways, including standing purchase orders, credit card, online procurement and ad hoc purchase orders.

Because of the different payment methods (tallied in different silos), Vought didn't realize how much it was actually spending with individual vendors, thus it missed out on discounts and wasted time, effort and money printing checks, transferring funds and accounting for all the purchases.

At Vought, the maverick buyers likely had reasons to be confused: The company had accumulated a hodgepodge of systems and processes from a variety of acquisitions and its mid-2000 divestiture from Northrop Grumman Corp.

"We were capturing tremendous amounts of data about purchasing, but we had a fractured view of this activity," recalls Pam Stewart, administrator of e-procurement at Vought. Prior to using the Ketera spending tool, "we never rolled everything together, so all of a sudden we qualified for greater discounts with suppliers," she says.

That was especially important because of hard times in the aerospace industry. "The financial aspect was important; we weren't interested in staffing up to do catalog creation and maintenance ourselves," Stewart adds.

Like Kennametal, Vought turned to the Web-based hosted service from Ketera, which creates and maintains the catalog of suppliers from which employees can purchase office, safety and janitorial supplies. Ketera handles all the updates and supplier links, while employees use an interface on their systems that resembles Amazon.com's.

About 200 of Vought's 6,000 employees have access to the Ketera system, including five in the purchasing department. "It's just not our culture to open the system up to everyone," Stewart says.

Low-Hanging Fruit

Maintaining the savings from spend management is the challenge for Kendall Mills, group director of worldwide procurement at Cadence Design Systems Inc., a $1.1 billion provider of electronics/semiconductor design software and services in San Jose. Cadence shaved $6 million off all purchases -- which went directly to the bottom line, Mills notes -- in the first 18 months after installing a spending control suite from Softface Inc. in Walnut Creek, Calif. Softface was recently purchased by Ariba.

Prior to using the Softface product, procurement staffers manually extracted data from the SAP ERP system and poured it into spreadsheets. That process could take as long as three months just to track 50 commodities, and it was error-prone, Mills says.

"What helps is that we're now looking at 100% of our spend, not just certain key categories," Mills says. "On the contract compliance side, when we see spend going up, we head it off quickly." The software helped Cadence cut the number of suppliers it uses from 8,000 to 2,000, he says.

"We're still achieving savings regularly, but it's getting harder as all the low-hanging fruit is gone," Mills says.

Working With IT

Companies typically consult their IT departments about their spend management plans, but the technology doesn't require heavy work from IT. "That these solutions can cut 20% off expenses and can be up and running within a matter of weeks and require very little involvement from your IT department ... is compelling all the way up to the CEO," says Ian Sullivan, a vice president at Perfect Commerce Inc., a Lee's Summit, Mo.-based procurement network.

At Owens Corning, the e-sourcing group worked closely with IT, says James Hawkins, e-sourcing process leader. "Shoulder to shoulder, we went after the best tool for us, narrowing it to two vendors, one with a hosted solution and one without," he says. "Right now -- and this will probably change in a couple of years -- we prefer the hosted solution because it keeps the work off our IT team for upgrades and maintenance."

The Toledo, Ohio-based maker of building and composite materials, with an estimated $3 billion in annual expenditures, signed up for the expense management service of Emptoris Inc. in Burlington, Mass. So far, Owens Corning is happy with the savings and expects the investment to pay off in the first year.

Some users want to expand spend management into more complex areas, such as managing contracts and benchmarking against other organizations. For example, Perfect Commerce has a procurement network that allows participants to compare price ranges to make sure they aren't overpaying.

"With our Open Supplier Network, which processed $3 billion in transactions in 2003, we have the ability to analyze transactions and provide that data to organizations," says Sullivan. "We can say, 'For the commodities you're buying, here's the range of what others on the network are paying for like goods and services.' "

Catalog Perils

Of course, opening up all these online shopping catalogs to "nonprofessional" purchasers (who may decide to redecorate their offices, for example) has potential perils. Organizations need policies to monitor spending as well as promote efficiency in transactions.

"The Internet makes spending money very easy if you have a catalog," says John Sharman, a global procurement expert with IBM's Business Consulting Services. "All of sudden, you see this world of things that you [as] an individual could be spending money on -- it doesn't matter if you're in a cubicle or home office."

Finally, there's the pricey-pen danger: "If you're historically getting 10% to 20% off list price for office supplies, and you aggregate your spend to a single supplier to get 40% off, that doesn't necessarily mean you're doing a better job managing office supplies," warns Sharman. "It could be that you were getting 20% off Bic pens, and now you've negotiated a contract to get 40% off Mont Blanc pens. In the real world, these things can occur."

Winkler writes about management technology from Seattle. She can be reached at winklerconnie@yahoo.com.

Copyright © 2004 IDG Communications, Inc.

7 inconvenient truths about the hybrid work trend
Shop Tech Products at Amazon