1. CFO
eBook
Find out how to reengineer
procurement to add more
value to your organization.
Strategies
for Spend
Optimization

2. STRATEGIES FOR SPEND OPTIMIZATION
Strategies for Spend Optimization is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA
02210. Mary Beth Findlay and Russ Banham edited this collection, with assistance from Jenna Howarth,
Caitlin Hegarty, and Stephanie Scott.
Copyright © 2013 CFO Publishing, LLC. All rights reserved. No part of this book may be reproduced,
copied, transmitted, or stored in any form, by any means, without the prior written permission of CFO
Publishing, LLC.
ISBN 978-1-938742-39-2
2
CFO PUBLISHING

3. CFO PUBLISHING
3

4. STRATEGIES FOR SPEND OPTIMIZATION
TABLE OF CONTENTS
FOREWORD: SPENDING WISELY
5
VALUE ADDED: PROCUREMENT AS A PROFIT CENTER
6
Big-Business Attitude: Reduce Cost, Increase Profits
The Long Game: Six Ways to Stretch Your Payment Terms
7
9
PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP
Spending Smart: Stop Paying Too Much for Stuff You Don’t Need
Get It Together: A Cure for the Supply Chain Blues
18
Investing in People: The ROI of Procurement Talent
19
CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS
22
Network Power: Working Better with Suppliers
23
DOLLARS AND DATA: PROCUREMENT TECHNOLOGY
26
Spend Management Software: Where Does the Money Go?
27
CONCLUSION: PROCURING VALUE
CFO PUBLISHING
13
16
THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT
4
12
30

5. FOREWORD: SPENDING WISELY
FOREWORD:
SPENDING
WISELY
D
espite stellar earnings performance by
US corporations and a stock market in
record territory, most companies are
spending more than they have in several
years. The belt-tightening expense controls in the
aftermath of the financial crisis apparently have
eased, and the cash hoard that built up during the
recession is being released.
This is good news, of course. But, it also focuses
the spotlight on how this money is being spent,
and how much of it. According to the Global
CFO Council, a group of chief financial officers
controlling roughly $1 trillion in assets, they
are looking to increase capital expenditures by
7 percent this year over last year. Most of the
money is earmarked for information technology
and new equipment, although the group said their
employees’ total compensation, including salaries,
would also receive a higher share.
Just like when mom and dad forked over a nice
check at graduation and advised, “Spend it wisely,”
CFOs are looking across the enterprise and hoping
for the same. The goal is not spend minimization
per se, but spend optimization. It entails creating a
culture of spending and inculcating it throughout
the business.
In this regard, procurement plays a central role.
The goal is to elevate procurement to a strategic
position tasked with systematically managing
expenses across the business, with a keen eye
on cost efficiency and accountability. Through
a process of enhanced spending controls, the
thinking goes, every division, department and
function would be empowered to spend more
responsibly. This, in turn, would compel significant
bottom line savings that can be directed toward
profitable business growth ventures.
It all sounds too good to be true, but the promise
is unquestionable. When spend is systematically
managed, dramatic reductions in cost are
achievable. Given the enormous wealth represented
by corporate expenses—equipment, machinery,
raw materials, technology systems, travel and
entertainment and even ordinary office supplies,
remarkable savings can be realized.
The problem in many companies is procurement
and whether or not it has the right skill sets to
take on the job of strategic spend management. In
a perfect business world, the CEO would state a
new strategic initiative and the Chief Procurement
Officer would weigh in on how best to keep the
costs in line. This perfect world still resides in the
future.
Nevertheless, spend optimization makes such
good financial sense that waiting is simply
leaving money on the table. The articles in
this eBook lay out how some organizations are
reengineering procurement to add greater value,
recruiting wider-ranging talent on procurement
teams and leveraging technology to achieve spend
optimization. CFOs can make a difference by
speeding up the clock—championing, launching
and overseeing spend optimization efforts. After
all, money (in finance) is everything.
--Russ Banham
CFO PUBLISHING
5

6. STRATEGIES FOR SPEND OPTIMIZATION
VALUE ADDED:
PROCUREMENT AS A
PROFIT CENTER
“While they don’t have the time to take the day-to-day
lead, executives who directly report to chief executive
officers should take responsibility and ‘own the business
case’ for the project. In particular, the finance or
procurement chief should be committed—and drive the
company’s commitment—to a particular
return on investment.”
6
CFO PUBLISHING

7. VALUE ADDED: PROCUREMENT AS A PROFIT CENTER
BIG-BUSINESS ATTITUDE:
REDUCE COSTS,
INCREASE PROFITS
Y
ou may have heard the saying that “small
business is big business,” and with more
than half of the U.S. economy populated
by small enterprises, this statement has
substance. For executives of small businesses, it’s
important to develop this big-business attitude when
it comes to your supply chain, and even in such basic
purchasing categories as office supplies. By doing
so, you can reduce cost, reduce risk, and increase
profitability.
To develop a big-business attitude, here are the
most-crucial steps:
$30,000 per year on various forms of packaging
supplies with three different suppliers. When the
volume was consolidated, the attractiveness of
$30,000 of business per year versus $10,000 was
incentive enough for these same suppliers to reduce
prices and include several value-added services at
no additional cost, in return for the opportunity to
increase their piece of the business.
1. Be creative about bundling spend
categories.
Even though a small business doesn’t have the
volume of a large conglomerate, it is possible
to consolidate some small-business purchasing
creatively. Consolidation can come in many forms,
cutting across categories or geographies. For
example, you may think that spending $5,000
per year on office supplies is not significant, but
when combined with other commodities such as
janitorial supplies and custom printing services,
your potential spend with one supplier may rise by
as much as 100%, increasing your leverage.
A client had two small manufacturing facilities,
each with its own supplier of janitorial products.
By combining the volume of both facilities, a single
source of supply was identified that provided not
only reduced pricing but also the opportunity to
obtain discounted payment terms, further reducing
the financial impact.
Even within the same spending category, you may
be able to find leverage. One client spent more than
CFO PUBLISHING
7

8. STRATEGIES FOR SPEND OPTIMIZATION
Looking to improve your
forecasting? Check out
Three Tips for Creating a
Reliable Demand Forecast.
2. The procurement department is not the
place for monogamy.
Human nature has demonstrated that the longer
we remain in a stable relationship, the less effort
we place into maintaining or improving the
relationship. In a supplier-to-customer relationship,
this tendency is often substantiated through
escalating prices and diminishing customer service
over time. That’s why maintaining a secondary
source of supply can mitigate risks and increase
competition.
Several years ago, I worked with an organization
that used a sole transportation source for all of its
inbound and outbound freight needs - remnants
of its early days when it was a small business. The
prices offered by the carrier had been steadily
climbing, and freight damage was quite prevalent.
Despite those problems, the company president was
hesitant to change. After we moved the business
away from the incumbent and divided it between
two alternative carriers, service levels improved and
the firm reduced overall transportation costs by
nearly 10% per year.
3. Forecast the future, forget the past.
If volume discounts are an opportunity for
reducing cost, reviewing historic volume or
spending may not provide a picture that creates
incentive for suppliers to increase discount levels.
One avenue of savings, however, may come through
communicating projected future business volumes
with existing or potential suppliers.
While arranging courier service for a client,
we developed an aggressive but realistic forecast
for future growth. This information was then
shared with courier providers to determine the
most-advantageous discount levels. The results
were discounts that rivaled those of much larger
companies, in not only reduced courier costs
but also more-competitive pricing for customer
shipping. All told, the moves supported improved
profit margins and a competitive advantage.
4. Negotiate, don’t haggle.
It is common knowledge that negotiating is a giveand-take transaction. Customers who continually
(and often ruthlessly) take without providing
any concession in return will often find suppliers
applying surcharges, premiums, and unexpected
price increases as a means to recoup costs.
Clearly identifying “wants” versus “needs” and
having the willingness to provide concessions will
8
CFO PUBLISHING
ensure a successful outcome during negotiations.
Several years ago, I was involved in negotiating
an agreement with suppliers on behalf of several
smaller organizations. The largest stumbling block
we reached was the belief that each supplier should
accept a reduced price on all items within the bid.
Not only was this expectation unrealistic, it also
shifted focus from the purpose of the exercise,
which was to ensure that the overall spending for
each customer was reduced. If I have to increase
my cost of paper, but my overall spending for office
supplies (which includes paper) decreases by 10%,
why would I care?
Consider for a moment that reducing costs
for overhead, materials, and services will yield
immediate increases in working capital and profits.
Also consider that the level of time and effort
required to obtain these financial improvements
is considerably less than producing similar profit
improvements through increased sales. Seems like
the right place to invest some time, don’t you think?
CFO Summary
• No spend is too small to ignore. If you are able to
reduce it in some way then you should reduce it.
• Consolidating sources to necessity across divisions
will help reduce spend.
• Knowing how to conduct and when to sever
relationships with vendors can also help reduce
spend.

9. VALUE ADDED: PROCUREMENT AS A PROFIT CENTER
THE LONG GAME:
SIX WAYS TO STRETCH
YOUR PAYMENT TERMS
F
aced with cash calls from their banks
and creditors in the wake of the financial
meltdown, many companies sought to
squeeze funds out of their working capital.
They did so by going after customers who owed
them money, cutting down on the costs associated
with inventory, and increasing their days payable
outstanding.
The result is that many corporate coffers are
filled to bursting with cash. To some experts,
that abundance has led to a certain complacency
about making improvements in working capital.
In 2010, following the worst year in recent
memory in terms of working capital performance,
nonfinancial companies merely treaded water.
The three components of days working capital
showed similarly sluggish levels of improvement.
Days sales outstanding (DSO) declined 0.1%,
while days inventory outstanding (DIO) and days
payable outstanding (DPO) each improved just 1.1%,
according to the 2011 CFO/REL Working Capital
Scorecard.
Still, there are indications that many companies
are looking to better those results. With much
of the low-hanging fruit of working capital
improvements already picked in the wake of
the financial meltdown, a good area to look for
betterment is on the payment side, says Steve
Riordan, global managing director of advisory
services at PRGX, a working capital consultancy.
Often overlooked because of the relatively low
status of accounts payable in finance departments,
A/P thus provides an opportunity for process and
structural improvements that can enable companies
to hold on to their cash longer. For companies
looking to improve their DPO scores, Riordan
recommends the following:
1. Let A/P chiefs drive A/P improvements.
Companies composed of many divisions often
put finance and accounting shared-services groups
together to support all those units. When it comes
to working capital improvements, a subgroup
consisting of executives from purchasing, treasury,
and payables often will run the show.
The problem at many companies, however, is that
while people from all three functions are responsible
for the project, “it’s not clear who’s ultimately
accountable for improving working capital,” says
Riordan.
When it comes to projects aimed at improving
payment terms, though, it’s clear who should be
in charge: the A/P director, who often reports to
the controller. Sitting on mountains of data about
externals (how fast vendors are being paid by the
entire market and on what terms) and internals
(the kind of job purchasing managers are doing in
managing payables), the A/P chief is in the best spot
to see where improvements need to be made.
2. CFOs or chief procurement officers
should sponsor the effort.
While they don’t have the time to take the
day-to-day lead, executives who directly report to
chief executive officers should take responsibility
and “own the business case” for the project. In
particular, the finance or procurement chief
should be committed—and drive the company’s
commitment—to a particular return on investment.
Besides the truism that corporate initiatives
CFO PUBLISHING
9

10. STRATEGIES FOR SPEND OPTIMIZATION
rarely succeed without top-management buy-in, an
important reason for high-level sponsorship is that
some decisions regarding payables can affect the
company’s value and reputation. One of Riordan’s
clients, a large supermarket chain, ran into a big
problem with a vendor when the chain tried to
stretch its payment terms from 21 days to 30 days.
The vendor “actually went to the press and tried
to insinuate that my client was having cash-flow
problems and bigger issues,” he says.
Even though the company was a stable and
successful retailer, “the vendor was able to cast
some doubt on the company’s finances,” the
consultant adds. As a result, it took the involvement
of senior management on both sides to resolve the
situation.
3. Build a strong alliance between finance
and purchasing.
While they’re not exactly rivals, finance and
procurement executives have sharply different
perspectives when it comes to payables. Purchasers
decide what they’re going to buy and buy it. Finance
10
CFO PUBLISHING
and accounting folks focus on the effects of those
purchases on company cash flows.
For their part, buyers don’t tend to be rewarded
for getting the best payment terms and hence
don’t often negotiate for them. Sensing that,
crafty vendors sometimes try “to drive a wedge
between finance and purchasing” by trying to
convince purchasers that payables terms aren’t all
that significant, Riordan observes. To get the best
arrangement, the two functions need to close ranks.
4. Approach vendors differently.
Setting a broad corporate payables goal and then
expecting managers to achieve uniform results from
vendors is “never successful,” maintains Riordan.
Rather than blanketing all sellers with the same
request for improved terms, A/P execs should divide
vendors into different categories and then tailor the
companies’ approach accordingly.
Riordan likes to divide vendors into four groups.
First are the “untouchables.” Because such sellers
have significantly more power than the buyer in
their relationship, buyers shouldn’t even attempt
to get them to change payment terms. While the

11. VALUE ADDED: PROCUREMENT AS A PROFIT CENTER
second group, the “squeaky wheels,” may complain
vociferously about such requests, they will in the
end come to a settlement. The best way to eke out
an improvement is thus to engage them in live
meetings.
The third category—the “good soldiers”—will
“scream and yell and make lots of noise, but in the
end they’re going to do what you ask them to do,”
says Riordan. Last are the “wallflowers,” who need
the buyers’ business so much that they’re in no
position to refuse to come to terms.
Not much thinking has to go into getting
wallflowers to accept later payments. All a CFO has
to do in such cases, says Riordan, is to send them a
letter that begins: “Congratulations! To keep doing
business with us, your new terms are....”
5. Start the bargaining from a rigorous
baseline.
Companies can lose money if they try to negotiate
purchasing terms strictly on the basis of price,
forgetting to factor in delivery costs, vendor
discounts, and allowances. In negotiating longer
payment terms, buyers should have a firm grasp
of the effect of the purchase on their company’s
adjusted gross margin—which includes such
costs—rather than simply on its gross margin.
If a buyer lacks such an understanding, the seller
can manipulate the deal by agreeing to stretch the
payment terms but charging too much for doing so.
“You’re going to lose sight of [vendors] sneaking
in and sort of taking money out of one pocket and
putting it in the other,” says Riordan. “If you don’t
understand their total profitability, you’ll have the
illusion that you’ve gotten a total improvement, but
you haven’t in fact gotten [one].”
The solution is to build budgets and create
incentives that are based on cash. Specifically,
a company can supply senior executives with
“protected budgets” in which targets aren’t based
on sales increases. It can also embed cash-flowimprovement targets into their bonus structures.
The idea, says Riordan, is to motivate “the people
who live and die every day by the income statement
to help the company out and improve the cash
balance.”
Improve your working
capital. Read Four Ways
to Become a Better
Borrower.
CFO Summary
• Creative consolidation can lead to big saving.
Combining purchasing for different facilities or
examining your office supply spend can reduce
costs.
• A long-standing relationship with one supplier
should not deter you for searching for new sources.
• Historic data is not everything. Communicate your
projected future volumes with suppliers to lock in
discounts.
• Fighting too aggressively for discounts can backfire.
Pick your battles wisely to avoid unexpected fees
from disgruntled suppliers.
• Improving working capital can allow for process
and structural improvements. Take charge. Make
sure the effort is conducted with strong support
from both finance and purchasing.
6. Pay for performance.
As is the case with all efforts to improve working
capital performance, payables projects suffer from
a tendency on the part of companies to gauge
success—and executive compensation—solely
on the basis of the bottom line of the income
statement. But since they tend to boost cash rather
than revenues, working capital improvements tend
to show up as cash assets on the balance sheet or as
upticks on the cash-flow statement, rather than as
profits.
Sources for Value Added: Procurement As A Profit Center:
“Mend Your Spend,” Shawn Casemore, CFO Magazine, September 30, 2011. Copyright 2011 © Shawn Casemore.
“Six Ways to Stretch Your Payment Terms,” David M. Katz, CFO Magazine, July 14, 2011. Copyright 2011 © CFO Publishing LLC.
CFO PUBLISHING
11

12. STRATEGIES FOR SPEND OPTIMIZATION
PARTNERING WITH
PROCUREMENT:
BUILDING A STRATEGIC
RELATIONSHIP
“Certainly most companies are doing some percentage
of their purchasing online, such as for office supplies,
but there has to be a cultural shift to get to the point
where virtually all purchasing is online, which could
happen within five years. Like it or not, e-commerce is
only going to grow. The improved efficiencies of online
buying are too great to ignore. What areas can you shift
to online procurement now? How might you deal with
your preferred terms and conditions not being part of the
transaction?”
12
CFO PUBLISHING

13. PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP
SPENDING SMART: STOP
PAYING TOO MUCH FOR
STUFF YOU DON’T NEED
M
ark Verbeck, like many CFOs, was
starting to feel like the bad guy, the guy
who always said no.
When he started working at
Blade Network Technologies as CFO in 2008,
the company, which makes networking software
that lives inside blade servers, was a 50-person
operation. Like many smaller businesses, it relied on
tribal knowledge to manage its spending: everyone
knew (or believed they knew) what everyone else
was doing, and when anyone bought anything,
everyone knew (or thought they knew) whether it
made business sense.
Every requisition went to Verbeck for approval.
Because the company was small, it had little leverage
with vendors and limited ability to negotiate for
lower prices or early-payer discounts. Therefore,
focusing attention on processes and spend—for
supplies, services, and the like—didn’t seem worth
the bother; it wouldn’t much affect the bottom line.
So no one focused.
But by 2009, when Blade had tripled to about 150
full-time employees, its paper-based process—
people throwing requisitions over Verbeck’s wall
for approval—forced him to start asking questions
and saying no more frequently. It was, he says, “not
a very fun part of my job and I felt ill-equipped to
make these decisions. We manufactured networking
technology,” and Verbeck was not a technologist.
(Blade was acquired by IBM in 2010.)
The growing problem at Blade, Verbeck says, was
not so much that money was being misspent as
that the work was burning up his and the finance
department’s time. Requests and invoices piled up
on his desk, distracting him from more valuable
tasks, while employees were either waiting to
purchase the stuff they needed to do their jobs or
buying and expensing it.
Verbeck looked for a better way to do things, and
in 2009 found the Coupa Software purchasing and
expense-management platform. In January of 2012
he became Coupa’s CFO.
CFO PUBLISHING
13

14. STRATEGIES FOR SPEND OPTIMIZATION
The future of online
retailers: taxes. Read
E-commerce: Click and
Pay.
Sweating the Small Stuff
When times are good, when credit easy to come
by and everyone is fat, no one sweats the small
stuff. But times haven’t been good for a while and
today the small stuff looms large, especially in small
businesses trying to grow at a time when investors
and customers are wary.
The savings that can be retrieved by automating
and rationalizing approval and purchasing processes
are palpable (a 2009 Aberdeen Group study
estimated that “improving the percentage of all
non-payroll, tax, tariff, and fee-related spend”—
that is, indirect, nonstrategic expenses—brought
under the management of a dedicated group can
help enterprises “achieve a 5% to 20% cost savings
for each dollar brought under spend management”).
But the real value, says Kristen Lampert, corporateservices manager at specialty-investment bank
Ziegler, is de-risking organizational spending by
making sure the approval chain has the right people
weighing in on the right things.
When times are good, when credit easy
to come by and everyone is fat, no one
sweats the small stuff. But times haven’t
been good for a while and today the
small stuff looms large, especially in
small businesses trying to grow at a time
when investors and customers are wary.
When Lampert took over the corporate-services
department at Ziegler in 2010—a team responsible
for managing logistics, purchasing, and events—
she couldn’t afford to waste time and effort on
inefficient processes: the unit had been downsized
to three full-time employees. In addition,
Ziegler’s approval and bill-paying processes were
all paper-based. “We’re over 100 years old,” says
Lampert, “and we had 100-year-old processes.”
There was no visibility across the firm, she says.
Expenditures were authorized by the wrong people,
and the company didn’t have a risk-management
component in place.
She describes an invoice for a software service
“that should have had oversight by the IT director,”
14
CFO PUBLISHING
but instead was approved by multiple, siloed
business units. The lack of communication led
to the bank paying for some services that were
supposed to have been cancelled.
Lampert established a work group to design a
request-for-proposal for a software service to
rationalize the company’s processes. Her argument
was that if the company could save 1% of the $16.5
million she managed annually, getting all spending
in one bucket, the return on investment would be
positive.
The group began by defining the organization’s
must-haves: something easy to use (“That increases
adoption rate,” says Lampert); the ability to manage
contracts; an easy-to-configure approval chain;
supplier network capability, and electronic links
from Ziegler’s system to its suppliers’ e-commerce
sites for electronic catalog purchasing (known as
punch-out support). After researching 18 solutions,
Ziegler chose Coupa, a software-as-a-service tool
Lampert expects will be easy to integrate with the
new general ledger the bank is in the process of
picking.
Ziegler implemented Coupa last March, and
Lampert says the bank has already recognized
$42,000 in second-quarter savings because
managers now reach out to multiple vendors to
get multiple bids on goods and services. Besides
saving money, the managers get recognition for
renegotiation successes that previously “were lost
in a million e-mails.” And the visibility the platform
provides, says Lampert, helps the company manage
risk. For audit purposes, she says, “We can now
track every contract, point to who approved what,
and better understand our contractual obligations.”
Navigating the Vendor Landscape
According to a 2011 Gartner report, the
e-procurement vendor landscape is “fragmented
and rapidly evolving,” so finance executives need
to perform due diligence when choosing a vendor
and service that fits their organization’s budget and
needs.
Aside from aggressively pursuing the retail
market, Amazon and other e-commerce giants like
eBay are shifting their thinking toward wholesale
distribution in industrial markets. Historically
prominent “bricks and mortar” distributors are
beginning to see that it is truly only a matter of time
until e-commerce companies gobble up their market
share.
For companies that buy from distributors, it is

15. PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP
important to recognize this shift and determine
how to prepare for it. There are all kinds of potential
problems. For instance, consider how Amazon today
tracks buying habits and makes “recommendations”
via e-mail and web displays. If you are struggling
to manage costs because of “rogue buyers” in your
organization (i.e., those operating outside the
normal bounds of procurement), how much harder
will they be to control with the Amazons of the
world in their face all the time?
The good news is that the industrial market can
learn from the lessons of the retail market. Here are
some key points companies should be considering
as they prepare for the inevitable increase in
e-procurement.
1. Cultural Shift
The number of companies still faxing or e-mailing
purchase orders is astonishing. Many supply-chain
professionals, not to mention corporate attorneys,
believe it’s the only way to purchase goods while
ensuring that the company’s own terms and
conditions, rather than those of the distributor,
apply to the transaction. If you buy from Amazon,
you’ll be signing off on its terms and conditions.
But when was the last time anyone signed and
returned, let alone read, the terms and conditions
of faxed or e-mailed purchase orders anyway? They
don’t even hold up in court, and if you do end up
there, in a dispute over whose terms and conditions
should apply, only the charge-by-the-hour lawyers
will win.
Certainly most companies are doing some
percentage of their purchasing online, such as for
office supplies, but there has to be a cultural shift
to get to the point where virtually all purchasing is
online, which could happen within five years. Like
it or not, e-commerce is only going to grow. The
improved efficiencies of online buying (never mind
the savings in paper) are too great to ignore. What
areas can you shift to online procurement now?
How might you deal with your preferred terms and
conditions not being part of the transaction? Such
questions need to be considered.
2. Loss of Leverage
What threats might exist from more electronic
buying? The main ones are product quality and
consistency, after-sales service, and transportation
costs. Is what you get going to be as good as it
looked on the computer screen? What kind of
service relationship are you going to have with the
online distributor? Will you trust the transporter if
you don’t have a direct relationship with it?
Think about the lost leverage that may arise. If
you have ever negotiated for the purchase of goods
or services with a supplier that’s larger than your
organization, you probably know what I am talking
about. Let’s say you’re currently buying office
supplies (an industry that saw the e-commerce
trend coming before all the others) from one of that
market’s big three players. What would happen if
Amazon or eBay bought it up? Surely you know
Amazon could afford it. How would you negotiate
price? How would you ensure that terms and
conditions were fair and equitable? What would be
the impact to your bottom line? The same applies
to janitorial supplies and industrial fasteners. How
might you leverage if competition diminishes?
3. Data Manipulation
Despite the popularity of enterprise resource
planning software among industrial and other
businesses, they are still challenged to capture the
right data and present it in a meaningful fashion.
Fortunately (or not?), that very capability has been
a main building block of many e-commerce giants.
Just look at the number of personalized e-mails you
get and how websites are providing personalized
purchase recommendations for you. If companies
can’t capture and utilize their own spending data,
they will be hard-pressed to keep these distribution
giants from influencing customers to buy someone
else’s products.
If your organization does have a problem with
rogue purchasing, it’s going to become a bigger one.
The e-distribution giants capture purchasing habits
and use them to present solutions companies didn’t
even know they needed. How will that affect the
budget? Get on top of your spending information
today to be well equipped to deal with the new
world of impulse buying.
CFO Summary
• Don’t lose sight of smaller expenses.
• Using automated processes can help reduce
oversights and provide more accuracy.
• In addition, having more accountability within the
chain of command can help identify problems or
concerns that may arise.
CFO PUBLISHING
15

16. STRATEGIES FOR SPEND OPTIMIZATION
GET IT TOGETHER:
A CURE FOR THE
SUPPLY CHAIN BLUES
C
ollaboration” and “supply chain” go hand
in hand, or you might think they should.
But there are two kinds of collaboration
with respect to supply chains. While many
companies are focused on working with suppliers to
arrive at more efficient and effective solutions, our
studies have repeatedly shown that far fewer work
cross-functionally inside the organization to achieve
the same result.
At manufacturing companies, procurement
and inventory management most often report
to finance, while planning and logistics report to
manufacturing. With rare exceptions, though, the
work groups operate independently of one another.
It’s not a collaborative environment.
Why that’s the case is a question that has
stumped me in the past. Why would a process
that is responsible for investing, handling, and
managing company capital not be designed and
built to function collaboratively? The answer I’ve
now found, thanks to some recent experiences with
clients, is simpler than you might think.
Organizations continue to segregate roles and
responsibilities based on their internal impact on
the organization, rather than their external (or endcustomer) impact. Consider the typical supply-chain
structure described above. The responsibilities
of sourcing and procurement departments, to
invest and manage capital, are overseen by finance.
Planning and logistics departments have a direct
impact on the efficiency and effectiveness of
production. All these roles are built and managed
based on internal impact.
You might be thinking, so what? Here is the
problem: lack of collaboration across the supply
chain drives tactical actions, not strategically
focused decisions. And tactical actions often
increase costs and reduce efficiency, with poorer
customer service the result.
Diverse Decision-Making
One of the single most effective solutions we have
brought to organizations is improved collaboration
between supply-chain functions and such key
stakeholders as engineering, design and project
management. Building cross-functional teams
promotes increased awareness of decision impacts.
At one of my client companies, the CFO had
decided that a key objective was to reduce its cost
structure. Sourcing and procurement interpreted
16
CFO PUBLISHING

17. PARTNERING WITH PROCUREMENT: BUILDING A STRATEGIC RELATIONSHIP
that and said “OK, we’re going to go out and buy
in bulk, we’ll get a reduced price.” Well, this was
a technology company, for which certain supplies
quickly become obsolete. The company was taking
in 100 units, say, when it really needed only 50 in
the short term. The other 50 were sitting on the
shelf going obsolete, and the inventory manager had
to write the stuff off and send it to scrap.
The ultimate reason for that poor outcome was
that sourcing wasn’t looking at the end customer’s
needs. It made an interpretation of the CFO’s
objective and took tactical actions on its own. They
should have gotten together with the inventory
department and said, we’re looking to bulk-buy in
these areas, what do you think? That conversation
should have involved engineering, too.
At some point in your corporate training you
may have experienced the Beer Game, a logistics
exercise in which teams manage four areas of a beerdistribution chain, developed in the 1960s at MIT’s
Sloan School of Business Management. Instructions
given to participants, and their resulting decisions,
lead to stockpiles of work-in-process inventory and,
ultimately, the dreaded “bullwhip effect.” But after
communications channels are opened up across the
supply chain, decisions become collaborative, they
reduce inventory, and they improve work flow and
lead time.
Despite actually knowing that decision-making
must be collaborative across the supply chain, many
organizations do little to facilitate it. Collaborative
decision-making requires that business leaders
and staff work closely to support the organization’s
strategy. Building cross-functional working groups
and holding frequent (yet brief) cross-functional
meetings serve to improve communications and
build a foundation for strategic decision-making.
CFO Summary
• As your company grows make sure your approval
chain adapts. Having the wrong people approve
spends can lead to unnecessary purchases or
neglected opportunities.
Having trouble getting
credit? You’re not the
only one. Read Collateral
Damage.
• E-commerce companies like Amazon are steadily
taking over the retail market and companies should
be prepared as they extend their influence within
the industrial market as well.
• Some risks that CFOs must address are the reduced
control over terms and conditions, the potential loss
of leverage, and the flood of data that influences
everyone from customers to employees.
• Lack of internal collaboration can lead to
uninformed decision-making and high inefficiency
costs.
Sources for Partnering With Procurement: Building A Strategic Relationship:
“A Cure for Supply-Chain Blues,” Shawn Casemore, CFO Magazine, April 10, 2013. Copyright 2013 © Shawn Casemore.
“Amazon’s Coming After Your Customers,” Shawn Casemore, CFO.com, January 7, 2013. Copyright 2013 © Shawn Casemore.
“How to Spend Too Much for Stuff You Don’t Need,” David Rosenbaum, CFO Magazine, August 09, 2012. Copyright 2012 © CFO
Publishing LLC.
CFO PUBLISHING
17

18. STRATEGIES FOR SPEND OPTIMIZATION
THE POWER
OF PEOPLE:
RECRUITING TOP
PROCUREMENT TALENT
“Why has procurement begun to take—to borrow the
phrase of one of the seven senior finance executives we
interviewed—‘a more globalized perspective’? The reason
isn’t much different from why other corporate functions,
like the CFO, have earned a higher corporate profile in an
increasingly complex economic environment. ‘As business
gets more complicated and more global, it has added
another facet to the whole issue of procurement.’”
18
CFO PUBLISHING

19. THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT
INVESTING IN PEOPLE: THE ROI
OF PROCUREMENT OUTLAYS
L
ook how much you’ve grown!
Finance executives don’t actually
say that, of course, but when they talk
about their colleagues in procurement
they sometimes sound as if they are surprised at
themselves for taking the function so seriously. It
wasn’t long ago, after all, that finance executives
tended to think of procurement’s role as strictly
transactional: acquire goods and services at the
cheapest possible price (locking it in, where
possible) and on the most favorable terms. The
department’s progress would be measured solely by
its ability to cut costs.
But a study conducted by CFO Research Services,
in collaboration with Ariba, a maker of collaborative
business software, found that finance executives
are well aware that the procurement function
has matured into making an increasingly highervalue contribution. In the survey of 263 senior
finance executives in North America, Europe, and
Asia, nearly 75% of respondents said that the
procurement function at their company had become
more “strategic minded,” rather than purely tactical
or transaction-focused, as compared with three
years ago.
Why has procurement begun to take—to borrow
the phrase of one of the seven senior finance
executives we interviewed—“a more globalized
perspective”? The reason isn’t much different from
why other corporate functions, like the CFO, have
earned a higher corporate profile in an increasingly
complex economic environment. “As business gets
more complicated and more global, it has added
another facet to the whole issue of procurement,”
says Paul Janicki, CFO of Roquette America, a
producer of carbohydrate-based products used
in food ingredients, pharmaceuticals, and other
industrial applications. “That’s why procurement
has become more strategic; it’s now no longer
just the means to do business, but also an area of
optimization.”
Finance chiefs should view corporate procurement
outlays as investments rather than costs, suggests a
report by The Hackett Group—investments in the
people who run procurement.
Indeed, at the best purchasing departments,
staffing leans much more toward the strategic,
according to the research and consulting firm.
In what Hackett calls “world-class” procurement
departments, 76 percent of employees are
professionals and just 9 percent are clerical workers;
in more-typical procurement departments, the mix
averages 58 percent professional, 24 percent clerical.
CFO PUBLISHING
19

20. STRATEGIES FOR SPEND OPTIMIZATION
Manage your talent
wisely. Learn how to give
them the tools to succeed
in the CFO eBook, Valuable
Lessons.
Top procurement outfits also pay top dollar,
according to the report. Including salary, bonus,
and benefits, they spend an average of $98,557 per
employee, 41 percent more than their more typical
peers. Hackett also found that top departments
provide more internal and external training: an
annual average of 61 hours per employee, compared
with 35 at typical companies.
As for results, the best departments have
operations costs that are 20 percent lower than
typical companies, and they operate with little more
than half the staff, Hackett found. And for every
$1 million spent on purchasing operations, these
top-notch outfits generate $6.3 million in savings;
average companies realized savings totaling only $2.7
million.
To conduct its research, Hackett searched
its database of several hundred companies and
identified the top quartile in efficiency (including
cost and staffing levels) and effectiveness (quality
and performance). The consultancy then examined
those “world class” procurement departments
to ascertain what they did differently, explains
Hackett’s procurement practice leader, Chris
Sawchuk. He declined to give the exact number of
companies that were studied.
The report found that top purchasing
departments are more involved in such
strategic activities as enterprise-level
planning, budgeting, new-product
development, and the use of crossfunctional teams for purchasing
activities.
The report found that top purchasing departments
are more involved in such strategic activities as
enterprise-level planning, budgeting, new-product
development, and the use of cross-functional teams
for purchasing activities. Rather than focusing only
on purchase price, says Sawchuk, top departments
take a big-picture view and devote time enough to
grasp the meaning of their policies for suppliers,
customers, and shareholders.
In addition to hiring and retaining highly skilled
20
CFO PUBLISHING
employees, the best purchasing departments drive
value by aligning their goals with those of the
company as a whole—financial goals, especially.
“CFOs manage the business based on performance
metrics such as cost, profitability, and cash flow,”
says Sawchuk. “Procurement is very strategic
and essential in terms of helping improve the
performance of these metrics. If a CFO wants to use
procurement to drive the business, there is a need
to make sure the objectives of the business and
procurement are well aligned.”
As much as procurement’s effectiveness—
especially in a slow-growing economy—depends on
understanding and focusing on shared companywide
goals, the function isn’t abandoning its duties as
a fierce cost-cutting function that has a direct
impact on the bottom line. About three-quarters of
the finance executives surveyed by CFO Research
Services and Ariba say that procurement is “very
involved” in finding opportunities for cost savings.
When asked where they saw opportunity for
procurement, about the same proportion of
respondents saw cost-cutting as the function’s
continuing focus.
In a postdownturn economy, reining in costs
becomes more complex; the chopping block has
already been rolled out one too many times.
Procurement executives need to figure out how
to leverage limited resources and restructure
activities to add capabilities without adding
cost. “Procurement works more with suppliers
understanding when we need them, where we need
them, and which are the economies of scale that we
can take advantage of, either by volume or by other
synergies with the suppliers,” says Bill Velasco,
division controller at Flowserve, a $4 billion supplier
of industrial equipment.
Beyond working more closely with suppliers, the
new model of procurement lifts the function above
executing purchase orders and into the lofty realm
of strategic planning, getting closer to operations,
sales, and technology. By becoming better aligned
with the business, procurement executives gain
a fuller understanding of the company’s future
sourcing needs: What are the core technologies?
Who are the key competitors? Which geographies
best serve the company’s long-term goals?
Rather than staying rigidly focused on writing
contracts, procurement executives can grow more
attuned to helping generate competitive advantage
for the company. Answering an open-ended survey
question, one finance executive wrote that he

21. THE POWER OF PEOPLE: RECRUITING TOP PROCUREMENT TALENT
envisions “working closely with procurement to set
shared objectives, track mutually beneficial metrics,
and align overall management styles.”
Nobody expects the transformation to happen
overnight. But there are signs of progress. In 2007,
when CFO Research conducted a similar survey, 15%
of respondents rated their procurement function’s
ability to perform its core functions as “excellent.”
In the 2012 survey, that figure rose to 25%. Larger
forces—ranging from the global credit squeeze in
2008 to 2011’s devastating floods in Thailand—have
prodded procurement executives to spend more
time weighing risks and trying to ensure continuity
of supply.
In the survey, finance executives identified some
knowledge gaps that procurement will have to
fill to cross over into upper management. Fewer
than half of respondents agree to any extent that
their company’s procurement group has “excellent
analytical and business problem-solving skills,”
while another 25% were neutral in assessing
those skills. In terms of specific abilities that need
improvement, more than one-third of respondents
chose each of these areas: detect and mitigate
supply risk, strengthen procurement’s working
relationship with finance, and strengthen its
working relationship with operations.
Developing capabilities in so many areas (while
gaining increased mastery over its traditional
domain) may sound daunting, but procurement as a
function has already come a fair distance. A decade
ago, recalls one bottling-company CFO, procurement
“consisted of people who were not high up in
the hierarchy.” Back then, he adds, a procurement
worker’s job was “to look for three estimates . . . and
the one that won was the one that always won, so as
not to cause any problems.”
And now? “Today, if you are doing it right,
procurement is much more of a strategic tool,” says
Paul Lehmann, CFO of manufacturer Overhead Door
Corp. And, he might have added, the sharper that
tool gets, the more effective it can be.
CFO Summary
• Procurement has increasingly begun to shift from
a purely transactional group to a strategic function
that is vital to the company’s bottom line.
Is your supply chain
secure? Read more in
Avoid Three Key SupplyChain Land Mines.
• Transforming procurement into an area of
optimization requires hiring the right people. The
best procurement departments are composed of
more professionals than clericals.
• Spending more on salaries and training can be
costly but companies with strong procurement
departments experience drastically lower operations
costs and fewer employees.
Sources for The Power of People: Recruiting Top Procurement Talent:
“Power to the Procurement People,” Helen Shaw, CFO.com, February 24, 2006. Copyright 2006 © Helen Shaw
“The Rise and Rise of Procurement,” Josh Hyatt, CFO Magazine, May 15, 2012. Copyright 2012 © CFO Publishing LLC.
CFO PUBLISHING
21

22. STRATEGIES FOR SPEND OPTIMIZATION
CONNECTING
COSTS: HOW TO
BETTER ORGANIZE
PROCUREMENT
FOR SUCCESS
“Matchmaking is only one function that supplier
networks perform, and for some companies it may not
be the most important one. For example, companies can
use networks to rein in ad-hoc buying by employees from
unapproved vendors and improve their so-called spendunder-management. ‘Our studies find the percentage of
spend captured by companies using supplier networks is
75% as opposed to 63% by companies not using them.
That means there’s less maverick spending at firms using
supplier networks for procurement.’”
22
CFO PUBLISHING

23. CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS
NETWORK POWER: WORKING
BETTER WITH SUPPLIERS
F
ounded in 1933 to make rubber stamps,
MarkMaster is today the world’s largest
“custom marking” company, according to its
website. How much demand remains for its
original product? Plenty. “We make between 10,000
and 12,000 rubber stamps every day,” says MarkMaster
CEO Kevin Govin.
Still, selling ink pads and stamps with messages
like PAID or DENIED hasn’t been easy in the digital
era. “It used to be when a bank opened, it would
order $2,500 worth of rubber stamps. Now, due to
fewer paper checks and envelopes, it’s $250,” says
Govin. “I even pay my own bills online. I’m shooting
myself in the foot, I guess.”
MarkMaster has adapted to modern times in two
principal ways: by diversifying its product line and
by enlarging its pool of buyers. It did the latter by
joining Ariba Discovery, a service delivered on the
Ariba network that matches business buyers and
sellers (and charges a fee for the service).
“We’ve grown 10% to 20%, compounded, for the
last 10 to 11 years since getting on the Ariba system,”
Govin notes. “Someone says, ‘We need to order
10,000 name badges,’ and they see us on the Ariba
network. Our banner business is booming. The
purchaser that used to go to Thomas Register [once
a paper catalog, today an online discovery platform]
now goes online.”
CFO PUBLISHING
23

24. STRATEGIES FOR SPEND OPTIMIZATION
Supplier networks aren’t
the only ones to consider.
Make sure to build up
your social networks too.
Learn more in the CFO
eBook, The CFO’s Guide to
Social Media.
As does just about everybody these days. Like
many suppliers, MarkMaster joined a supplier
network to get itself in front of as many buyers
as possible. Buyers, meanwhile, typically use
such networks “to improve communications with
suppliers,” says Constantine Limberakis, senior
research analyst at Aberdeen Group.
Metrics Beyond Matchmaking
Matchmaking is only one function that supplier
networks perform, and for some companies it may
not be the most important one.
For example, companies can use networks to rein
in ad-hoc buying by employees from unapproved
vendors and improve their so-called spend-undermanagement. “Our studies find the percentage
of spend captured by companies using supplier
networks is 75% as opposed to 63% by companies
not using them,” says Limberakis. “That means
there’s less maverick spending at firms using
supplier networks for procurement.” (Ariba CMO
Tim Minahan points out that nothing can be
approved for purchase on the Ariba network without
being run against built-in business rules.)
Minahan believes his network’s greatest
value lies in its ability to create a web of
business partnerships. On the network,
he says, “you can see a supplier’s
capabilities and its reputation... Now you
can say ‘a supplier is financially sound,
let’s do business.’”
Limberakis says supplier networks can also lower
a company’s “cost of poor quality,” the expense
associated with purchasing subpar stuff. That
cost is 7% for companies using networks, says
Aberdeen, versus 10% for other companies. Still
another metric improved by networks is on-time
delivery: 77% for companies that use them, 69% for
companies that don’t.
Minahan believes his network’s greatest value
lies in its ability to create a web of business
partnerships. On the network, he says, “you can see
a supplier’s capabilities and its reputation. We’ve
partnered with Dun & Bradstreet to make financial-
24
CFO PUBLISHING
risk scores available on Ariba Discovery. Now you
can say ‘a supplier is financially sound, let’s do
business.’”
One Network or Several?
According to Metcalfe’s Law, the value of a
network is proportional to the square of the number
of connected users of the system: more users,
greater value. That’s why Ariba, which a Forrester
Research study identified as the network with “the
most complete range of functionality and the best
user experience,” boasts of the many nodes on its
network: close to 700,000 companies doing $200
billion in transactions for the 12 months ending
Nov. 1, 2011.
But no one supplier network can cover the whole
business world, cautions Forrester analyst Duncan
Jones, the author of the study. “I ask my kids why
they use Facebook,” he says. “They say, ‘You have to
or you won’t know about all the parties going on.’
If you’re a supplier, you want to know about all the
parties. But in the business world, there’s never
going to be one dominant player like Facebook. It’s
no good just to be on Ariba and miss out on all the
other parties. If you’re simply looking for suppliers,
why pay a fee to Ariba? Why not just use Google?”
Ariba’s main competitors are the big ERP
providers—Oracle E-Business Suite and Hubwoo,
based on SAP’s platform—and Basware, a supplier
network that Forrester scored highly for “its broad
category support and its supplier enablement and
integration capability.” Unlike Ariba, Basware is an
open network. “We partner with over 120 different
networks,” says Robert Cohen, Basware vice
president for North America. “We think that’s the
only sustainable model. We’re not trying to connect
organizations to our network; we connect them if
they’re connected to any network.”
The payoff for Basware’s 320,000 companies
and one million users, says Cohen, is the visibility
companies get into working capital. Without
that visibility, “when a commitment is made to
buy something, finance doesn’t find out until
the invoice is received,” he points out. And if the
invoice is triggered without a purchase order, “you
have very little choice on how or when to pay it, so
you’re losing the chance at early-payment-discount
terms. Maybe you’re even subject to late fees by the
time the invoice gets to you.” By automating these
processes and improving collaboration between
buyers and suppliers, “both sides can better manage
cash flow,” says Cohen.
Basware’s advantage as an open-network provider

25. CONNECTING COSTS: HOW TO BETTER ORGANIZE PROCUREMENT FOR SUCCESS
won’t last forever, as Ariba and other networks
increasingly move to the cloud, thereby facilitating
greater interoperability between networks. (Indeed,
Ariba is strongly pitching its Commerce Cloud to
SAP users.)
The Network Ahead
If the variety of supplier networks makes it
difficult to choose one, it also makes it expensive
to go to “all the parties.” Ultimately, Aberdeen’s
Limberakis sees an “oligarchy of networks”
emerging, where a small number of providers
dominate.
Minahan of Ariba says “productivity improvement
through community” is the future of supplier
networks. “Tomorrow, Ariba’s competition will be
Facebook, Groupon, eBay, and Amazon,” he predicts.
Until supplier networks become a commodity,
it’s up to individual CFOs to figure out where a
network’s ROI lies for their organization, says
Limberakis. But they’d better not take too long.
In the summer of 2011, the U.S. Department of
Treasury announced that by 2013, any vendor
submitting an invoice to Treasury will have to use
the Internet Payment Platform. One can foresee a
time when being on a network will be a requisite
for conducting business anytime, anywhere, with
anyone.
In other words, if an organization doesn’t belong
to a supplier network, it will be increasingly difficult
for it to go to the party, let alone find a date.
CFO Summary
• Networks can be used by suppliers to find new
business and by buyers to improve communications
with existing providers.
• Financial-risk scores made available through
supplier networks can help buyers identify
trustworthy suppliers.
• Selecting a supplier network can be difficult due
to the vast variety, and sometimes connecting to
only one is not enough. CFOs need to identify the
network or networks that will provide the best ROI
for their organizations.
Sources for Connecting Costs: How to Better Organize Procurement for Success:
“Network Power,” David Rosenbaum, CFO Magazine, November 01, 2011. Copyright 2011 © CFO Publishing LLC.
CFO PUBLISHING
25

26. STRATEGIES FOR SPEND OPTIMIZATION
DOLLARS
AND DATA:
PROCUREMENT
TECHNOLOGY
“In the past, such analysis meant bringing in a herd of
consultants to thrash through the paperwork and produce
a one-time snapshot of spending. That’s a far cry from an
embedded and largely automated process. But experts say
that the ability to drill down into a company’s spending
habits is essential to cost-cutting efforts because most
of the obvious targets (layoffs and elimination of or
reductions in various forms of discretionary spending)
have already been hit.”
26
CFO PUBLISHING

27. DOLLARS AND DATA: PROCUREMENT TECHNOLOGY
SPEND MANAGEMENT
SOFTWARE: WHERE DOES
THE MONEY GO?
I
t’s been a bumpy ride for the software category
known variously as spend management,
supply management, sourcing management,
supplier-relationship management, total-cost
management, spend analysis, and, from way back
(circa 2000), E-procurement. That so many labels
can be applied to the same concept hints at the
difficulties this category has had in fully defining
itself. Those problems include a mix of dot-com
hype, technological complexity, and entrenched ways
of doing business—which have proved resistant to
change regardless of what technology makes possible.
Despite those challenges, the basic concept
of using technology to ease the many processes
involved in buying goods and services, and to
ultimately reduce costs in a number of ways,
remains powerful enough to inspire vendors and
customers to forge ahead.
Spend-management software relies on linguistic
analysis algorithms to extract, cleanse, and
classify, (by product, supplier, and other criteria)
the messy data contained in invoices, purchase
orders, contracts, and other purchasing records.
The goal is to automate the way toward a closedloop of spending analysis: determine from whom
the company buys goods and services; narrow (or
improve) the supplier base and negotiate better
terms; manage contracts efficiently; and analyze the
actual corporate spend.
In the past, such analysis meant bringing in a herd
of consultants to thrash through the paperwork and
produce a one-time snapshot of spending. That’s
a far cry from an embedded and largely automated
process. But experts say that the ability to drill
down into a company’s spending habits is essential
to cost-cutting efforts because most of the obvious
targets (layoffs and elimination of or reductions
in various forms of discretionary spending) have
already been hit.
“For people who live in the world of ERP and
general ledgers, it’s very hard to get your arms
around spend information,” says Jim Frankola, CFO
of Ariba, a pioneering spend-management software
company that in some ways can serve as a proxy
for the entire industry. At his previous company,
Frankola once tried to ascertain what the firm spent
on shrink-wrap. Information on those purchases
was scattered across multiple systems, and coming
up with the total figure—which might have helped
in negotiating a discount—required plenty of
digging.
CFO PUBLISHING
27

28. STRATEGIES FOR SPEND OPTIMIZATION
Stay on top of the latest
technology trends with All
Together Now.
28
CFO PUBLISHING
Bill Gunn can relate. Hired in 2003 by Gap Inc.
to head up its nonmerchandise procurement
organization, Gunn takes advantage of the daily
business-intelligence feature in the company’s
Oracle ERP system to “have at our fingertips the
supplier spend data that used to take three or four
months to gather.”
With more than 3,000 Gap, Old Navy, and Banana
Republic stores nationwide, Gunn’s company has
what he describes as “a real hidden asset in our
nonmerchandise supply chain,” which includes the
vast network of suppliers that play a role in opening
and maintaining all those stores. The spendmanagement capabilities in the Oracle software,
Gunn says, address all facets of the process,
including the critical but often-overlooked back-end
analysis.
“In the past, we’d contract for certain pricing and
related terms,” he says, “but we had no way to know
whether those agreements were adhered to. Most
agreements have plenty of variables that can affect
the ultimate spend, so it’s not enough to negotiate
terms up front that satisfy you. You have to follow
through and see how the spending actually played
out.”
“There’s no clearer or more direct lever to improve
financial performance than to focus on spend or
procurement,” says Tim Minahan of the Aberdeen
Group, a Boston-based IT consulting firm. “While
every additional dollar in revenue a company earns
entails significant costs in sales and overhead, every
dollar saved drops straight to the bottom line.”
Once you back out the cost of the software and
associated process and organizational changes, of
course. But those changes often provide an impetus
for spend-management software investments. Nate
Lentz, CEO of Verticalnet, a provider of supply
management software and consulting services,
says that often as a result of acquisitions, many
companies now want to centralize spend efforts
rather than negotiate and source at a divisional
level. “When they do spend analysis across the
corporation, they discover an enormous opportunity
to leverage their scale for both direct and indirect
materials,” he says. Or as Faheem Ahmed, head
of market strategy for supply-relationship
management at ERP vendor SAP, says, “Purchasing
is moving from being tactical to being strategic.”
Companies interested in spend-management
software have no shortage of products from
which to choose, but those products tend to fall
into distinct categories. Some provide a broad
technology platform that can accommodate virtually
any purchase a company might make. Others
address a distinct category of spend, be it raw
materials or services such as contract labor. And
some are narrower still, focusing only on a specific
expenditure such as telecommunications, travel, or
facilities maintenance.
While some analysts maintain that spendmanagement software is a big-ticket item of interest
only to companies with at least $1 billion in revenue,
there are new, smaller vendors that charge as little
as $10,000 to start (as opposed to a tab of $1 million
or more on the high end), and they usually offer
their services in a hosted model, requiring virtually
no changes to a customer’s infrastructure. Monthly
charges may be based on a flat fee, volume of
transactions that pass through, or other criteria.
Many analysts say that to take full advantage of
spend management, companies may have to piece
together several packages or services, although
there has been plenty of M&A activity in the space
as some vendors work toward more-complete
offerings. Others are content to combine software
and services with consulting help in specific areas
in which even a savvy purchasing department
might lack the requisite knowledge to craft the best
contracts.
That was the case at Wachovia when, following its
2001 acquisition of First Union, which brought its
total number of branches to 2,700, an idea to track
electricity, gas, and water bills suddenly clicked.
“We’d talked about how smart it would be to do
this,” recalls Ginny Schlosser, CFO of corporate
real estate at Wachovia Bank and former CFO of
corporate real estate at First Union, where the idea
first took root. The merger, combined with soaring
electricity costs at the time, gave the project life.
The bank opted for a software/consulting service
from Cadence Networks that not only gives it the
clear picture of total spend it needs to negotiate
better electricity rates, but also helps it trace
wasteful usage, including the location of leaky
water lines. The bank now plans an additional step:
to reduce energy and water consumption through
employee education and other initiatives.
It’s not unusual for spend-management systems
to yield double-digit savings—about 15 percent,
according to industry watchers. They also cull out
the maddening waste that so exasperates many
thrifty CFOs—for example, a $75 difference in room
rates at the same event in the same hotel. Armed
with solid, up-to-the-minute data, companies can

29. DOLLARS AND DATA: PROCUREMENT TECHNOLOGY
identify waste, eliminate rogue spending, negotiate
better deals, and in general make better decisions.
Irritability Factor
But there are problems. As the CEO of one spendmanagement company says, “There’s a growing
sense of irritability over what these expensive
applications promise and what companies actually
get from them. Indeed, another Forrester study
found that 35 percent of respondents whose
companies had invested in procurement and
sourcing technology said the benefits were below
expectations. Companies face three challenges:
deciding what software (or combination of
software) best meets their needs, getting suppliers
to cooperate, and making the organizational and
process changes within their own companies that
are needed to move away from business as usual.
Also hanging over the greater adoption of
spend-management software is the bad taste
left in many people’s mouths by the earlier foray
into E-procurement, which tended to focus less
on analyzing spend data and more on reducing
transaction costs.
Managing the relationships with suppliers is also
tricky. As Minahan warns, “You can only negotiate
a 15 percent discount from your suppliers for so
long before you put them out of business—you’re
sucking the fat out of the suppliers’ profit margins.”
Zealous users of online auctions, trading webs and
early E-procurement systems now take a more
holistic view of the entire procurement cycle, versus
focusing solely on negotiating costs.
GlaxoSmithKline knows this learning curve: in
1997, before it had become part of GlaxoSmithKline,
pharmaceutical company SmithKline Beecham
developed an internal procurement system dubbed
SpendTrak that it believed put the company ahead
of its competitors. “But SpendTrak only allowed us
to do coding at a supplier level, not the granularity
required to perform compliance reporting on
preferred suppliers,” explains R. Gregg Brandyberry,
vice president of procurement for global systems
and operations at GlaxoSmith-Kline. The company
could see how much it spent with IBM, for example,
but it couldn’t get a quick read on a specific
contract. “Especially on certain indirect goods and
services,” says Brandyberry, “we wanted to make sure
we weren’t overbuying, or that the specification was
for what we actually needed.”
Beginning in 2004, GlaxoSmith-Kline installed
Emptoris spend-analysis software and began to
get granular, making sure that spending follows
the terms of carefully negotiated contracts. The
software also helps the company get a sense of the
performance of vendors supplying various indirect
goods, so that, as Brandyberry says, “We can ask
ourselves, ‘Do we need to buy Superbrand X when
another brand will do?’” Glaxo is now ascertaining
whether the system can be expanded to encompass
spending on a broad range of services.
“CFOs are getting smarter about this,” says
Aberdeen’s Minahan. “As a result, the buying
organization is taking a more holistic look at their
supplier relationships.” Gone are the days when
buyers focused intently on reverse auctions to drive
down the prices of goods. “Now,” says Minihan,
“CFOs are checking the P&Ls and asking, ‘Where do
those savings show up?’”
CFO Summary
• It can be difficult and time-consuming to isolate
costs when data is scattered among distinct
systems across departments. Procurement
software can help streamline the information to
identify areas for improvement.
• CFOs looking to implement procurement technology
face the challenges of selecting the best-fit product
for their companies, getting suppliers on board,
and directing the transition within the companies’
organizational structures.
Sources for Dollars and Data: Procurement Technology
“Where Does the Money Go?,” Connie Winkler, CFO Magazine, March 22, 2005. Copyright 2005 © CFO Publishing LLC.
CFO PUBLISHING
29

30. STRATEGIES FOR SPEND OPTIMIZATION
CONCLUSION:
PROCURING
VALUE
T
here’s an old Japanese proverb, “When
you have money, think of the time when
you had none.” The point, of course, is
that money is precious and should not
be frittered away on wasteful expenditures. The
upside is that organizations that heed this maxim
should have more capital left over at the end of
the day than competitors that fail in this regard,
dollars that can be invested in more fruitful
ventures.
Obviously, to garner such benefits, stricter
expense management directives, a shift in
organizational behavior, and a culture of spend
management should be embedded enterprise-
30
CFO PUBLISHING
wide—that’s what the articles in this eBook
strongly suggest. This transformation requires
elevating procurement strategically (in some
companies), recruiting more business-oriented
procurement personnel, enhancing operational
procedures to provide spending accountability,
and leveraging technology to manage the entire
process.
As always, organizations that appreciate the
possibilities inherent in spend optimization
have early mover status, and thus should enjoy
competitive advantage. As Confucius wrote, “He
who does not economize will agonize.”