Access to accurate and credible third party spend data and supporting analytics is always a critical part of Procurement’s ability to identify historical spend trends and subsequently develop strategic category plans and future sourcing opportunities.
In spend categories where the volume purchased is a key lever of the negotiation strategy, the importance of having such accurate and credible data is clearly high in enabling Procurement to negotiate the lowest possible unit price.
Can the same be said of the importance of having such a high level of credible and accurate spend data within the categories of Consultancy and Legal Services?
In considering the importance of spend data in managing Consultancy and Legal Services, it is important to understand the characteristics of these types of Professional Services spend and their relationship to spend data.
Although not always the case, most Consultancy & Legal spend is typically one-off/project related spend which is unlikely to be repeated in the future and therefore related spend data cannot be relied upon when analysing historical data and making future strategic sourcing decisions.
However, the data will certainly provide a valuable insight into the behavior and associated governance that an organisation has in place that will indicate just how closely such spend is internally controlled.
For example, in many organisations where there is a lack of robust governance, a long tail of spend is likely to have developed over time in terms of the number of consultancies and law firms engaged where stakeholders have been allowed to continually engage with new suppliers, rather than consolidating spend into a smaller number of pre-approved, preferred suppliers where it can be commercially leveraged by Procurement.
Where Procurement has negotiated periodic rebates within Consultancy & Legal agreements, it is preferable that they have access to their own credible and accurate spend data to support the process of calculating the rebate value without having to solely rely upon their supplier’s data to undertake this process.
Unfortunately, it is still the likelihood that in the majority of instances where rebate agreements are in place, Procurement are having to rely on the supplier’s spend data to support the reconciliation process.
Interestingly, in my experience, senior stakeholders across a business can have different views as to the level of accuracy and insight they require from Consultancy and Legal spend data to facilitate the management of these categories.
In one client, there was a view expressed that historical spend data needed to be around 85-90% accurate before it could be presented to senior stakeholders who owned the applicable budgets for further discussions on future sourcing strategies.
Their view was that before meeting with any stakeholders to discuss sourcing opportunities, Procurement needed to have a greater understanding of the category spend profile than the business stakeholders themselves, which they saw as a critical part of ensuring stakeholder buy-in before agreeing to Procurement support, given many senior stakeholders reluctance to involve Procurement in the management of Professional Services spend.
Clearly, spend data that contains significant inaccuracies is not going to earn Procurement the required credibility and trust of the stakeholders across most spend categories, but at the same time, historical spend data must not be allowed to defer the commencement of the stakeholder engagement process and the discussions on the category approach given historical spend for Consultancy and Legal spend is often a rear mirror view of the spend which may not have a close relevance to future requirements.
There also needs to be an understanding that within Consultancy and Legal spend, there are certain factors that will always have a potential bearing on the overall accuracy of the spend data given the nature of the services e.g. the timing of the billing may be staged across a project lifecycle (delivery against key milestones, KPI’s, etc) or a key business process e.g. reporting of a company’s statutory tax returns and external accounts.
Furthermore, an organisation may tactically procure Consultancy or Legal spend through specific Global/Regional entities within their corporate structure for billing/tax purposes.
In my experience, the reluctance of senior stakeholders to allow Procurement to engage with the business can unfortunately, result in missed opportunities to deliver cost reduction benefits for a business whilst the data is being cleansed and reclassified, such savings are unlikely to be recoverable in the future.
However, within the same client as previously referenced, a Regional Legal Counsel expressed a different view to the power and importance of Legal spend data.
Historically, Accounts Payable data from Finance had contained lots of wrongly classified legal spend and therefore, the Legal team had to rely upon it’s in-country lawyers to collate and manually report on their legal spend, but as the legal team didn’t see all of the applicable spend, this data also contained lots of inaccuracies.
Procurement engaged an external Spend Analytics team to cleanse and reclassify all external spend data, utilising a ‘best in class’ spend tool, which allowed the legal spend data to be presented in a number of ways previously not possible, including but not limited to spend by Region/Country/Business Entity/General Ledger code, etc.
Having presented all this date to the Regional Legal Counsel, he expressed his view that he now had too much data and advised Procurement that what was really important to him was the data trends e.g. was the spend with a legal firm or in a country/region more or less than the previous period?
His view was that such trends could then be used by Legal and Procurement to identify opportunities to manage the legal spend more efficiently and effectively.
So, the Professional Services Category Manager needs to acknowledge like all Category Manager’s the importance of collating sufficiently credible and accurate spend data which they can present to senior stakeholders to enable meaningful, joint discussions to take place on future sourcing and governance strategies.
However, at the same time, it should be understood that Consultancy and Legal sourcing strategies and governance processes can still be discussed and implemented in collaboration with senior stakeholders without having completed the process of classifying and cleansing of spend data.
In my experience, running these activities in parallel ensures that there is no unnecessary delay in identifying and delivering potential cost reduction opportunities.
C Young Procurement Consultancy Limited