Spend Management

Transformation Through
Ariba Category Strategy
May 2005
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Business Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Establishing Spend Management Transformation Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Main Challenge to Spend Management is the Functional Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Category Strategy to Spend Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Achieving Combined Benefits of Process Efficiency & Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Organizational Impact of Category Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Spend Management Transformation Savings Opportunity and Levers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Diagnostic Methodology & Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
How Ariba Addresses These Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
How Customers Have Benefited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Spend Management Transformation Through Ariba Category Strategy

Executive Summary
The Ariba Category Strategy methodology provides the framework to enable a marketing leading approach
to developing and executing a spend management transformation program. It enables the creation,
implementation, and best-in-class execution to end-to-end spend management processes across the
desired amount of spend while minimizing the amount of internal disruption.

The spend management marketplace has evolved over time from a simple reverse auction and transactional
procurement paradigm to an end-to-end, closed-loop spend management paradigm. However, a "one-
size-fits-all" approach to this process works well only for very simple categories and can limit achievable
savings, manageable spend, and business unit adoption. Ariba's Category Strategy approach groups
categories along common market and process characteristics to drive maximum realized savings and
stakeholder adoption through increased speed, sustainability and coverage.

Ariba's Category Strategy approach allows companies to go beyond software and services to develop an
integrated and phased category approach to sourcing and procure-to-pay process enablement of their
strategic spend categories. The category strategy approach combines together historical experience, savings
benchmarks and spend management best practices to deliver both quantitative and qualitative results.

Business Challenges
Today, most companies understand the need to fully manage all of their spend, but they face significant
challenges in trying to do so. First among these is the recognition that effective spend management
requires a comprehensive process to identify savings opportunities across all categories of spend.
Once these opportunities are identified the next step requires their conversion into contract-level
savings through strategic sourcing, procure-to-pay (P2P) processes through contract compliance, and
invoice capture and reconciliation.

The key challenge for any procurement organization is to implement spend management across all of
their unique spend categories while at the same time leveraging common tools and processes to
achieve economies of scale. The figure below shows the process steps involved in the spend
management process and the typical functions involved in each process step.

Identify Opportunity
This step involves analyzing spend within each category, across business units and suppliers and
identifying the areas that offer the best opportunity to realize savings. Opportunity assessment may be
triggered by contract expiration, changes in business or legislation, client needs, supplier relationships,
market price, and similar factors.

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 Spend Management Transformation Through Ariba Category Strategy

Develop Strategy
This step involves determining the most effective way to handle supplier engagement and negotiation for
each spend category by evaluating various criteria. These criteria are primarily related to the value of
the item being purchased to the business—usually measured by dollar volume or similar metrics—as
well as the item's sourcing complexity due to its uniqueness, supply-chain dependencies, price volatility,
or other considerations.
Source and Negotiate

The sourcing negotiation step comprises all the activities required to plan and negotiate agreements with
suppliers who can provide the goods and services companies must utilize. This includes analyzing
relevant information and effectively engaging and managing internal stakeholders before, during, and
after sourcing events.

Contract and Procure

This step involves all the processes needed to procure goods and services, negotiate and create contracts,
and ensure contract compliance. This includes taking the negotiated contract and establishing it in a
form that can be searched, managed, and leveraged in actual procurement with the ability to measure
and sometimes mandate compliance (i.e., permitting certain goods and services to be bought only
through an established contract).

Invoice and Pay

The invoice and pay phase involves all the processes and communication required between the buyer's
accounts payable team, the supplier's accounts receivable team, and the banking institution for fund
transfer. This includes receiving and validating electronic invoices from suppliers based on the buyer's
invoice acceptance rules. Each invoice is then matched to the original purchase order and compared
against receivables as well as contract pricing and terms. Finally, invoices are reviewed and approved
for payment.

Monitor and Manage

The monitor phase of the process involves using both quantitative and qualitative measures to discern
whether all spend and performance goals are being met and negotiated savings realized. Companies
must consistently and accurately track their spend, processes, and resources to measure the effectiveness
of their efforts and discern whether negotiated savings are actually being realized.

Spend management is a journey rather than a single event. It requires an ongoing process to effectively
manage all of a company's unique spend categories and to increase realized savings by continuing to
increase the rate and breadth of spend enabled across the business processes.

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Spend Management Transformation Through Ariba Category Strategy

Establishing Spend Management Transformation Goals

The role of procurement within a company continues to become more strategic than ever before. A
recent survey reported that 70 percent of procurement directors now report to a company's management
committee. This is up 20 percent over 2004. Companies are increasingly mandating that procurement
lead in bringing spend under control.
In order to reach their spend management goals, these new procurement leaders must go beyond
simply managing sourcing and procurement functions in a traditional sense. They must also take on a
holistic and comprehensive management of their company's external cost and supplier base.
A company's successful spend management transformation requires the transformation of the traditional
company operational paradigm into one that focuses on spend management. Successful spend management
leaders understand that such a transformation cannot occur solely through use of the latest software or
through process reengineering and change management.
Spend management transformation goals are strengthened when they are linked to corporate goals to
retain a strategic focus and visibility within the company. The figure below shows the linkage between
corporate goals and transformation goals:

Main Challenge to Spend Management is the Functional Approach

Companies can be successful in measuring the effectiveness of their spend management efforts by two
primary metrics; 1) scope of spend under management, and 2) the savings and benefits achieved.
Company procurement organizations typically adopt a functional strategy towards their spend
management activities. They solve each spend category process step in a silo and adopt a fragmented
solution set for each process step. As an example, it is quite common for companies to use a reverse
auction solution for sourcing, a separate solution for procurement, use an ERP system for invoicing
and payment and use back-end controls for enforcing policies for every spend category.

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 Spend Management Transformation Through Ariba Category Strategy

The functional strategy approach to spend management results in a number of problems. First, the
functional silos are not linked together either from a process perspective or from an organization
perspective. For example a reverse auctions approach to sourcing only effectively supports a small
portion of spend, possibly 20 to 30 percent in a typical company and is not suited for complex
categories of spend that necessitate strategic sourcing, knowledge sharing and process standardization.
Company procurement organizations typically adopt a one-size-fits-all catalog-based approach to their
purchasing process. Yet for most companies this meets the needs of only about four to five percent of
their spend. The remaining ~95 percent of spend within a typical company is complex and does not
lend itself to the catalog approach. As a result, many companies’ procurement organizations continue
to manage very little of their spend using automated catalog-enabled processes.
Most ERP-like invoicing and payment solutions execute invoice-PO reconciliation at the aggregate invoice
level and very rarely enforce contracts which are at the line item level. Further, this allows collecting data
only at Level 1 (aggregate invoice level) and not at Level 3 (i.e. line item level). Back-end controls are
usually not effective in enforcing best-practice purchasing policies, especially if data is collected at Level
1 as described above.
The figure below illustrates the example of the standard functional approach that companies typically
practice in their spend management. Each process step in managing each of their strategic spend
categories is in a silo and a one-size-fits-all approach is utilized.

The problems described above typically result in very little spend being managed by procurement
organizations from sourcing to procurement through put. As a result most companies obtained very little
in savings from their functional approach to spend management. The savings can be as low as three to
four percent of the total spend amount being managed.

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Spend Management Transformation Through Ariba Category Strategy

In conclusion, the typical functional approach to spend management is easy for companies to introduce
and is seemingly efficient, given that procurement organizations adopt one process independent of
spend category, but it is not effective in achieving Spend Management transformation goals as
exemplified in the figure below.

Category Strategy to Spend Management

The Ariba Category Strategy approach takes an end-to-end category approach to spend management.
This methodology specifically focuses on establishing strong links between each process step in
procuring all of a company's strategic spend categories.
The Ariba Category Strategy implements a best-practices approach to a spend management process
step by step and category by category. This includes the following:
Identify Opportunity
Benchmark and continuously improve contracts using insights culled from Level 3 data line item level
data specific to each category.
Develop Strategy
Develop an effective way to handle supplier engagement and negotiation for each spend category by
evaluating various criteria.
Source and Negotiate
Implement a strategic sourcing process that encompasses all categories of spend, and facilitates
knowledge sharing and process standardization across the company.
Implement Contract and Execute
For every purchasing transaction, enforce contracts and purchasing policies, collaborate with suppliers
in specification and price definition if need be.
Invoice and Pay
Reconcile invoices with POs and contracts at the line item level rather than just as the aggregate level.

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 Spend Management Transformation Through Ariba Category Strategy

Monitor and Manage

Collect Level 3 data and measure qualitative and quantitative supplier performance.
The Ariba Category Strategy approach facilitates the effective management of ~100% of spend from
sourcing to procurement through put and also provides much higher savings ~12-15%, as shown
below. The approach analysis significantly enhances spend management effectiveness. The successful
implementation includes the development of strong links between each process step, i.e. a common tool
set or complex integrations between disparate tool sets as well as the incorporation of category-specific
requirements at each process step as depicted below:

The typical company functional approach to spend management uses a one-size-fits-all process to
spend management across all spend categories. This is simple and easy, but it only works for three to
four percent savings on a small portion of spend; i.e. it is efficient but not effective. On the other hand,
the category strategy approach can effectively manage a company's strategic spend, but it seems to
render spend management too complex; especially given that a typical enterprise has 100-150
categories; i.e. it is effective but not efficient as exemplified below:

This dilemma generates a significant question of how to adopt the category strategy approach to spend
management and make it efficient, simple and scalable, as well as effective at the same time.

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Spend Management Transformation Through Ariba Category Strategy

Achieving Combined Benefits of Process Efficiency and Effectiveness

The resolution to achieving the combined benefits of process efficiency and effectiveness through the
category strategy approach to spend management is to group categories along common characteristics.
This is enabled through finding the middle ground between a one-size-fits-all functional and fragmented
process on the one hand, and the 100-150 unique end-to-end processes as a result of the ideal category
strategy approach on the other.
This middle ground enable companies to adopt category-specific best practices that are effective while
at the same time reducing the number of unique processes to be scaleable for each category in order
to be efficient.
In order to reach to middle ground, categories need to align along three main dimensions:
Category Market Groups
Category market groups are comprised of Electronics, IT, Metals, Paper & Packaging, Plastics, Raw
Materials, Services and Transportation; with sub-groups under each of these main groups. All categories
within a given market group could be accommodated with a common strategic sourcing/reverse auction
strategy with minor variations at a category level. Salient characteristics that drive market groups are
common supply bases, supply bases, business impacts, benchmarks and savings history, sourcing
experience and spend characteristics.
Category P2P Process Groups
Category P2P process groups, on the other hand, are comprised of SKU-based categories, Travel,
Labor-Based categories, Customized/Complex Specs, Logistics and 3rd Party Services; with sub-groups
under each of these main groups. All categories within a given P2P process group could be accommodated
with a single common P2P process with minor variations at a category level.
Stakeholders
These groups within a procurement organization need to be aligned along the stakeholders (business
units, category owners) they serve to facilitate best-in-class customer service and gather non-procurement
related business requirements imposed by the stakeholders. However, these groups do not facilitate
operational scale since they do not look for common process characteristics across stakeholder groups
to facilitate efficiency and effectiveness. This is the reason why typically procurement organizations have
the right intent, but struggle in execution.
The alignment of these three groups facilitates the following as illustrated below:

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 Spend Management Transformation Through Ariba Category Strategy

Organizational Impact of Category Strategy

A company's procurement organization is typically set up for day-to-day operations and not for spend
management transformation. Best-in-class procurement organizations focus on shifting resources from
tactical operational types to those more suited for spend management transformation, including the
following main groups:

 Sourcing Operations: Responsible for sourcing categories and negotiating contracts

 P2P Process Operations: Responsible for managing the procure-to-pay process for all
categories to ensure compliance with contracts and purchasing policies
 Stakeholder Relationship Management: Responsible for providing customer care to spend owners
 Technical Operations: Responsible for tool development and implementation, customer support
and supplier relationship management
 Strategic Consulting: Responsible for strategic planning and change management (which is key
for promoting stakeholder adoption)
Organizational efficiency and effectiveness necessitate alignment of sourcing operations, P2P process
operations and stakeholder relationship management groups along common market dynamics, P2P
processes and stakeholders respectively. The category strategy approach to spend management will
have a big positive impact on organizational design. The figure below shows the key skill sets needed in
sourcing operations, P2P process operations, stakeholder relationship management, technical operations
and strategic consulting groups. Spend managers are critical to bringing all the three groups together.
They would be responsible for pushing specific categories through various operational groups to ensure
continuous throughput.

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Spend Management Transformation Through Ariba Category Strategy

Spend Management Transformation Savings Opportunity and Levers

A spend management transformation initiative leveraging Ariba's Category Strategy methodology
capabilities can provide 12 to 15 percent spend-related savings and 30 to 40 percent procurement cost-
related savings across entire spend and cost bases respectively; the actual value varying by category
and state of current customer performance. These savings are achievable and also need to be
measured at the "realized" transaction level that hits the bottom line, and not savings identified
during a sourcing initiative. Savings can be achieved through the following main components:
Better Contract Pricing
An eight to ten percent reduction can be achieved on contracted unit prices through more effective
sourcing through category-specific sourcing strategies along category market groups, (i.e. sourcing
strategies, price and spec schema, benchmarks and market knowledge (pre-qualified supplier bases),
proven online reverse auction technology to increase market liquidity, a standardized strategic sourcing
process encompassing RFP document collaboration, reverse auctions, competitive bid analysis,
knowledge sharing and savings tracking. This can be deployed across all category negotiations managers
both at the CPO and business unit levels.
Sustainable Contract Savings
Companies have difficulty capturing all their contracted savings throughout the purchasing transaction
due to contract non-compliance, with typical erosion levels at 20 to 40 percent of sourced savings. But,
close to 100 percent contract compliance can be achieved (i.e. 4-6% savings at the transactional
level) through the implementation of an end-to-end procure-to-pay platform to handle each step of the
P2P process: budgeting, requisitioning, supplier-buyer collaboration, contract enforcement, invoicing and
invoice-PO-fulfillment reconciliation.
The deployment of P2P processes aligned along category P2P process groups that promote contract
term enforcement and reconciliation to minimize rate non-compliance, enforce spec-related business
rules and facilitation of supplier-buyer collaboration on scope definition, and minimize spec non-compliance
and user adoption through tailored processes, to minimize vendor non-compliance all help to enable
contract savings.
Improvement on Contract Savings
Contracted savings can be improved by around four to five percent at the purchasing transaction level
through the deployment of P2P processes aligned along category P2P process groups that facilitate
automated spot buying wherever feasible (e.g. bulk buys, spot buy for every consulting purchase, one-
offs). The implementation of category-specific business rules for demand management (e.g. travel, PCs)
and the availability of superior information to ensure better management of customer demand and
identifying opportunities to optimize purchasing patterns.
Reduction in Procurement Costs
Operational costs can be reduced by 30 to 40 percent through the automation of P2P processes across
all categories to facilitate reduction of personnel involved in buying, requisitioning and disbursement; and
also reduce intangible "non-people" related paper transaction costs. The setting a standardized strategic
sourcing process can also reduce staffing levels needed in category negotiations operations resulting in
reduction in procurement costs.

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 Spend Management Transformation Through Ariba Category Strategy

Continuous Improved Savings

One to two percent savings could be achieved in the "out" years on an annual basis by continuously
re-sourcing categories to exploit dynamic markets and match contracts with changing internal purchasing
patterns. The monitoring of category-specific Level 3 transaction data (price and quantities), the development
of an information backbone to drive sourcing decisions, and the ongoing measurement of supplier
performance can all be used as levers for further sourcing negotiations.

Extend Savings to Wider Spend Base

Given the vast number of categories that make up a typical spend base, companies have difficulty in
extending the savings methodologies and processes to all categories. This can be accomplished as
described above by grouping categories along common spend management methodologies and processes,
having dedicated resources on staff for each category group, and building tools and processes aligned
along these category P2P process groups.

Diagnostic Methodology & Process

Ariba's Category Strategy methodology enables companies to develop a strategic plan around category
strategies and guide the ensuing delivery cycle. The category strategy contains the following primary
steps as illustrated below.
Ariba has developed a proprietary diagnostic methodology and associated Excel-based model to help
clients develop a strategic plan around. The model leverages and incorporates our sourcing and procurement-
related benchmarks, spend management best practices around category strategy, and our past client
experience. The diagnostics and associated model is executed around a combination and quantitative
and qualitative assessments. It has the following main steps as illustrated in the diagram below:

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Spend Management Transformation Through Ariba Category Strategy

How Ariba Addresses These Challenges

The Ariba Category Strategy diagnostic methodology helps identify process and organizational gaps
needed to execute a spend management transformation. Ariba can help fill these gaps through; 1)
Enterprise and integrated services; 2) Strategic consulting services; and 3) Best-in-class software tools.
Enterprise and Integrated Services
Our enterprise and integrated services across all skill sets fill a company's gaps both in terms of
resources and competencies. This forms our ability for execute spend management transformation
for all any company.
Strategic Consulting Services
Our strategic consulting organization can provide consulting services for developing a detailed
strategic/operations plan continuing from where the diagnostics leaves off and effectuating change
management in your organization.
Best-in-Class Software Tools
Our software tools provide best-in-class functionalities that accommodate requirements of all market
groups and P2P process groups (i.e. ~100% of your spend) on a single end-to-end integrated platform.
These software tools fill the process gaps identified by our diagnostics and help your organization to
achieve self-sufficiency over time through process automation

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 Spend Management Transformation Through Ariba Category Strategy

How Customers Have Benefited

Ariba's Category Strategy methodology to spend management is unique in the marketplace, providing
opportunities for companies to successfully begin the journey for Spend Management transformation.
This approach has had increasing success over the last 12 months. It has been successfully applied in
full range of companies from large multinationals, major airlines, oil and gas, and retailers.
 Providing customer care for companies who have had limited success with a traditional "one-
size-fits-all" approach to spend management
 Structuring creative savings-based strategic partnerships with customers that extend into a
spend management lifecycle
 Developing plans for successfully executing spend management transformation programs
 Helping customers plan for a major spend management initiative through strategic planning,
process design and change management
 Developing a bottom-up business case to facilitate internal customer funding, especially when it
is predicated on demonstration of a strong ROI

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