AI Increases the Need for Manual Spend Analysis

Everyone with an AI tool is proclaiming how their tool negates the need for manual spend analysis and, beyond that, how it negates the need for sourcing (because their Agentic solution can create the event and execute it automatically), and how it can even handle the contract generation, negotiations, and signing. How it will save you so much time and money that you will never need to do manual spend analysis again.

And it’s all lies, damn lies, and statistics — of the worst kind — since it usually involves probabilistic Gen-AI that often hallucinates market conditions, best practice, and true innovation.

It’s true that an agentic solution can run pre-packaged spend analysis against all of your spend once it has been classified, identify the products and categories with the greatest variance, compare the average price paid to current market prices, suggest opportunities, and push the products into the sourcing tool (and invoke the sourcing agent).

But here are the problems:

  • even assuming it’s ranking opportunities by the savings today, that doesn’t mean it’s the greatest savings tomorrow; there could be contracts in place, declining demand, or rising inflation in the category
  • similarly, products or categories passed over could be the greatest opportunities due to increasing demand, lack of long term contracts, or stagnation in pricing
  • without verification, the “market prices” could be quite off actuals as it could be “public” pricing only and private is quite cheaper, especially with volume discounts
  • the opportunities are not real unless they are with suppliers you can actually source from (and auto-identification is not actual product verification)
  • and just getting auto-responses to auto-requests doesn’t guarantee you get the responses from the suppliers with the best products and prices

And that’s just the beginning.

Here are the missing pieces.

  • it’s working on a predefined categorization (yours, the vendor’s, or, even worse, a random AI one); sometimes the best opportunities come from a categorical reorganization that allows you to bundle the right mix of products for the suppliers you’re inviting
  • suppliers don’t auto-bid in response to auto-RFI requests, vendors do — and for strategic categories, you need strategic suppliers
  • you can use agentic CLM to assemble clauses or send and retrieve documents and even do an initial analysis, but since the review is based on Gen-AI LLMs that can hallucinate as often as not, a review can be helpful, but it’s not a real review
  • the data ingested for product matchings may or may not be accurate, especially since suppliers or distributors can put want they want on their site, or, more importantly, leave out key details

It’s great to use AI to find potential opportunities, but you can’t use AI to verify, and you definitely can’t use AI to capture them. Manual spend analysis has just become more important than ever, as has a tool that allows you to do it as efficiently as AI appears to. Fortunately, a such tools do exist — although you may have to work hard to find one.

The State of Spend Intelligence is The Same Today as it Was 20 Years Ago. There is NONE!

In this age of AI hype, every vendor with an “Agentic AI” or an “AI Employee” is claiming their LLM-based garbage app is going to provide you with the “spend intelligence” you need for your Procurement success. The reality is that it is as much hogwash today as it was 20 years ago when I wrote that There’s No Such Thing as Spend Intelligence.

The words I wrote exactly 20 years ago today still stand.

There is no such thing as a spend intelligence solution.

Let’s start with the definition of intelligence.

Intelligence is a most complex practical property of mind, integrating numerous mental abilities, such as the capacities to reason, plan, solve problems, think abstractly, comprehend ideas and language, and learn.

And since spend management solutions are software, let’s review a definition for software.

Software is the (collection of) program(s) that enable a computer to perform a specific task, as opposed to the physical components of the system (hardware), where a program is the collection of source code and libraries which have been compiled into an executable or otherwise interpreted to “run” in (active) computer memory, where it can perform both automatic and interactive tasks with data.

Simply put, intelligence is a property of mind and software is a property of machine. And despite the efforts of the artificial intelligence community, I do not expect the property to cross the chasm anytime soon. Artificial intelligence is simply a collection of very sophisticated algorithms processing large data stores, instruction sets, and probabilities very quickly to come up with reasonable responses to queries – it is not thought, although it might appear to be thought since today’s computers can perform billions of calculations in a second.

The only difference is that today’s processors easily do hundreds of billions of instructions per second and with multi-threading and massive parallelization, average racks do hundreds of trillions of calculations per second and custom AI Data Center racks do quadrillions of calculations per second. But calculations do not equal intelligence. And since the models are still probabilistic, they haven’t gotten any better and, in fact, with LLMs, they’ve gotten worse!

In fact, with hallucinations a core function, not only can you not depend on the math (which these models get wrong all the time) but you can’t even be sure they’re working on the right data. We’ve went from insight to inaccuracy. That’s not intelligence. That’s idiocy … at it’s finest!

For a Successful Procurement, you need Lagging, Lasting, and Leading Indicators!

A recent post by Garry Mansell on why some businesses fail while the numbers still look fine really makes the case on why you need all three types of indicators to be successful.

According to Garry, it happens more often than people admit. The revenue doesn’t collapse first. The reputation wobbles first. And once reputation wobbles, revenue follows on a delay. You can usually see it early, but it appears as weak signals. A different tone from customers. Partners becoming slower to commit. Hiring taking longer. Senior candidates asking slightly sharper questions. Suppliers quietly tightening terms. Teams becoming cautious about promising anything externally. It’s never announced. It’s felt.

The reason boards get surprised by this is that most board packs are built around lagging indicators. By the time the numbers reflect the problem, the organization has already lost something harder to regain … belief.

Revenue numbers are lagging indicators, but those are key indicators in the board pack. What are needed are lasting — sales cycle time — and leading — sales cycle time trend changes — indicators. If the revenue cycle time is increasing, and has been for the last two or three quarters, that’s a really bad sign, even if revenue is more-or-less staying constant because a flat organization can only support so many sales cycles, and revenue will start falling if they drag out much longer.

The same problems appear in Procurement presentations, which typically have the opposite problem, especially when trying to sell new processes or technologies just implemented. They will quote leading indicators like identified savings, and ignore the lasting, average cost per unit reduction adjusted for inflation, or lagging, actual savings vs. projected savings 12, 24, and even 36 years ago (for three year contracts). After all, as far as the CFO and CEO are (rightly) concerned, it’s not savings if it doesn’t hit the P&L!

So make sure to include all three indicators. In Procurement:

  • leading indicators define what should be possible
  • lasting indicators define what path the organization is on
  • lagging indicators define what the Procurement organization has actually achieved

Just like, in Sales:

  • lagging indicators define what happened in the past
  • lasting indicators define what is happening now
  • leading indicators define what is going to happen … and how good, or bad, it’s likely to be

To remain successful, revenue must, at least remain on track, if not increase in an organization just like Procurement success must also remain on track, if not increase.

Another Reason You Can’t Wait Too Long for the CPO!

In our last post, we reviewed a post by the Great Garry Mansell on the rule of two where he outlined when an organization needs to hire a COO in order to continue to grow. We noted that you can use the same same logic to determine when you should hire the CPO, which should happen earlier than most organizations believe.

In a follow up post on the hidden tax, Garry gave us another great reason to hire a CPO early.

Basically, as organizations grow, they spend money to feel professional. It’s a hidden tax that grows over time that not only (greatly) reduces their EBITDA and profit, but also decreases their resiliency.

As Garry points out, as companies grow, they spend money to feel professional. They add tools because someone recommended them. They add layers because it feels grown-up. They add process because it looks like control. They add roles because it feels safer than making a hard choice about what to stop. And then they end up with three to ten times as many tools as they should (just look at the average number of SaaS tools in an organization), and spend two to three times as much as they should be. And the processes they add are not the right processes because they don’t have the expertise to define best-in-class sales, marketing, procurement, etc. processes because they don’t have a seasoned CRO, CMO, or CPO to define them. They hire people they don’t need to get stuff done that should be automated or simplified by better processes (that could only be defined by the right senior people who should be hired at the right time, and funds saved until they can be).

This is another reason why you need a CPO early. A CPO will vet not only the reason, but the ROI, of every proposed product/platform and prevent unnecessary purchases and, if something is required, find the best product/platform. They will prevent processes that don’t add value. And they can even help determine when hires are really needed or when better platforms and processes can delay the need.

Procurement will focus their spend on the things that improve outcomes. And they will happily cut the things that improve optics because optics don’t carry you through volatility. Cash and speed do. And Procurement will help you conserve cash and act as fast as it is prudent to.

As Garry states A “good company” that has protected margin and kept agility will outlast a “professional company” that has simply become expensive. And a good company is one that puts Procurement front and center. After all, as Coase clarified, Procurement is the reason a company exists!