Spend Analysis

Understanding the who, what, when and where of purchasing

A fundamental part of the “As Is” analysis is identifying who is buying what, from which suppliers, when, how often and on what terms. This allows you to define your organisation’s buying patterns, identify trends and changes in buying behaviour and to identify the sources and types of funding.

The outcome is to have a clear view of your organisation’s buying patterns and in particular review the contracts and agreements already in place.

Reviewing contract information

There are three areas which you should consider when reviewing contract information:

• Critical assets supported by contracts should be identified at this stage, for example, your maintenance contracts on plant or, IT systems.

• The extent of asset specificity should be identified. (Asset specificity means an asset that has a high value in certain applications only and has not much value in alternative uses.) Suppliers of assets with high specificity incur a higher level of risk as their market is restricted, therefore they tend to protect themselves by increasing cost and/or insisting on a long term contract. It is useful to identify any high specificity asset suppliers in your ‘As is’ analysis.

• The extent of moral hazard should be identified (in particular post contract moral hazard). Moral hazard arises in cases where the actions of individuals cannot easily be observed and so they are not incorporated into the contract providing an opportunity for undesirable behaviour post contract. This is also sometimes referred to as ‘compensating behaviour’. Incentives can be incorporated into contracts that encourage appropriate behaviour from all parties post-contract.