Some of the claims coming from spend analysis vendors remind us of the old Steve Martin gag, “How To Make A Million Dollars And Never Pay Taxes.” The joke continues, “First, make a million dollars...”

We’re thinking specifically about Preferred Vendor as the “million dollars” analog here, so let's imagine that (somehow) we’ve already built that dimension. In other words, we’ve already classified our vendors as follows:

• Preferred
• Approved
• Bypass
• Not known

And now look what we can do! We can crosstab this Preferred Vendor dimension by Commodity, Organization, and Geography. We can add a measure to all those crosstabs — or anywhere else — that calculates expected savings on the transactions containing vendors that aren’t Preferred. “Expected savings” is of course an imaginary number, but it can be estimated by Commodity based on industry norms and past experience.

Spend analysis vendors make great hay with this concept. Insights and potential savings tumble forth from demo dashboards. Everyone’s excited, and everything looks easy. Easy, that is, until embarrassing questions pop up like:

• "Do we have preferred vendors?"
• "Who decides which vendors are preferred?"
• "Who is going to poll the end users to figure this out?"
• "Who builds the Preferred Vendor dimension?"

Oops. (You can always say, like Steve, "I forgot.")

At one financial services company some years ago, a sourcing consulting team building a Preferred Vendor dimension — working together with a client team — ended up having to add all top 500 vendors to the Preferred category. Because, as one analyst remarked, “Every vendor is preferred by someone.” The preferred vendor analysis was, of course, useless as a result.

Spend analysis takes work. Creating a preferred vendor dimension doesn’t happen by itself. If Procurement won’t do it, someone else has to do it; and if it’s outsourced, the outsourcer has to conduct the interviews and build the dimension at high cost.

So the next time someone shows you a Preferred Vendor analysis, ask them how the Preferred Vendor dimension is going to be built, and how it can be modified and refined over time. Here’s how it’s done in Spendata:

Create a Preferred Vendor dimension (1:35)