In the midst of my current spend analysis fever, I came across this interesting factoid about the shifting dynamics of U.S. industry:

“Twenty years ago, the top 100 companies in the Fortune 500 either dug something out of the ground or turned a natural resource (iron ore or oil) into something you could hold,” wrote new-age marketing and business guru Seth Godin. Today, two-thirds of the Fortune 100 traffic in services or ideas (e.g., labor, transportation, consulting, etc.)

This shift from a manufacturing- to services-based economy, begs two questions for supply management organizations:

1. Will services make up a greater portion of my total spending?
2. If so, is my company prepared to manage services spending?

The answer to Question #1 is a resounding, “Yes.” U.S. companies spend more than $1.5 trillion on business services annually. That means that more than one-third of all corporate purchasing dollars are spent on services. In select industries, services comprise as much as 85% of total spending.

Unfortunately, the answer to Question #2 is “Unlikely,” at best. Research from Aberdeen Group finds that “nearly half of all services purchases are not controlled by the purchasing department.” Instead, sourcing and purchase decisions are made by various business functions, such as human resources, marketing, or engineering.

There are a number of challenges to effective services procurement. (For more details on these, access research from Aberdeen or AMR Research. Or listen to what blogger and services procurement solution exec John Martin has to say.) This post will address one of the biggest services procurement challenges: the lack of detailed visibility into services spending.

In last week’s webinar — Beyond Spend Visibility: Turning Data into Action — one audience member asked a question that I hear quite a bit: Purchase orders (POs) and invoices often lack detailed information on the services being purchased. How can spend analysis really help provide visibility into services spending?

According to webinar panelists, the answer to this question relies on both the automation approach and classification schemas you use.

“It comes back to the kind of automated sourcing tool you’re using,” said Forrester Research Vice President and Supply Management Research Lead Andrew Bartels. ”Neural networks are able to interpret the wording in the invoice, which is typically where this arises. It can also be done with rules-based [cleansing and classification] engines, which can search for key phrases or key terms and interpret the invoice for use for classification.”

Adding to Andy’s comments, it is important to note that top performers also use a triangulation approach where the spend analysis solution marries the invoice information with PO line descriptions (e.g., “professional engineering services”). In the case where services spend details are not in a PO system, the solution will also access and interpret spend from other systems and non-PO data sources, such as administrative check requests (ACR). The approach depends on the unique buying patterns and spend details of the enterprise and its systems.

Todd Grunert, Purchasing Manager of Supplies and Services at Abbott Laboratories, was even more direct: “It’s really all about the taxonomy,” noting that Abbott developed its own spend data taxonomy based on a combination of industry schemas, including SIC, NAICS, and UNSPSC. This enabled Abbott to expand the taxonomy to support detailed classification for complex services categories like print and consulting. It also allows Abbott to map spend back to these industry classifications for high-level reporting and analysis.

Todd demonstrated the important role the classification schema plays in managing services spend by sharing example: “At Abbott, I was responsible for meeting and events initiative. This broke down into several sub-categories, meeting and events planning logistics, meeting and events production, continuing education, and audio visual.” Abbott’s taxonomy supported classification of services spend data at this granular level. “We were able to take that descriptive information and manipulate the data to fit specific suppliers and spending into those particular buckets to assess the opportunities that resided within each particular category.”

Todd summarized Abbott’s attack plan to access and understand its services spending this way: “Gaining visibility into services spending relies on the ability of the tool to cleanse that data, add information to that data, enrich that data and get it properly bucketed. It’s the ability of your [classification schema] to break that out to a finer granularity from a services perspective so you can address it specifically with the suppliers within a given category to determine whether you’ve got opportunities or not.”

Sage advice at a time when previously uncontrolled services spending is becoming a larger portion of your company’s overall spending. Hear all Todd and Andy’s comments on spend analysis pitfalls and successes by downloading the complete webinar here. Don’t have time to listen? Access the webinar slides here.