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Taxonomy: Time to move on


With many clients insisting on using standard taxonomy for ease of implementation and universal acceptance, should a consulting firm advice otherwise? Should we give our clients what they want or should we help them by identifying what they need?

A Taxonomy can be called the backbone of the spend classification process. It helps organize the commodities in a parent-child linkage of hierarchy, and based on this hierarchy one manages to get clear spend visibility.

To categorize the spend many companies rely on many standard taxonomies. E.g. UNSPSC, eClass, eOTD etc. These standard taxonomies though appear organized with proper hierarchy, are they really efficient? Does using them for classification give us real visibility?

The first drawback of such standard taxonomies is the word 'standard' itself. In this ever evolving market with ever changing demands a company is striving to make their products different from their competitors resulting in significant portion of goods/ components procured, to be non-standard. This results in specific department buying components which are cannot be classified correctly due to non-availability of those commodities in these standard taxonomies.

The best work-around usually applied for these situations is, adding the necessary commodities to the taxonomy (customizing the standard taxonomy). But this is followed by a bigger challenge of mapping the newly added commodity. Randomly adding the commodity not in-line with hierarchy of implementation completion creates long term problems for operations team.

These include :

 (1) No clarity of how to classify using that category, as even though the most granular level matches the commodity, its parent hierarchy is nowhere in sync with it.

(2) Inaccurate spend classification resulting in that commodity falling into the bucket of irrelevant category manager at the client's end.
The problems with standard taxonomy implementations are further aggravated when the sponsors are consulted for taxonomy finalization, but then it's the buyers and category managers are made to provide feedback on wrong classification of their commodities. Because when the sourcing hierarchy if in not sync with the Taxonomy level hierarchy, the saving strategies born out of an accurate spend analysis are often inaccurate.

Talking about the most widely used standard taxonomy for reference is the UNSPSC. With 19 versions since its inception it currently contains 50K+ categories distributed across its 4 level hierarchy. Any firm requiring so many categories is next to impossible. Then why have so many categories to confuse the Analyst working on data or even the AI, which will not be able to differentiate what is actually procured by understanding the 'grammar' of the said category in the Invoice/ PO description.

No wonder applying a standard taxonomy reduces expenses of the Consulting firm (which then are able to offer its services at cheaper rates) and efforts by not having to painfully map the necessary commodities of the client using their sourcing hierarchy to the commodities procured from the data, helping the quicker implementation of the project.

However if long term partnership is desired along with more-than-theoretical saving for the client, the consulting firms need to move on from standard taxonomies.

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