In order for procurement teams to find cost saving opportunities, increase efficiency, and improve cash flow, reviewing and analyzing current and past spending is a great first step. Spend analysis can help your team make some informed and data-supported decisions.
What is spend analysis?
Spend analysis, or procurement spend analysis, refers to the process of collecting, organizing, cleaning, classifying, and analyzing your company's spend data. The goal of spend analysis is to decrease procurement costs and improve efficiencies by expanding spend visibility and transparency. Spend analysis uses real-time data and analytics to show you the proper insights needed to make better sourcing and supplier decisions and improve your relationships with them. What's more, it also helps improve your company's financial results and cash flow.
There are some key terms you should know that pertain to spend analysis:
- Spend data: Also called procurement spend data. This refers to information concerning an organization's expenses for products and services from outside suppliers.
- Spend data management: A process that collects, sorts, and manages spend data.
- Spend analytics: A process that collects, cleanses, classifies, and analyzes spend data. This can be done through spend analysis software, or spend cubes.
How is spend data categorized?
Spend data is lumped into two primary categories:
- Direct spend: In procurement, direct spend refers to goods and services directly linked to making products. For example, hardware, materials, and parts related to the manufacturing process.
- Indirect spend: Sourcing goods and services that aren't directly linked to product manufacturing. Indirect spend in procurement helps businesses build and maintain operations. Indirect spend categories include:
- Marketing services, such as media buying and agency fees
- Professional services, such as the fees associated with consultants and advisors
- Utilities, including water, gas, and electricity
- Maintenance, repair, and operations (MRO)
- Information technology, including both hardware and software
- HR-related services, such as recruitment and new employee onboarding
- Transportation and fleet management
- Travel and lodging
Why is spend analysis important?
Spend analysis tools work by converting raw data into actionable and helpful information, delivering key insights into a business's procurement processes and expenditures. This uncovers opportunities to lower the costs to produce products and services.
There are several reasons why spend analysis is a must for businesses of all sizes, including:
- Identifying opportunities to reduce costs
- Leveraging or consolidating similar products and/or services
- Improving supplier relationships and execution while managing supply risk
- Creating more accurate budgeting and spending forecasts
- Diversifying the supplier database
- Identifying spending that is unauthorized or out-of-contract
- Identifying options for increased sustainability in procurement processes
- Streamlining sourcing processes for more efficiency
How does a business implement spend analysis efficiently?
There are three primary phases of the spend analysis process:
Step 1: Defining your spend analysis parameters
To define proper parameters for your spend analysis, decide what insights you're looking to gain. Think about what you want to analyze, whether it's certain:
- Customer accounts
- Customer processes
Once you've decided on what you're looking to analyze, set appropriate parameters.
Step 2: Identifying spend data sources
Spend data sources include general ledgers and financial statements, and documents. When you identify data sources before you start your analysis, you'll help create a more structured setting to gather the data, ensuring your ability to see the whole picture.
Step 3: Identifying key performance indicators (KPIs)
Next, it's time to identify the most relevant KPIs for your business. What's considered relevant for you will depend on your:
- Primary goals for your procurement spend
KPIs vary from company to company, but common examples include:
- Spend by procurement operation
- The number of people involved per commodity
- The number of suppliers and transactions
- Transaction distribution by currency
Step 4: Identifying spending patterns
Similar to KPIs, spending patterns will also vary from company to company, but they often include cycle periods and fluctuations. Understanding cycle periods and fluctuations help inform the parameters that are set for sourcing and analyzing the data.
Step 5: Collecting data
Now that your goals, processes for data sourcing, and spend patterns have all been clearly defined, it's showtime — time to start harvesting the spend data.
Step 6: Cleansing the spend data of inaccuracies
Upon collecting the data, it's important to address any inaccuracies, duplications, or anything incomplete or irrelevant before you start inputting your data into the analysis.
Step 7: Categorizing data
Once your data is complete, you'll need to group the data in accordance with what will best inform your KPIs — this is commonly organized by the supplier or financial category.
Step 8: Identifying weaknesses or inconsistencies in supplier management
After you finish your data categorization, start analyzing your KPIs and financial metrics for any discrepancies or inefficiencies in your supplier management. For example, duplicate services and/or providers.
Step 9: Identifying cost reduction opportunities in the procurement process
You must search for opportunities to save in actual spend; eliminate duplicate, unnecessary, or wasted resources; negotiate lower pricing; and so forth.
Step 10: Creating an actionable plan targeting KPIs
Once you have your actionable insights from the spend analysis, devise a plan to improve your KPIs based on your findings.
Benefits of spend analysis
There are several benefits associated with spend analysis, including:
1. Increased spend visibility
This is one of spend analysis's critical benefits as it provides businesses with improved visibility and transparency into how much they spend buying materials and services. It allows the procurement organization to get a good, thorough look at their core expenses, purchases, and other spending habits.
2. Cost savings
Spend analysis can help sourcing managers meet their cost reduction goals. Once all numbers are crunched, the metrics will demonstrate the organization's spending patterns and the potential savings in a broad spectrum of categories. This allows purchasing managers to cut costs by using alternative products or suppliers, consolidating suppliers, and merging products they once bought separately into groups they can negotiate. There are several ways to cut costs and reduce prices, including:
- Contract buying
- Improved contract compliance
- Reduce maverick spending
These cost savings can also apply to office supplies, temporary staffing, contractors, consultants, and other indirect items.
3. Better supplier relationships
Procurement spend analysis allows you to evaluate your supplier performance for improved relationship management. Information is the starting point for improved procurement performance and relationships with your suppliers. Your spend analysis provides that information through data and insights that help you understand the potential value of improved relationships with your suppliers. Once you determine which suppliers offer you the best value, you can work with them to foster more evolved procurement processes. Procurement professionals can also get a glimpse of their supplier's performance to encourage supplier development. What's more, they can also use the spend analysis data to weed out underperforming suppliers and boost their contract compliance through the continuous monitoring of pricing.
4. Ensured compliance
Spend analysis helps organizations manage both their risk and maverick spending, resulting in continual compliance by enriching their spend data with credit scores and other revenue information about their suppliers. This allows them to better assess their business's overall supply chain failure risk. A thorough spend analysis will also contain data that helps contract management by allowing procurement professionals to track and identify any suppliers with non-contracted spend or any spend with non-contracted vendors.
5. Internal benchmarks
Spend analysis provides the opportunity to benchmark your performance internally across all business units and locations, paving the way for meaningful comparisons that you can use for strategic decision-making. When spend data is collected and organized in one place, it allows you to answer a broader spectrum of questions, including the average number of vendors or spend category, as well as which vendors generate the highest revenues. This knowledge is crucial for setting realistic, achievable targets for improvement.
For organizations to deliver improved performance, it's critically important to collect, cleanse, classify, and analyze their spend data in various ways to uncover new growth opportunities. Data accuracy and consistency are only attained when an organization takes full advantage of spend analysis, as it gives them a more effective way to collect, store, and manage vast amounts of data while providing a more profound understanding that can be used to develop new initiatives and make confident decisions surrounding spending.
How BILL Can Help
Does informed decision-making, better sourcing decisions, reduced cycle times, cost savings, strategic sourcing, and an overall improved procurement process sound like something that could help your business grow? Our solutions are designed for efficiency, giving you more time to focus on what's important. To learn more, schedule a personalized consultation and sign up today!