Key takeaways
- Spend data is the information related to a company’s spending, specifically goods and services purchased from external suppliers or vendors. This data is usually grouped into categories and subcategories.
- Spend analysis in procurement provides teams with actionable insights and improvements to optimize existing procurement processes, reduce costs, increase efficiency, generate bottom-line business value, and grow competitive advantages.
- Visibility into procurement categories and effective management of categories fosters benefits like greater risk management and less costly supplier redundancies.
- There are four common mistakes that should be avoided when conducting a spend analysis: 1. ignoring the importance of data quality, 2. focusing solely on cost reduction, 3. not involving relevant stakeholders, and 4. not reviewing spend data regularly.
- An effective spend analysis and implementation consists of five steps: collect, clean, classify, analyze, and act.
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What is spend analysis?
Spend analysis is the practice of analyzing company-wide spending to cut costs, identify areas for process improvements, forecast needs, and maximize existing spending or vendor relationships.
Spend analysis example
If a business category is seeing an increase in spending (such as an increase in software licenses), this presents an opportunity to negotiate a business package that may be more cost effective than individual licenses. Spend analysis is necessary for strategic sourcing.
Spend analysis in procurement
Spend analysis in procurement provides teams with actionable insights and improvements to optimize existing procurement processes, such as identifying unnecessary expenses or inefficiencies, in order to cut business costs.
Because procurement teams are responsible for sourcing and purchase decisions, it’s also necessary to keep on top of all spending data to help inform and improve future spending and negotiate better terms and prices.
Spend analysis in procurement helps teams reduce costs, increase efficiency, and identify areas of improvement to:
- Generate bottom-line business value,
- Operate in a more agile and efficient manner, and
- Enforce purchase compliance.
Spend analytics vs. spend analysis
Spend analytics and spend analysis are synonymous and interchangeable terms for the same discipline: collecting, tracking, classifying, categorizing, and analyzing business spending. However, despite the similarities, it can be argued that the difference between the two disciplines is a fine and nuanced line.
Spend analytics is the collection, tracking, and classification of spend data typically through a dedicated software. Spend analysis is the practice of drawing data insights from the data gathered.
Spend analytics creates the visibility procurement teams need to complete a spend analysis.
What is spend data?
Spend data, or procurement spend data, is all the information related to a company’s spending, specifically goods and services purchased from external suppliers or vendors.
This type of data accounts for spending information like:
- What’s being requested, how often, and by which departments and people
- Negotiated terms
- The quantity and quality of goods or services
- The reliability of suppliers
Where does spend data originate?
Spend data is usually pulled from the purchase process and the accounts payable process. A streamlined procure-to-pay process makes the collection of information much easier because it integrates these two processes.
There are many sources of procurement spend data, but typically this data comes from:
- Purchase requests
- Purchase orders
- Invoices
- Contracts
- Goods received notes
- Supplier performance, risk, or compliance audits
- Transaction data (payments, payment method, discounts, late fees, etc.)
This data can also come from ERP tools, e-procurement or procure-to-pay solution, or financial data like general ledger information.
Direct vs. indirect procurement spend
Direct procurement spend is the purchasing of products or services that are required to produce value for customers and, as a result, generate revenue. Indirect procurement spend is the purchasing of services or products essential for day-to-day business operations but which don’t necessarily provide a direct value to customers or generate revenue.
Despite the difference in spend purpose and necessity, both are essential to maintaining business operations.
The benefits of analyzing your business spend
When data is collected, organized, and analyzed properly, there are many benefits that can be achieved or opportunities that can be discovered, including:
- Short- and long-term savings
- Improved supplier management
- Better sourcing opportunities and purchasing power
- Greater spend visibility and transparency
- Greater purchase compliance
- Defined internal performance benchmarks
- More bottom-line business value
- Become a better strategic partner
Spend categories in procurement
Categories are groupings of similar goods or services driven by similar suppliers and/or drivers of demand. Because company spend is grouped, these categories offer insights into sourcing strategies like creating discounts or managing multiple transactions and supply arrangements.
Categories can also have subcategories, depending on the need for additional differentiation. A subcategory is a subgroup of similar goods, services, or purchase characteristics.
Some common types of procurement categories include:
- Administrative support
- Travel
- Professional services
- Insurance
- Information technology
Additional categories and subcategories can also be included and defined depending on specific business needs, competitor activity, and business goals. Visibility into procurement categories and effective management of categories fosters benefits like greater risk management and less costly supplier redundancies.
Spend analysis KPIs
To analyze spending and determine trends or patterns, consider tracking these KPIs.
Cost avoidance
Cost avoidance measures the amount of expenses that were avoided, particularly on things like machine repairs, replacements, or damages. This is especially important for manufacturing, retail, or healthcare companies.
Maverick spending
While most teams have a level of maverick spending that they’ll consider acceptable, it’s important to keep an eye on this type of spending to ensure it remains low.
If the level of spending is too high or much higher than the acceptable level, then that is a sign of purchases being made outside the defined spending policy and scope. In addition to the risk of fraud or an uptick in unjustified expenses, maverick spending also undermines the procurement strategy.
Supplier performance
Measuring how well suppliers or vendors are performing is essential to determining whether they’re a valuable business partner or a resource-consuming weight. While the metrics will vary depending on the industry or category, supplier scorecards may include performance metrics like:
- Number of suppliers or vendors
- Lead times
- Contract compliance
- Availability
- Rate of fn-time delivery
- Acknowledgement rate
- Responsiveness
Contribution to total spend
Contribution to total spend measures how company money is being spent by categorizing expenses across teams, categories, or suppliers.
This KPI is valuable because it can pinpoint opportunities to save or cut back on expenses by negotiating better contract terms or changing suppliers.
The 5 steps of spend analysis
Step 1: Identify
A spend analysis begins by identifying the data that’s going to be analyzed, such as the KPIs highlighted in the previous section. This data is usually included in a company’s accounts payable, e-procurement, or ERP system.
It’s not unusual for data to be disorganized or scattered across various systems, so don’t rush this step. Even if the process is lengthy, be sure to identify and capture everything that’s needed.
Step 2: Collect
Once the data has been identified, it’s time to collect and begin organizing the information. At this point, the focus should be on combining data and centralizing the information into a single place for analysis.
Step 3: Clean
After collecting and streamlining the data, the next step is to “clean” the data that was identified and collected. Cleaning includes steps like standardizing data formats, reconciling repeat data, eliminating or correcting errors to ensure that the spend data is being analyzed in a consistent and accurate manner.
Step 4: Classify and categorize
In order to ensure that the spend analysis provides the most accurate and compelling insights, it’s important to classify and categorize the data to better understand the spend data.
This includes grouping or categorizing spend data based on categories, departments, teams, and vendors or suppliers.
Step 5: Analyze and act
With all your data collected, centralized, and organized, it’s now possible to crunch the numbers and perform the spend data analysis. After reviewing, draw insights and make recommendations to improve cost savings, increase procurement, and generate business value with improved strategic sourcing.
This can come in the form of:
- Cutting repetitive purchases
- Automating procurement workflows to reduce errors and increase purchase oversight
- Splitting vendors or suppliers to maximize contract value
Spend analysis types
Tail spend analysis
Tail spend refers to ad hoc expenses or uncategorized expenses that are low in value, volume, or frequency. Because of their irregular nature, this type of spending is usually not prioritized — but it should be. That’s because over time, tail spend can add up if not tracked.
A tail spend analysis centralizes this information and provides end-to-end visibility.
Supplier spend analysis
A supplier spend analysis measures how much a company spends on goods and services from suppliers or vendors. This type of analysis gathers data related to supplier invoices in order to identify patterns and opportunities to increase savings.
Category spend analysis
A category spend analysis groups similar company expenses based on categories like services, products, suppliers, characteristics, or departments. By analyzing category spend, procurement managers can gain insight into forecasted demand.
Payment term spend analysis
A payment term spend analysis provides a complete view of unrealized discounts. These unrealized discounts are typically associated with late payments of invoices or negotiation opportunities.
This type of analysis is important because it illustrates the negative impact of late or missed payments due to inefficiencies in the procure-to-pay or accounts payable process, as well as opportunities to become more strategic at sourcing or negotiating.
Contract spend analysis
Contracts help procurement teams reap the full benefits of their negotiated contract terms with suppliers. A contract spend analysis helps highlight cracks in negotiated contract terms that ultimately lead to spending leaks or missed opportunities for discounts.
By analyzing contract spend, procurement teams have better insight into securing the best contract deals so buyers opt for preferred suppliers.
Spend data visualization techniques
Data is only as useful as it is understandable. In other words, if the data can’t be navigated and easily interpreted, then the insights and improvement ideas hiding behind the numbers will never be revealed and its usefulness plummets to zero.
With spend data visualization techniques, dense or complex data can be turned into easily digestible information.
This makes it easy to not only understand, but also share the information for future process optimizations. Below are some examples of spend data visualization techniques to help procurement teams tap into valuable strategies and improvements.
Static visuals
Static visuals are best suited for a smaller analysis, simple streams of information, or short-term reporting needs. That’s because these require less resources in terms of data collection and centralization.
For larger analysis needs or complex data sources, interactive dashboards are the best choice. Interactive dashboards are responsive to real-time updates and can easily organize various streams of information into multiple formats. Because interactive dashboards can typically be customized to best match your needs, this option is great for digging into information and gaining both granular and big-picture insights.
Easily generate results for areas like:
- Spend by category
- Spend by supplier
- Cost centers
- Number of vendors
- Total spend value
- Operational and financial metrics
4 common mistakes to avoid when conducting a spend analysis
To conduct a spend analysis effectively and draw valuable insights, avoid these common mistakes.
Mistake 1: Ignoring the importance of data quality
Good insights are drawn from good data, but bad data can lead to confusion and inaccuracies that can lead to larger issues.
Ignoring data quality is detrimental to the spend analysis process because it allows data that’s inaccurate, incomplete, inconsistent, and unreliable to be leveraged when it shouldn’t be.
Mistake 2: Focusing solely on cost reduction
A spend analysis collects and organizes the cost of doing business, which makes it easy to identify costs that can be cut back or eliminated. While cost reduction is important, it shouldn’t be the only goal.
In addition to identifying how spending can be curved, a spend analysis can also highlight issues related to non-compliant contracts or complicated workflows that result in late payments or messy invoice reconciliation.
By expanding the focus of a spend analysis beyond cost reduction, the procurement team can provide greater value by reducing costs and refining workflows for greater business efficiency.
Mistake 3: Not involving relevant stakeholders
A spend analysis is a collaborative process that involves various flows of information and stakeholders. For that reason, it’s necessary to loop in all the parties involved in order to ensure that all the data is accounted for to ensure excellent data quality.
Mistake 4: Not reviewing spend data regularly
Like any continuous improvement plan, reviewing spend data regularly and not just once is a must. But establishing a consistent review schedule doesn’t necessarily mean it needs to happen every week or month. Consider conducting a thorough analysis quarterly to keep track of spending.
Top tools for effective spend analysis
Spend analysis in Excel
Excel is a powerful tool for analyzing data. Not only can you import large amounts of data, the proprietary Analyze Data feature makes it easy to organize, categorize, analyze and visualize data quickly, free of complicated formulas.
However, managing spend in Excel may come with a learning curve and may not be as intuitive for a new Excel user.
Spend analysis with BI tools
Business intelligence, or BI, software is useful for conducting a spend analysis because it “ingests” business data and then presents that data in easily digestible and understandable visualizations, such as reports, charts, graphs, or dashboards.
BI tools are especially useful because the tool can handle many types of data — whether it’s current, historical, internal, or third-party data — and the data is automatically and continuously provided for the tool to analyze.
Some downsides for BI tools are the cost of implementation, issues with data integration, and a lack of data transparency which can lead to issues related to data manipulation.
Automated spend analysis software
There are many business process management solutions available today that offer process automation capabilities, data integrations, and customizable spend analysis visualizations. These solutions simplify data management by centralizing all streams of information for various processes or departments into a single platform.
This makes cleaning and analyzing data easy, with results and updates reflected in real time with seamless data integration. That means you can connect your existing data sources — such as Excel, ERP, or e-procurement or invoice systems — so all stakeholders are looped in and flows of communication are open.
Manage your spending with end-to-end visibility and transparency
Spend analysis is necessary to not only tracking expenses across the company, but also examining trends and finding ways to reduce waste and improve buying power and amplify procurement’s voice as a strategic business partner.
With Pipefy’s flexible procurement solution, easily integrate tools and systems to centralize data and manage spending with total visibility and transparency. Pipefy offers customizable dashboards that gather reliable data in seconds. With automated reports, quickly share insights with internal stakeholders and create better procurement practices.
