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 learn how to manage budgets more efficiently and make 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.
To practice spend analysis, business leaders must become familiar with the relationship between data management and data analysis. Both processes involve spend data, which is the information that relates to your organization's expenses. However, each process will use your company's spending data to achieve different goals in the budget management process.
Spend data management
Spend data management simply refers to the process by which you collect, sort, and organize your spend data. Financial software can collect spend data from multiple sources and give you access to this data through a centralized dashboard.
Spend analytics
If spend data management seeks to organize your spending data, spend analysis seeks to interpret it. Analyzing spend data means that you evaluate your current and historical spending to improve your core business operations.
Spend analysis software can be used to analyze spend data, and most software platforms can provide actionable insights through reporting features.
How is spend data categorized?
Spend data is lumped into two primary categories: direct and indirect spending. Here's an overview of each.
Direct spend
Direct spend refers to the cost of goods and services that directly contribute to the making of products. Examples of direct spend include:
- Raw materials and components used in the manufacturing process
- Packaging costs
- Equipment and machinery directly used in producing products
- Payroll devoted to your production process
- Print materials, such as instruction manuals and consumer guides
Procurement teams often perform spend analysis on direct spend data to find ways to optimize production costs through strategic sourcing or other methods.
Indirect spend
Indirect spend refers broadly to the costs that are not directly linked to production. These indirect costs are used to maintain and grow your business. Common spending categories include:
- 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
Business leaders rely on indirect spend analysis to optimize their overall operations by reducing overhead costs and seeking ways to boost efficiency. For example, implementing software automation can increase a company's ability to process a higher volume of transactions, which can reduce the labor costs and time commitment for each transaction.
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
Spend analysis enables companies to identify cost-saving opportunities and track progress toward their major financial goals. By analyzing expenditure data, business leaders are able to forecast future spending and make data-driven decisions that keep the company moving forward.
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:
- Departments
- Periods
- Vendors
- Customer accounts
- Customer processes
Narrowing your parameters to one or more of the above categories will help you focus on distinct, measurable goals. You'll also be able to compare data across departments or track changes in spend analysis data over time.
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:
- Category
- Commodity
- 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
Make sure to have a mix of large and small KPIs. If your goals are too broad or too high, it can be harder to track your progress toward this end goal. Instead, divide your goals into smaller, more manageable steps.
For example, if you want to reduce your procurement costs by 15% over six months, start by reducing costs by 5% over two months. These incremental goals will help you track your progress toward your goal.
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.
That's why it's vital to have the most up-to-date information possible. Financial software can centralize your data and give you access to clear, accurate spend analysis 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. Here again is where enterprise resource planning (ERP) software and other programs can be helpful. These spend analysis tools can help you gather data across departments so that you can monitor your performance and engage in spend analysis.
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. After all, accurate results only come from accurate data. Eliminating these errors will ensure that you have a clear, accurate, and up-to-date understanding of your financial performance.
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. Here is also a good place to distinguish between direct and indirect spending. Indirect spending analysis will help you manage your operations more generally, while direct spend analysis will help you focus on your production costs.
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. Even a simple contract error can cost businesses 9% of their total income. Additionally, a lack of supplier diversity may present challenges in managing your supply chain, which can likewise stall production and create a burden on your cash flow.
Step 9: Identifying cost reduction opportunities in the procurement process
Now is the time to look for specific cost savings opportunities in your procurement process. Some suggestions include:
- Eliminating duplicate or unnecessary resources
- Negotiating better supplier contracts
- Optimize your inventory management
- Enforce procurement guidelines to eliminate unnecessary purchases
Maintaining strong relationships with your suppliers will give you additional leverage to negotiate lower pricing in the future. Diversifying your supplier network may also help you source materials more affordably, which can reduce your direct spending costs.
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. Most business leaders seek to reduce their operating costs and/or improve the return on investment (ROI) of their current supplier contracts.
Benefits of spend analysis
Business owners rely on spend analysis to drive their most important decisions. Here are just a few of the benefits of regular spend analysis.
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.
Having this level of visibility will empower companies to pinpoint budget challenges or areas of inefficiency. Leaders can develop KPIs to address these issues to optimize the procurement process.
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!
