Spend analysis or spend analytics, is the practice of reviewing historical spend data to gain actionable insights, reduce costs, increase efficiency or improve supplier relationships. The methodology includes the process of collecting, cleansing, classifying (or categorizing), and analyzing the spend in your organization.
Spend analytics is a basic principle in strategic procurement and should be the foundation for every professional procurement function. It's an important tool for identifying savings opportunities, managing risk, developing procurement strategies, and implementing category management. Spend analytics also provides more transparency across the entire business, that may be critical for anchoring and prioritizing activities internally.
As procurement becomes more mature and a strategic business function, spend analysis will play a key role in aligning all the various stakeholders in the organization.
Key Benefits of Spend Analysis
Procurement and spend analysis are or should be, the basis for the work in all procurement functions.
Here are some key benefits procurement and spend analytics can provide to your business:
1. Provides full transparency: Updating and upgrading the data is very important for spend analytics. When facts are updated on a continuous basis, companies get an organization-wide and complete overview of their spending and derive insights. A thorough spend overview is important for the procurement function and across various business functions, such as finance, manufacturing, and IT. Sharing and communicating insights is critical for procurement to be a well-functioning strategic partner internally.
2. Increases efficiency: Research suggests that most of the time, people spend only 20 percent of their time on strategic activities - leaving 80 percent devoted to low-value tasks such as collecting, filtering, and formatting data into reports. Here, deploying automated and insightful analysis can increase the efficiency of the procurement function to give you more time to focus on value-adding or strategic activities.
3. Supports category management: Spend analytics provides the basis to classify and categorize your spend based on the data. Effective spend categorizing is the first step towards successful category management.
4. Prioritization of resources: Analytics uncover insight to help you allocate and prioritize your resources. For instance, insights are imperative when it comes to prioritizing categories; though critical categories are the ones that come first in the priority list, keeping smaller categories away from this lens might conceal large opportunities for savings.
5. Internal benchmarking: Analyzing spend across business units, functions, and projects, gives you action-based insight to benchmark your execution.
6. Identifies savings opportunities: Procurement and spend analytics are critical to identifying opportunities for tangible savings. With spend analysis, you understand the areas where you're spending money and where you're wasting money. These dynamics of spend analysis make it possible to manage spend well while creating numerous profitable opportunities for the company.
7. Implementation of measures: Procurement analytics is a fantastic tool to drive fact-based decisions. It's all about how you use your data to make smarter decisions and implement the necessary measures.
8. Improves data quality: One of the most common challenges to implementing spend analytics is data quality. Although data quality standards and issues are different for different organizations, the hard fact is that you can only improve the data quality by using the data you have. Here, procurement and spend analytics help you overcome your data gaps by highlighting data deficiencies. This way, it makes sure you take systemic actions exactly where they're needed to enhance the quality of your data.
Addressable Spend vs Non-Addressable Spend
Spend is a collective term that reflects all internal and external purchases throughout the business. This includes all purchases of goods and services, regardless of whether they are investments or repetitive by nature.
The procurement function should nevertheless prioritize its resources towards the spend that they have the opportunity to influence, both directly and indirectly, i.e. addressable spend. In practice, this often means all external purchases with the exception of taxes and VAT.
The Modern «Spend Cube»
A spend cube represents a visual simplification of the spend along several dimensions. The traditional, and slightly outdated, spend cube contains three dimensions:
- What do we buy (what categories or products/services)
- Who buys it (what company, department, cost center, business unit)
- Who do we buy it from (which suppliers)
Spend analytics is a more modern, all-encompassing, and dynamic methodology compared to the traditional spend cube. However, the principles are still the same. It's all about visualizing, analyzing, and understanding the spend composition and trends, such as:
- What are we purchasing?
- Who is purchasing?
- Who are we purchasing from?
- When and how often do we purchase?
- How much did we spend in total and what prices did we pay?
- What quantities or volumes have we purchased?
- What is the spend development?
In terms of spend analysis, there are only two limitations; our own imagination and the available data. Learn more about the most common sources of spend and procurement data.
Spend Analytics, Procurement Analytics and Spend Management
The procurement terminology can often be somewhat confusing, even for us who work with procurement on a daily basis. We, therefore, want to provide an overall explanation of spend analytics, procurement analytics, and spend management – and how these are related.
Spend analytics refers to analyzing all internal and external spend and is an example of procurement analytics.
Procurement analytics is a more comprehensive term than spend analytics. This is a collective term used for all relevant analysis throughout the entire procurement process. Typically, this involves obtaining and linking procurement data from multiple sources. Relevant data sources can be many and vary between businesses, but common data sources will often be:
- Contract information
- Financial supplier information
- Supplier assessments (e.g. quality, service and delivery precision)
- Corporate social responsibility (CSR) and environmental impact
- Market information (e.g. market indices)
However, the purpose of procurement analytics is still the same. It's about gaining the necessary insights to drive fact-based, smarter and sustainable procurement decisions. There are many different types of procurement analytics, such as:
- Spend analysis - analysis of internal and external spend in the business
- Contract analysis - analysis of contracts, contract loyalty and metadata
- Supplier analysis - analysis of risk and potential across the supplier base
- Savings analysis - analysis of opportunities, initiatives and realized savings
Spend management is an umbrella term used to encompass a set of procurement and sourcing practices to maximize value from a company’s spend while mitigating risks, enhancing supplier relationships, improving efficiency, and regulating compliance.
Spend management means giving your spending a framework to help you look into, manage, categorize, and analyze it. But spend management, in reality, is a lot more than that: it's to equip people with tremendous visibility of the right data they need to draw insights from and make decisions.
Spend management reflects all the processes and activities to fully manage your spend. This includes the entire procurement process, where procurement analytics constitutes a vital part.