Spend Analysis

A Comprehensive Guide to Understanding Spend Analysis

Reviewing historical and current spending related to procurement in your organization is important for finance leaders. It allows them to improve the sourcing process, make strategic decisions, and greatly improve spend management efficiency. One of the best ways to analyze this data is through spend analysis. 

What is Spend Analysis?

Spend analysis is the process through which organizations identify, collate, categorize, and analyze spend data. The primary aim of a spend analysis is to cut down on procurement expenditure, and to identify inefficiencies throughout the procurement process.

Spend analysis is conducted to better understand an organization’s spend structure and to find actionable insights to institute change. The aim of a spend analysis is to create strategies that improve savings and streamline procurement and supply chain management. 

Important Terms to Know

Before we begin, it’s important to understand some key terms: 

Spend analysis helps companies answer important questions, including:

Sources of Spend Data

Before conducting spend analysis, companies need to get procurement spend data from multiple sources. These include:

Spend analysis focuses on three main areas: transparency, analysis, and process improvement. 

  1. Spend transparency or visibility: access to clean spend data, including metrics and KPIs, allows businesses to view spending from multiple angles. 
  2. Spend analysis: analyzing information by asking questions about procurement and overall spending, and identifying methods to reduce procurement spend.
  3. Process improvement: once analysis is complete, the organization can implement changes to reduce costs and improve vendor relationships.

Companies have to gather data from disparate sources and then collate it, thus creating a single source of truth to review the company’s total spend. Both direct and indirect procurement spend data is collected and used. 

The success of spend analysis depends mainly on accurate information from different sources of data. KPIs are used to measure past and current performance of the procurement process, with data available mainly through a finance system. 

How to Conduct a Spend Analysis

Procurement teams can access data from multiple sources. Here are the key steps to conducting a spend analysis.

  1. Identifying Sources of Spend Data

The first step is to identify all key sources of spend data from different business units. This could include the AP department, the general ledger, transactional data from pCards, or e-Procurement portals. 

There are internal processes that departments follow, so a thorough data audit is required at this stage. All of the data must be consolidated into a centralized database. 

  1. Cleansing the Data

Data must be cleansed first before spend analysis can be conducted. Standardizing data from multiple sources is important. For instance, a uniform language and currency must be selected, and all duplicate entries should be reviewed. If business units are using different names for the same vendor, they need to be reviewed and standardized. 

Then, additional fields can be added to clarify information and to enrich the available data, including any ISO certifications or industry codes. 

  1. Classifying Expenses and Grouping 

The data needs to be categorized and classified into broad categories. You can classify spend data into different categories such as building supplies, procurement, travel, legal, etc. 

This data can then be grouped together based on vendors. There might be different vendors who share the same parent company, so grouping them together is important. Grouping helps improve vendor management too.

  1. Analyzing Data

Once you have classified and cleansed the data, you just need to analyze it. Depending on the specific targets you’ve set above, you can review the data and identify what changes you can make. For instance, you can review contracts to see if you have the best deals, or if you can improve the terms. 

  1. Repeat as Necessary

Spend analysis is a great way to reduce costs. Ideally, you should perform a spend analysis after specific intervals. Some companies perform it once every quarter, whereas others conduct a spend analysis once every six months to a year. 

The Benefits of Conducting a Spend Analysis

Spend analysis used to be a daunting task that would often take weeks to complete. However, with automated platforms and advanced finance systems, spend analysis is easy. It also offers a myriad of benefits.

Greater Cost-Savings Opportunities

Once you have all the data in place, including KPIs and metrics, you can then analyze it more effectively to identify key savings opportunities. It allows organizations to spot inefficiencies and identify patterns and insights that they can leverage to reduce procurement costs. 

Better Data Quality

Since the quality of spend analysis depends so heavily on the quality of data, companies often make sure that data is gathered accurately from major sources and is properly cleansed. Improved data quality automatically offers greater insights into procurement processes. This also offers granular visibility into spend as a whole, and eliminates maverick spending considerably. 

Improved Compliance

With relevant data stored in the centralized database, companies can ensure that they abide by internal policies, and comply with industry or government regulations. 

Gain Control Over Your Spend with SoftCo eProcurement

SoftCo eProcurement is a fantastic solution that allows companies to improve the purchasing process and gain more visibility into procurement spend. It lets you automate regular spend, establish workflows for requisition approvals, and pre-approve spend to mitigate inefficiencies in the procurement process. 

For organizations that want to streamline procurement and unlock new opportunities to reduce their expenditure, SoftCo eProcurement is an excellent solution!