The Complete Guide to Procurement Spend Analysis

Controlling indirect spending is one of the most impactful activities a business can undertake. Although managing this spend category can be difficult, many cash flow and financial issues faced by small and medium-sized businesses can be corrected through employing proper methods and processes.

Spend analysis is the cornerstone of this aspect of budgetary control. It gives finance teams the visibility necessary for making changes and the flexibility to drive growth.

This article provides a basis for understanding spend analysis. You will learn:

How to plan for and conduct spend analysis
Best practices for ensuring the accuracy and completeness of spend reports
Pitfalls to avoid in analyzing spend

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What is spend analysis?

The first step to controlling money in your organization is understanding where every dollar goes. Spend analysis is the process of organizing, verifying, examining, and reporting on corporate spending to inform better decision-making.

The spend analysis process allows you to prepare and use data effectively. It includes the following steps:

Collect all data and spending information into a single source of truth
Classify and organize data according to pertinent spending categories
Use analytics tools to parse and compare spending patterns
Use resulting data insights to make decisions and reduce wasteful spending

Benefits of spend analysis

Data drives better decision-making, and spend data offers a wealth of insights that help organizations run better in any economic environment. While spend analysis is associated with cost cutting, the truth is that the insights gained actually optimize spend rather than just reduce costs.

Spend analysis provides teams and businesses with many other benefits, including:

Increased visibility: Poor visibility is one of the fastest ways to lose capital, especially in a young or rapidly growing business where expenses and investment quickly expand. Increased visibility from spend analysis ensures the business maintains adequate cash flow and optimizes expenses wherever possible. It also allows the company to grow effectively and allocate future budget to activities and projects that support long-term stability.

Improved cost management: Indirect spend is one of the hardest areas to optimize but one of the most important to get a handle on. Spend analysis and price benchmarking create a clear expectation of the costs associated with operations and marketing. From this place of insight, teams more effectively estimate the cost of goods and select supply partners that offer a balance of strong pricing and support.

Greater process efficiency: The foundations of spend analysis require businesses to organize and track finance data within the organization. Therefore, companies often see better processes emerge as a secondary effect of analyzing spend. When building a spend analysis function within the organization, start with a clear and repeatable process for organizing data. Create a centralized location (such as a spend management platform) to handle purchases, create spend controls, and run reports. Creating a stronger process around spend analysis further enhances the benefits of this essential business practice.

More productivity: When the purchasing process becomes more visible, team members spend less time seeking assistance to meet their needs. Visibility allows buyers to see how spending affects the overall budget, which can inform spending requests and the vendor selection process. Individual contributors spend less time chasing down funding for ideas, getting vendors approved, and moving their needs through the fulfillment process. It lets them focus instead on high-value activities that lead to positive outcomes.

Stronger negotiations: Spend analysis helps companies better understand their purchasing habits and trends, which gives them more leverage when negotiating with suppliers. Through strong spend analysis, companies can more easily identify the suppliers to target for partnership. After identifying good vendor partners, the next natural step is negotiating for stronger deals and discounts — an important aspect of maintaining better long-term supplier relationships.
Better budget allocation: Spend analysis helps finance teams use data to streamline the budget process. By examining detailed and accurate spend patterns and budget utilization from past periods, financial teams can allocate resources to the appropriate budget pools, identify opportunities for reinvestment, and accurately forecast future spending needs. It also helps the organization build a cooperative business culture around company spending in which leaders optimize projects and team activities. The money saved through budget optimization funds future roadmap and operational activities to keep teams engaged and excited.

How to perform spend analysis

Create a repeatable process around spend analysis to achieve better performance and easier reporting. Use the following seven best practices to create accurate and insightful reporting on purchasing data:

1. Define the goal

When setting a goal for analytics, start by determining the data that’s needed, how it influences spending, and how you can improve spend efficiency. Attach relevant KPI (key performance indicator) metrics to each goal to ensure you measure your progress and have a clear definition of success.

2. List data sources

Identify every pertinent data source in your analysis. Ask stakeholders to participate in this process to ensure you pull data from all departments and relevant systems (such as enterprise resource management, marketing, the finance team, and customer relationship management).

3. Consolidate and cleanse

Collect data in a centralized system, ideally a procurement or spend analysis software platform. Cleanse the data of duplicates, fill in gaps, and ensure the integrity of the data included in your analysis. Creating an accurate and clutter-free record of your spend data increases organization-wide confidence in the numbers.

4. Organize data

In the best-case scenario, all digital and non-digitized data (for instance, paper invoices or contracts) is collected, scanned, and digitized for future searchability. Once data from every channel has been collected and verified, arrange it according to an accepted scheme or taxonomy. Data management enables a more detailed review of financial information, which informs future projects through accurate spend categorization.

5. Link and categorize

Connect your spending to associated sources such as vendor accounts, projects, and categories. Populating these fields in a database during the initial data prep allows you to conduct a more thorough analysis later.

6. Analyze and iterate

Prepare analysis and reporting relevant to your goal. Establish a workflow to verify and report on the data and conduct regular analysis to improve spend optimization over time.

7. Track performance

Once all data is collected and analyzed, teams can track finance performance KPIs over time. There are plenty of useful metrics to track, such as cost per unit, spend-to-budget variance, and projected cash flow. Monitoring these metrics ensures that changes made to the financial process and spending approach have the intended outcomes. It also makes it easier to identify areas of spending that still need refinement or those that will experience change over time. It provides sufficient data for performing vendor lifecycle analysis and ensures those relationships remain competitive and beneficial.

Types of spend analysis

Depending on what you’re trying to accomplish with spend analysis, you may need to look at different categories of data in search of actionable insights. Finance can examine several primary spending types as part of an overall spend analysis program.

Tail spend

The most common form of uncontrolled spending for the majority of companies is indirect procurement spending, informally called tail spend.

This aggregate spending is made up of small, inexpensive purchases. It may include spending for ad hoc orders, corporate card purchases, manager-approved spot buys, office supplies, and petty cash.

Tail spend often follows the Pareto Principle (also known as the 80/20 rule), where a small percentage of low-dollar purchases add up to a significant portion of expenses. Analyzing tail spend reveals opportunities to reduce unnecessary spending, leaving more cash available to power growth.

Supplier spend

Supplier spend is the money your organization spends with vendors. Analyzing supplier spend provides insights into the number of providers you use, how much you spend with each, and the contract terms that influence those purchases.

By analyzing supplier spend, you may be able to consolidate your vendor list and save money through volume pricing. Use this data to negotiate better terms and pricing and strengthen supplier relationships with a carefully selected roster of vendors.

Category spend

This type of analysis looks at which categories of products and services you spend money on, including supplies, products, fixed assets, debt, wages, or other cost centers.

Category spend may bring spending inefficiencies into focus, help inform budget allocations, or act as a guide for streamlining expenses. Category management controls procurement costs for high-ticket categories and aligns category purchasing with business needs.

Item spend

More granular than category spend analysis is item-level spend. In this analysis, you look at each line item to determine what your business needs (and doesn't need) to run effectively. It can help reveal places to cut costs.

While negotiating for items individually may be more time-consuming than productive (i.e., negotiating the price per pen in a deal), this type of spend analysis helps procurement teams service needs and find potential savings opportunities.

Payment and contract terms

In some cases, companies may improve cash flow and leverage by adjusting payment net terms (the time between purchase and repayment) and conditions of a supplier contract. By analyzing this data and negotiating term extensions, you can lower your periodic liabilities and improve the capital efficiency of your cash.

It also allows you to compare price and terms analysis against industry benchmarks to gauge your current contract performance.

Example of a spend analysis project

An excellent example of a spend analysis application is when a parent company has multiple locations. Franchises, for example, operate identical business locations across a regional or national network. Leveraging standardization and optimization in supply chains ensures optimal financial and process performance for these companies.

Let’s look at one such type of business: a gym chain. In many cases, individual locations are responsible for ordering and maintaining supplies. While this means each site gets the supplies it needs to run the business, it can introduce process efficiencies, low visibility, and loss of leverage for the business as a whole.

A spend analysis project for this example of a gym brand might proceed as follows:

1. Data discovery

The finance team pulls in all data from its locations for a similar period (for instance, the previous year or quarter). It organizes the data from each location to look at the entirety of the procurement process.

2. Location comparison

The finance team then attempts to make an apples-to-apples comparison of performance and spending at each location by asking questions such as:

What is the total spending at each location for major categories such as rent, equipment, supplies, labor, marketing, and maintenance?
What is each location’s spending relative to its membership, geographic location, etc.? For instance, a location in a rural area may spend far less on building rental than an urban location but also attract fewer members.
Which vendors are contracted for common supplies such as towels, cleaners, consumable products, etc.? Are there overlapping vendors offering similar products, and is there an opportunity to consolidate vendors?

3. Process comparison

What is the order process for locations? Do all locations follow the same requisition and approval process for buying? If not, would streamlining these processes improve the purchasing experience and reduce maverick spending?

4. Logistics comparison

How does each location receive goods, and are there ways to centralize the order and distribution process for geographically close locations to optimize the supply chain in these areas?

5. Contract consolidation

Based on the spend analysis review insights, the finance team could start changing procurement processes to optimize spending and delivery. One area that’s often prime for adjustment is consolidating the vendor pool. The team may look for vendors that can service the needs of every location, provide backups or similar products in case of backstock, and offer better volume pricing by ordering for multiple locations. Streamlining vendors and contracts can yield considerable savings.

Viewing the business through these lenses allows the finance team to make better decisions about each location’s budget allocation, the vendor relationships necessary to cover its needs, and which process improvements could make each location run more efficiently. These exercises often help Finance balance allocation in a way that assists lower-performing locations in being successful.

3 Best practices for better spend analysis

Now that you know the basic steps and types of spend analysis, use the following best practices to refine your procurement spend analysis program:

1. Start with a strong process

As with most finance objectives, the spend analysis process is foundational to success. When implementing spend analysis techniques in your business, begin by identifying a repeatable, transparent process for collecting and reporting on data.

This begins well before the data-creation stage via a strong approval workflow. Start your process at the purchase requisition stage to prequalify all spending and set standards for how and when money will be spent.

The process should also include a reliable means and method of data collection. Without a way to ensure all data gets captured, reporting lacks integrity.

2. Enlist a champion

Spend analysis projects are in-depth, multi-departmental efforts. Creating a point of contact or a project owner role for the spend analysis program is vital to ensure project completion.

This person is responsible for collecting data sources, collaborating with vendors and internal stakeholders to gather information, and acting as quality control for incoming data. The stakeholder should have all the necessary tools to organize data in a transparent and accessible manner.

3. Use data to strategize solutions

Once spend data has been collected and analyzed, the real work begins. From the insights gathered through the preparation stage, you now have the power to make changes to spending and curb areas of unnecessary spend.

Use real-time data to guide how spend categories are prioritized, which departmental spend numbers are achievable, and what strategies are needed to streamline vendor lists and take advantage of volume discounts. Determine a plan for taking action on revealed insights.

Why spend analysis projects fail

Spend analysis relies on consistency and accuracy across an organization. Many ineffective spend management practices falter due to common issues, such as:

Lack of process: Without a reliable process, data integrity is destroyed by maverick spending and missed data collection. Build a consistent procurement process with an intake or purchase requisition, approval workflow, departmental checklist, payment, and reporting process. Document this process and educate stakeholders on its use to ensure adherence.

Inconsistent data collection: Spend analysis only works if all the data is collected in one place. In many cases, data stashed in siloed and decentralized systems is overlooked. The best solution is to use a centralized system with integration to collect data from every system and data source.

Manual administration: Manual data entry and spreadsheet-based tracking practices open the door to missed data, errors, and inconsistent reporting. In most cases, purchasing programs contain too much data for effective manual processing. This is why 73 percent of respondents to a Deloitte survey said their organizations are now on a path to intelligent automation. Using a spend analysis solution instead of Excel eliminates the backlogs, delays, and errors that reduce the value of your spend analysis process.

How Order.co improves spend analysis

Keep track of indirect spend with procurement software solution to eliminate the issues most likely to derail your spend analysis efforts. Using Order.co, your organization can automate many manual processes and create effective guardrails for purchasing.

The integrity of a procurement solution ensures that your data serves as a source of truth for reporting and analysis projects.

Create a well-documented, easy-to-follow process for buying and approving purchases
Automate purchase order creation, catalog curation, strategic sourcing for purchases, invoice processing, payments, and analysis
Integrate your data sources into all major financial systems to facilitate the larger planning, budgeting, and forecasting process
Use dashboards and visualizations to produce useful reporting for stakeholders at every level

If your organization is ready to create a modern spend analysis program with cost reduction, increased savings, and streamlined purchasing, request a demo of Order.co.

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