Spend analysis: the ultimate guide

In today’s world of dizzying competition and lightning-fast change, you may only have moments to seize an opportunity or spot a risk that could be a game-changer for your company. To pivot quickly and make rapid business decisions, you need confidence—you need to feel like you have reliable intel to back you up and give you a clear view of your situation. That’s where the process of spend analysis, and the spend analytics tools and methodologies that support it, comes in.

Not only does spend analysis provide key insights about your past expenditures, it also provides the basis for analytics tools to forecast spending patterns and make strategic predictions for future planning.

According to a recent report from The Economist Group, about a third of C-suite respondents cited spend analytics as a top priority for the coming year. Powerful spend analysis tools, especially those incorporating AI-driven capabilities, are crucial for navigating modern complexities and empowering you to optimize your business and procurement operations.

By systematically reviewing and analyzing disparate data sets, spend analytics solutions and practices can help you uncover inefficiencies, negotiate from a stronger position, and build better relationships with your suppliers.

What is spend analysis?

Spend analysis is the data-driven process of collecting, cleansing, classifying, and analyzing complex expenditure information. Its goal is to help you meet key objectives, such as lower procurement costs, greater efficiency, and higher compliance. At its core, it addresses some questions that help you better understand and optimize your spending:

• What are we spending money on?
• How much have we paid?
• Who are we buying from?
• Is there a better way to do this?

Historically, spend analysis was a labor-intensive and manual process. Procurement teams had to sift through disparate data sources and spreadsheets, often missing opportunities or risks. But fortunately, today’s AI-powered spend analysis tools automate these tasks and provide on-demand data insights. This streamlines the integration and standardization of data from multiple sources and makes it easier to analyze the information in real time—helping you make intelligence-based decisions that improve business results.

Spend analysis process

While the spend analysis process may vary to reflect a company’s unique needs and challenges, it’s nonetheless a structured and systematic undertaking that relies on access to continually updated reports and datasets as well as robust analytics. Here’s how a typical process works:

Capture direct, indirect, and services spend data

This includes capturing data from different systems across your business, including ERP, accounts payable (AP) systems, e-procurement platforms, expense management systems, and business units. Information for both direct spend (such as raw materials for production) and indirect spend (office supplies and utilities) must be gathered to provide a complete picture of the organization's expenditures.

Cleanse, de-dupe, and enrich data

Once data is collected, you can cleanse and standardize it to make it useful. This involves unifying formats, eliminating duplicates, and handling any blank fields. You can then enrich the information with further data points such as credit score numbers for each supplier.

Categorize all spend data

After cleansing, you must categorize your data into standard spend categories. This step involves creating a logical taxonomy that groups similar types of spend, making it easier to analyze and manage. Category management can include direct spend categories like raw materials and indirect spend categories like IT services.

Merge with external data

Integrating external data with internal spend data provides a more comprehensive analysis. Modern software solutions enhance this process by allowing for customized data mergers and reports to deliver findings that would not have been possible with manual systems from the past.

Transform raw data into actionable insights

With the application of analytics and predictive modeling, you can quickly and more accurately identify trends, forecast future spend, and uncover opportunities for cost savings.

Identify risks and opportunities for cost savings

You can then analyze your transformed data to identify potential risks, such as supplier dependencies or compliance issues. This process also reveals opportunities to cut costs by highlighting areas of inefficiency or overspending.

Use insights to empower end users

Data is knowledge, and knowledge is power. The customized information and reports available today can provide some game-changing insights. But ultimately, people must take responsibility to act on them. In this last important step, it’s essential to ensure that you are sharing (with the right teams) your findings and access to critical intelligence.

Benefits of spend analysis in procurement and across the business

Thanks to increased visibility and intelligence, spend analysis makes it easier for your procurement team to realize some of the following benefits:

• Lower costs: Spend analysis highlights savings opportunities and potential risks, helping you negotiate better terms, consolidate purchases, and switch to more cost-effective suppliers.
• Better risk management: Analyzing spend helps you identify overpayments or patterns that could indicate potential supply chain vulnerabilities.
• Improved strategic sourcing: Detailed insights into spending trends let you make faster decisions, negotiate from a stronger position, and better align your strategic sourcing processes with your cross-business goals and objectives.
• Streamlined procurement processes: Spend analysis helps you identify inefficiencies and bottlenecks. These discoveries can lead to process improvements, faster cycle times, reduced labor costs, and better procurement performance overall.
• Enhanced supplier relationship management (SRM): You can use insights into SRM and supplier performance to develop stronger partnerships and ensure your suppliers meet the standards and expectations you set.
• Optimized contract management: Adding analytics to the contract management process helps you see beyond the fine print to spot challenges and opportunities. These insights let you negotiate the best ongoing and renewal terms throughout the lifecycle of the contract.
• Ability to benchmark performance: Spend analysis allows your organization to benchmark performance internally and against industry standards, identifying best practices, setting targets, and driving continuous improvement.

Spend analysis example

By integrating spend analysis solutions, the powerhouse clothing brand American Eagle Outfitters optimized its spend visibility and compliance across multiple procurement categories. This allowed for quick access to detailed spend data, which helped the company maintain a high level of compliance with its procurement policies. Notably, American Eagle Outfitters consistently achieved an 80% target for PO compliance, translating into substantial savings.

Additionally, the integration of multiple source systems facilitated real-time spend analytics, allowing American Eagle Outfitters to identify and act on cost-cutting opportunities. This strategic use of integrated spend analysis solutions strengthened American Eagle Outfitters’ vendor relationships and enhanced its overall procurement efficiency.

What is maverick spend?

Maverick spending, also known as rogue spending, happens when your employees make purchases that bypass your procurement policies. With the ease of online buying, even B2B goods and services can increasingly be acquired by anyone with an internet connection. This type of spending can lead to many problems and risks, including higher costs, lost visibility, unreliable quality, and potential compliance issues if the buyer doesn’t stick to legal or regulatory requirements. It can also damage your relationships with preferred suppliers, who may not appreciate being sidestepped.

By setting up your spend analysis solutions to spot the trends associated with maverick spend—and by educating your teams about the risks of this practice—you can help protect yourself against the problems it causes.

Spend analysis metrics and KPIs

The best spend analysis solution can help you monitor various metrics and agreed-upon key performance indicators (KPIs) through real-time dashboards and reports. Such metrics give you a window into overall spend and performance across suppliers, categories, sourcing processes, pricing, and more. Here are some common KPIs used in spend analysis:

• Savings: This core, basic KPI measures the reduction in expenditure achieved through improved procurement strategies, better supplier negotiations, and more efficient processes. By tracking cost savings, you can quantify the financial benefits of your spend management efforts.
• Spend under management: This KPI refers to the total spend that is actively managed by the procurement team. It helps you understand how much of your expenditure is being controlled and optimized. Higher levels of spend under management indicate better oversight and more effective procurement practices. The metric ensures that all spend is visible and accounted for, reducing the risk of maverick spending.
• Supplier performance: You can compare metrics such as on-time delivery rates, defect rates, and compliance with contract terms to assess supplier performance. Regular monitoring sets a visible and agreed-upon bar and fosters stronger supplier relationships.
• Operational KPIs: Operational KPIs measure the efficiency of procurement processes. These can include metrics such as cycle time for processing purchase orders, the accuracy of order fulfillment, and the efficiency of invoice processing. Improving operational KPIs leads to more streamlined procurement processes and reduced operational costs.
• Payment terms: An often-underutilized tool, payment analysis examines the conditions under which payments are made to suppliers. This means assessing things like average payment days, early payment discounts taken, and compliance with agreed-upon payment terms.
• Employee KPIs: Employee KPIs measure the performance and productivity of procurement staff. These can include metrics such as the number of purchase orders processed per employee, the accuracy of order placements, and the level of compliance with procurement policies. Tracking employee KPIs can help you identify training needs, improve overall team performance, and boost the efficiency and effectiveness of the procurement function .

What to look for in spend analytics software

Cloud-based, AI-powered spend analytics solutions are essential to any serious procurement and supply chain strategy. Regardless of what stage you are at in your digital transformation journey, every step you take toward improving data integration, visibility, and accuracy will pay off in both the short and long term. Look for the following as just a few of the key features you should expect in your spend analysis software:

• Comprehensive data integration: The software should integrate with existing financial, ERP, and supply chain systems to consolidate all spend data in one place.
• Real-time dashboards and reporting: Look for customizable, real-time dashboards that provide quick insights into key spend metrics and workflow processes.
• Advanced analytics and AI capabilities: The software should leverage AI to transform raw data into actionable insights and predict future spending trends.
• User-friendly interface: Ensure you are getting an intuitive, easy-to-navigate interface that requires minimal training and works on both desktop and mobile devices.
• Scalability and flexibility: Choose software that can scale with your organization, integrate with new systems, and adapt to changing procurement needs.
• Robust security and compliance features: The software must include strong security measures and comply with relevant regulations to protect sensitive data.
• Customizable reporting and analytics: Select software that allows for the creation of bespoke reports and detailed data analysis tailored to specific needs.

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