Data & Analytics

The wider potential of analytics in procurement

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Updated: Sep 28, 2022

Spend analysis has been around for a long time as a tool for procurement organizations to make better sourcing decisions.

I could not find any definite sources on who invented spend analysis and when exactly, but it seems that the first applications of spend analysis have been conducted sometime in the mid-1990s.

These were most probably management consulting-led one-time spreadsheet efforts. At least this is how I got introduced to spend analysis in the early 2000s when working in a management consulting company.

During these 20+ years that spend analysis has been around, there have been a lot of technological advances as it has mostly moved from manual spreadsheets to SaaS solutions enabling process automation, usability, data quality, and frequent data refreshes.

However, the basic concept of spend analysis has stayed more or less the same: gather spend data and build a data “cube” for analyzing the spend data from supplier, purchasing organization, and category perspectives.

In recent years, analytics (along with big data, machine learning, and AI) has become one of the most hyped things in the business world. Data has been described as the new oil and the next big thing. However, few businesses have been able to realize the potential of analytics in practice.

This is also the case in the world of procurement and I see spend analysis as one major reason why.

 

Expanding the meaning of Procurement Analytics

The reason is not that spend analysis is somehow flawed in itself. Quite the opposite – a robust spend analysis is a valuable tool for any procurement organization. Of course, if your spend analysis is not well implemented and is not providing value, it can be very hard to see value in applying analytics in procurement in more general. If this is your problem, your first step should probably be to get your spend analysis fixed ASAP.

However, the main reason why I see spend analysis as being harmful to realizing the potential of analytics is something different: the problem is that that spend analysis is a well-established concept in the procurement software market that it is limiting the procurement community’s thinking regarding what analytics could actually mean for procurement today and in the future.

One simple way of looking at the procurement software market is to divide it into two major solution categories: Source-to-Contract (S2C) solutions and Purchase-to-Pay (P2P) solutions.

Spend analysis is placed into the S2C category as its main purpose is to provide fact-based data to support sourcing activities. This is how more or less all analysts and consultants describe the market and position spend analysis.

The problem is that when a procurement person thinks about analytics, they often default to the familiar concept of spend analysis and thus can’t think outside the (spend) cube.

Even if analytics is seen as more than just basic spend analysis, it gets placed into the S2C solution category because that is where the good-old spend analysis has always been. And thus by limiting our thinking, we fail to see the wider potential of analytics in procurement.

 

The wider potential of analytics in procurement

But what is then this “wider potential of analytics in procurement”? What should the greater vision of analytics be for procurement?

I can give you at least three areas where analytics can be applied to raise your procurement to a new level:

  1. First, analytics should help you to understand and influence your total spend, identify opportunities, deliver savings, source and collaborate effectively, manage risks, and enable sustainability. This has much in common with basic spend analysis, but with advances such as integrating market and other external data, taking into account category-specific requirements, and building forecasting capabilities.
  2. Second, analytics should give you data and information to drive the development of your procurement organization, systems, and processes where it matters. In this light, it is easy to see why analytics should not be categorized as an S2C solution but as something that can help you get better in all your S2C and P2P activities.
  3. Third, analytics can help you to become a critical and credible contributor who communicates and collaborates effectively with business stakeholders. This means you need to go beyond procurement metrics and language and deliver something that your business stakeholders understand and that can help them become more competitive.

Photo by Lucas Ludwig on Unsplash

Matti Sillanpää

Matti is a Co-Founder and a former Product Manager of Sievo.

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