Spend Analysis 101:
Basic Guide to Analyzing your Spend
Welcome to Spend Analysis 101.
To know how money can be saved and where opportunities can be realized, it is important to start with knowing how the money is spent. In this guidebook, learn the fundamentals of Spend Analysis.
What is Spend Analysis?
Spend analysis is one of the key tools that procurement organizations use to proactively identify savings opportunities, manage risks and optimize the organization’s buying power. It is often regarded as the fundamental foundation of sourcing. It is a tool that sourcing executives can utilize to engineer superior performance. Data from spend analysis can improve visibility into corporate spend, as well as drive performance improvement, contract compliance, and most importantly, cost savings.
Analysing procurement spend provides data that can be used as a baseline to measure improvements, and to also provide reliable data for deciding strategies to realize short and long term savings. As procurement moves to a more strategic function in the company, spend analysis is its fundamental strategic technique which establishes a parallel process that guides senior leaders and budget holders in maximizing value for the organization’s dollar.
The process of spend analysis involves pulling together purchase history data to answer and assess the who, what, when, where, why, and how of an organization’s expenditures.
- What are we buying?
- Who are we buying it from?
- Who is buying it?
- How often do we buy?
- When did we buy it?
- How much did we pay?
- Are we getting what we had been promised?
- Where were the items delivered to? (geographical location)
- How does the data compare from previous years?
Sources of Spend Analysis Data
Here are some of the most common sources of spend analysis data.
- internal systems
- purchasing card files
- archiving EDI information
- supplier networks
- banking data
- group purchasing organization information
- trade financing archives
- ERP tools
- general ledger information
Spend Analysis KPIs
Data can be analysed using relevant parameters or Procurement KPIs.
- spend and number of transactions per commodity or category
- number of suppliers per commodity or category
- average purchase order value
- total expenditure per supplier
- transaction distribution by dollar range
- spending distribution between main clients
- spend and number of transactions per procurement officers
- number of procurement officers involved in the transaction per commodity group
- key figures and reports regarding compliance (e.g. Maverick Buying Quote)
- material prices or material price changes
- payment terms and conditions
Spend Analysis vs Spend Visibility
Spend analysis is often viewed as part of a larger domain known as spend management. There are three core areas of spend analysis: visibility, analysis and process. Visibility in the spend management area refers to the ability of an organization to have a comprehensive view of the metrics that drive improved cost savings, process efficiency and supply-chain performance. Specifically, spend visibility enables analysis of past spend for planning future direction and monitoring for compliance issues.
Spend visibility goes beyond tracking spending as it gives both a detailed and holistic picture of how money is moving through your company. Within the process of collating, cleansing, categorizing and analyzing expenditure information, spend analysis provides consistent spend visibility information on suppliers, spend and compliance.
To understand more, say you’re a CEO of a mid-size company, with about 300 employees. Let’s you’ve run out of papers and pens. Will you still place more orders them when your budget for office supplies is on the verge of maxing out? You need to determine what portion of your budget for office supplies has already been spent, and if more can be spent without exceeding the budget.
Without spend visibility — in this case, a real-time count of how much of their budget has already been spent — most companies would have ordered the office supplies anyway. They would find out later on that they exceeded the budget for office supplies after the finance publishes a quarterly report.
Spend visibility is the cornerstone of a superior procurement performance.It brings about knowledge into the core components of spend categories. Organizations with clearer spend visibility into their sourcing activities can utilize their reports and insights more to drive performance, and to make more informed business decisions. Real value is achieved only when visibility is gained into spend.
Spend Analysis Benefits
Organizations with spend analysis have reaped benefits in the areas of cost effectiveness and process efficiency. Here are some benefits of having an efficient spend analysis solution:
- Get a comprehensive visibility into all corporate spend and improved data quality.
- Identify savings opportunities and realize incremental savings.
- Streamline and centralize procurement process and other administrative efficiencies.
- Manage risk and maverick spending to ensure compliance.
- Evaluate supplier performance for better relationship management.
- Benchmark internally.
- Leverage spend data across business units.
- Work collaboratively with other organizations.
Get a comprehensive visibility into all corporate spend and improved data quality.
The key benefit that spend analysis can provide to an organization is heightened visibility and actionable spend intelligence. Spend analysis offers an organization greater transparency into the amount of money it spends purchasing materials and services. It allows the procurement organization to have a look into the core of their expenses and purchases. Data accuracy and consistency can only be achieved if organizations take full advantage of spend analysis. Quality and depth of analysis improves over time. It does not only give them a more effective way to collect, store, and manage the enormous amount of data they have but also provide a deeper understanding that can be used to develop initiatives and make confident spending decisions.
Identify savings opportunities and realize incremental savings.
As a sourcing manager, one reason why you want to conduct a spend analysis is to meet your cost reduction goals. When all the numbers have been crunched, the resulting metrics will show the spending patterns and the potential savings in several categories. Depending on the reports conducted, purchasing managers may then be able to cut costs through the use of alternative products, supplier consolidation, and merging products that were purchased separately into contractible groups. Price reductions can be achieved through contract buying, improved contract compliance, and reductions in maverick spending. Organizations can also achieve additional savings on indirect items ranging from office supplies to temporary staffing, contractors and consulting services.
Streamline and centralize procurement process and other administrative efficiencies.
Organizations with spend analysis have reaped benefits in the areas of cost effectiveness and process efficiency. The whole process will vastly improve, from financial reporting to budget preparation if there is a detailed information organized around multiple dimensions. A more productive and efficient procurement function conducting spend analysis will build deeper relationships with fewer key suppliers and need fewer employees for unnecessary delegated tasks. There will be a significant reduction in cycle time for creating reports and ad-hoc analyses therefore reducing labour costs or reassignment to more productive work.
Manage risk and maverick spending to ensure compliance.
When you spend data is enriched with information on your vendors annual revenue and credit scores, you can better assess the overall supply chain failure risk of your organization. A good spend analysis data will allow you to track and identify suppliers who have non-contracted spend as well as spend with non-contracted vendors. You can identify the categories of spend where there may be too many suppliers with no contract in place. The risk in the contract is reflected in the pricing, and that can be from a lack of orders being made or in not being able to scale up fast enough to deliver the volume of goods and services required. The reduced contract risk to the vendor often translates into lower costs. Contract compliance information is crucial as the bridge to savings, while enriching spend data with supplier risk information helps the organization in utilizing spend data to avoid supply chain disruptions.
Evaluate supplier performance for better relationship management.
The starting point for superior procurement performance and supplier relationships is information. Spend analysis provides insights and knowledge into their potential value for improved supplier relationships. Once the organization determines which suppliers offer the best value, it can work with them to establish more evolved procurement processes and inventory programs. Procurement professionals can peer into the performance of their suppliers to encourage proactive supplier development. At the same time, it can root out non-performing suppliers and help boost contract compliance by monitoring pricing on a continuous basis. Scorecards help evaluate suppliers and vendors by capturing metrics that evaluate performance. Having a comprehensive spend analysis gives more information on the amount of money an organization spends on purchasing materials and services, and to which suppliers it spends the most. This information is useful on contract negotiations and can be used to maximize the money the organization spends on procurement. When successfully implemented, this would leave an organization with fewer suppliers that it can work with to attain greater value from their suppliers and establish a more efficient and leaner procurement process.
Having spend analysis gives you the opportunity to benchmark your performance internally across business units in different locations. It could measure how much is spend on office supplies globally. This paves way to meaningful comparisons that can be used for strategic decision-making. Collecting and organizing spend data together in one place enables you to answer a wider range of questions such as the average number of vendors or spend by category, and which vendors are generating the highest aggregate revenues. Understanding this is crucial to set targets for improvement that are realistic and achievable.
Leverage spend data across business units.
Data extracted and analysed in spend analysis systems plays a major role in the strategic planning of the procurement function. However, other internal business units are also currently leveraging spend analysis to achieve their business objectives. The finance department can leverage spend analysis in the vein of the procurement’s main goal: gain a better understanding of corporate spend. Finance professionals can leverage spend analysis systems to analyze data from purchasing card, invoice, requisition or invoice sources as a means of generating more accurate accounting reports.
Work collaboratively with other organizations.
Each individual organization should develop their own blueprint to deliver savings and efficiencies but working with a group can help generate a more powerful strategic plan. A collaborative spend analysis project will provide the group the visibility to plan the most effective time to carry out a joint competitive solicitation for a commonly procured good or service. Having a firm understanding of which members of the group are buying those goods or services already can go a long way towards delivering savings and efficiencies for all involved. If you have all your spend data in one place, and in a format common to other organizations, it becomes much easier to consolidate your data together. This generally has the effect of making your collaborative efforts more strategic. Quickly being able to identify those common suppliers, common categories, and opportunities to collaborate can lead to dramatic savings opportunities. A collaborative spend analysis provides a proactive conversation and strategic discussion.
How to do Spend Analysis
There are a number of steps to conduct spend analysis.
Step 1- Determine and Identify
Step 2- Gather and Collect
Step 3- Validate and Cleanse
Step 4- Enhance and Enrich
Step 5- Classify and Categorize
Step 6- Analyze and Estimate
Step 7- Validate and Repeat
Determine and Identify
To start a spend analysis, the first step is to scope the spend so that you can narrow down the things you need to buy from thousands to just a manageable few. You can segment your spend into groups, or by materials. From here, you can determine all the sources available for your spend data, from all of your departments, plants and business units. Start by identifying the areas of your business that purchase items such as procurement, finance and marketing.
Gather and Collect
Once you have narrowed the scope down, you can now capture your spend data and consolidate all of it into one central database. Data is usually in different formats, different languages and different currencies, so collecting it into one a single source might be challenging, but there are programs available to make this step easier.
Validate and Cleanse
Cleansing is about detecting inaccuracies and removing corrupt records and redundancies from a set of data. This includes finding and eliminating errors and discrepancies in descriptions and transactions to ensure its accuracy. Through data cleansing, you can identify which contacts in your database are incomplete or irrelevant. Typographical errors are removed and missing codes are validated and corrected for up-to-date information.
Enhance and Enrich
Spend analysis is the basis for every procurement department but is only viable when data is enriched. Data enrichment applies to the process of enhancing, refining, and improving raw data. It also includes standardizing the spend data for easy viewing. Enriching the data makes sure that all the header and line-level names and details are accurate and to a specific naming standard. Data is often missing specific fields and misspellings and abbreviations are common — as are incorrectly coded fields.
Classify and Categorize
Group your suppliers for better supplier management. Purchases made from Microsoft like Microsoft Tools, Skype, Surface should all be grouped together, since they’re the same supplier. At the same time, categorize the data into meaningful groups (for example: marketing, office supplies, software) to identify how and where the business is spending its money. Unifying heterogeneous spend data into clearly defined categories makes them easier to address and manage across the whole organization. Classification is about harmonizing all purchasing transactions to a single taxonomy enabling customers to gain visibility to the global spending in order to make better sourcing decisions.
Analyze and Estimate
To ensure that you have negotiated the best contract deals per supplier, analyze your data, Check if all of your buyers are purchasing from preferred suppliers. With this, you can identify opportunities of reducing the number of suppliers per category and negotiating better rates. . After confirming the estimates were calculated correctly, analyze in detail to determine the best possible method for cost savings and develop an action plan for each of them.
Validate and Repeat
Validate your savings and know how much of it was realized. See if what you estimated as potential savings were actually realized. Then repeat. Doing a spend analysis once is a great start to identify savings, but there should be a continuous process of updating your data to ensure that contract terms are being adhered to, that buyers are purchasing from preferred suppliers and that savings opportunities are being identified.
The spend cube is a review of procurement spend data presented as a multidimensional cube. It refers to the three dimensions of the cube – Suppliers, Corporate business units, and Category of item. The dimensions usually reviewed include: sub-categories or variants purchased across the organization, stakeholders or departments buying the category and comparative spend with different suppliers. The contents in the cube are the price and volume of items purchased.
The spend cube is typically the ﬁnal output of the spend analysis process. It allows you to look at all of the analyzed data from a variety of angles. If a company is not managing 100% of expenditures across all locations, business units, and divisions, then there needs to be a spend cube analysis.
The 3 axes represent Category (What you are buying), Cost Center (Who you are buying it for), and Supplier (Who are we buying it from). These are the 3 legs of the stool – if any one leg is not there, the entire model falls apart.
Each axis of this cube contributes critical information. Category analysis tells what specific types of goods and services you are. Cost center analysis tells you which internal business groups or individual customers (end users) are the ones driving the demand. Supplier analysis tells you which suppliers are getting the money today. This is important because you might find the expenditures highly spread out instead of aggregated, or you might find out that many vendors have multiple concurrent contracts in place with your company.
Once you’ve got this data together, you can set your strategies. You can slice and dice data to analyze it from many different directions. This ensures that you have just one sourcing strategy and not hundreds. Getting this data at hand lets you decide which high spending end users to align with, and which suppliers you want to target for renegotiation.
OLAP (Online Analytical Processing), is the traditional approach used when sources are scarce. It performs multidimensional analysis of business data and provides the capability for complex calculations, trend analysis, and sophisticated data modeling. As the foundation for many kinds of business applications, OLAP enables end-users to perform ad hoc analysis of data in multiple dimensions, thereby providing the insight and understanding they need for better decision making.
The OLAP engine is the core feature of the Spend Analysis module. It is the enabling technology that provides answers to the most analytical questions in spend analysis and enables users to easily extract and view data from different points of view. The OLAP capabilities of your spend analysis vendor can be categorized based on whether the product is endowed with its own OLAP engine or it relies on third-party analytical services- and therefore it solely acts as a presentation layer on top of the third-party OLAP engine.
The key feature of OLAP is that it provides a multidimensional, conceptual view of the data, including full support for hierarchies and multiple hierarchies. This allows users to analyze database information from multiple database systems at one time. A multidimensional database considers each data attribute (such as product, geographic sales region, and time period) as a separate dimension. OLAP software can locate the intersection of dimensions and display them. The information can be compared in many different ways. Moreover, attributes such as time periods can be broken down into sub-attributes.
Types of Spend Analysis
Tail Spend Analysis
Tail spend is the spend in any organization that is not actively and strategically managed in all the spend categories. It is the place where procurement organizations may be leaving money and utilizing their resources inefficiently because it is usually least focused. Though it is generally considered as low-value purchasing, as it contains a small portion of the spend (usually 10-20% under each spend category), it is a significantly important area of any organization’s spend management. Because large number of suppliers are accounting for it, it has an impact on the company’s financial performance.
With companies making millions of purchases every year, there are those that are too small or too infrequent that often get neglected. Procurement teams invest heavily in their core spend areas, but the tail-end remains a largely untapped opportunity for most companies. There is a little understanding of how much money is involved in tail spend, hence less knowledge on how to manage it to realize the potential savings. This can lead to potentially losing millions of dollars annually.
Doing an in-depth spend analysis on tail spend helps encourage compliance and identify maverick spend, which refers to non-compliant transactions. The most common way of doing this is carrying out a traditional spend analysis, and then ranking the suppliers based on annual spend. The smaller suppliers that add up to around 20% of total spend are defined as the tail.
The figure above illustrates the simplest approach to analyzing a company’s tail spend, which is calculating the ratios of spend to suppliers at various points along the purchasing range. Here, the Y-Axis represents spend per supplier while the X-Axis represents the total supplier base, with suppliers ranked in descending order of size from left to right.
Tail-end spend management has been growing recognition and increasing importance within procurement. Putting a significant effort on it can not only yield potential savings but can also reduce costs and get more spend under management. According to data compiled by The Hackett Group, better managing tail spend can lead to 7.1% savings on average. Increased visibility into tail spend also can help identify areas that should have already been strategically sourced. Segmenting the tail spend away from strategic sourcing managers and aligning dedicated resources with the right tools and capabilities are the best steps in managing tail spend.
Organizations successful at managing tail spend segment the tail spend away from their strategic sourcing managers and align dedicated resources with the right incentives, capabilities, and tools to attack the tail.
Vendor Spend Analysis
Vendor spend analysis is identifying how much of the spend comes from the critical vendors. It allows one to create a detailed spend profile for each vendor using the historical consumption data. Knowing this can help one focus on getting the best value from these preferred vendors and consolidating the relationships.
A vendor type report collects spend based on the vendor, and gives users the ability to select a comparable year and a review year. Spend data is optimized by identifying opportunities for consolidation and enhanced compliance. It helps visualize spend insights in several ways- by vendor, category, geography, etc. and enables multi-faceted analysis for data-driven decisions.
There are usually many low-value transactions with multiple vendors across many business units. The total number of one-off and small value vendors is usually big. Knowing this can help in about streamlining and leveraging spend by identifying contract leakages and maverick spending. The aim is to reduce the number of vendors in each category. In the chart below, you can see what portion of the spend is with your core vendors.
Every dollar spend is important and savings opportunities can be missed through off-contract purchases. Vendor spend analysis will facilitate the identification of purchasing trends, buying patterns as well as monitor utilization and spend consolidation of key strategic suppliers.
Category Spend Analysis
The first step in doing a category spend analysis is understanding the scope and breadth of the category. Are you buying the similar good and services from too many different vendors? This analysis is built on hierarchies and spend transactions are categorized into the most appropriate category. The reporting allows one to explore the spend in the defined spend category hierarchy, which in turn allows you to identify spend leakage issues.
Allocating spend consistently into categories makes the data easier to navigate, interpret and understand. When organizations can focus on prioritizing their top spend categories, this helps them identify and forecast savings opportunities. Prioritization will allow better negotiations for key spend categories to ensure more favourable contracts and pricing. By drilling into their spend data, procurement professionals are also gaining a deeper understanding of their spend categories.
When you have a high-level overview of spend by category, it is easier to identify categories that help in delivering savings and which projects bring strategic importance to the organization. With this, you can easily figure out which action to take based on what gives the most impact on staff or operations, and what are the risks associated. Access to detailed information on spend by category gives you the data to determine priorities and resource allocation that will deliver the highest return on investment for the level of effort required.
Item Spend Analysis
Item spend analysis refers to analyzing expenditure at an item/ SKU level. It takes into account every individual purchase, classifying each one of them to identify what department it was for and what supplier was used. The analysis enables to explore situations where the same item is being purchased from multiple vendors, at different unit prices, by different geographies or different branches of the business. Doing this analysis can highlight the different ways of purchasing in the business and potentially identify spend leakage issues such as purchasing from non-preferred vendors and maverick spend.
Payment Term Spend Analysis
Payment spend analysis provides excellent insight for companies to analyze payment practises and terms within their P2P processes to identify issues such as unrealized discounts through late payments of invoices. It utilizes the data and give a comprehensive information to identify unrealized interest from early payments of invoices. It explores the opportunities of leveraging all possible discounts or interest from the invoice payment process. It also covers the review of payment patterns so a company could identify practices and activities that are not done properly.
Contract Spend Analysis
This spend analysis tells companies if they are complying with their existing negotiated contract terms. It analyzes spend with vendors by contract to identify spend leakage through non-compliant contracts. It ensures that the best contract deals per supplier have been negotiated and that all the buyers are purchasing from preferred suppliers.
Spend Analysis Tools
Spend Analysis in Excel
Microsoft Excel, traditional, is an excellent tool to make powerful dashboards that can provide analysis, insight and alert managers in timely manner. Many people use Excel to analyze spend data but fail to do in the most effective and efficient way. Accounts payable or the general ledger usually have company spend data categorized by supplier or by product name and spend size. This data can easily be placed in an Excel spreadsheet to provide an overview of the company’s spend structure and to understand which part of supply chain needs to be prioritized.
While doing spend analysis on excel is doable, there will still be a lot of issues that most organisations will encounter. For example, excel is not scalable for spend data in the hundreds and thousands of rows. Challenges like over generalized classification, data inconsistencies and data formatting issues, same supplier different names, regional settings causing inconsistency like decimal delimiters will cause a normal analyst to do more data cleaning work than actual data analysis. Say you’ve been able to do all this properly and you’ve spent 2 days in a month doing it, you will then need to update the data and classify new data the next month which will not be scalable. There are solutions in the market that have developed this into actual science and the service is provided as a cloud solution.
By leveraging manual spend analysis processes, like Excel and Access-based tools, organizations fail to execute on the repeatable process that spend analysis automation enables. Manual processes for this function also lack timeliness and speed of data updates and refreshes, as well as present the risk of limited reporting and analysis capabilities. Without the ‘slice-and-dice’ allure to many spend analysis systems (presenting the ability to cut spend data in myriad ways for efficient analysis), the reporting process of the spend analysis function is limited.
Pros and Cons of using Excel in Spend Analysis
|Spreadsheets are the comfort zone, inexpensive and with templates and formulas to aggregate data||Spreadsheets are time consuming and users are spending a significant amount of time collecting data|
|Spreadsheets are proficient in documenting and reporting very simple stand-alone requirements||They become exponentially difficult to manage when multiple compliance sets and multiple locations are involved|
|It is easy to create data collection tools and simple to create charts||They are not designed to record an audit trail of accountability and struggle to assign owners to processes|
|No need to extract data from external systems, all data are right at your fingertips||They do not deliver automated workflow driven processes and require manual intervention to deliver reports that are more prone to error|
|Using Excel, reporting is usually easier and more hassle-free||This is not a secure process due to people using email to send to others for updates and creating different versions of the spreadsheet|
Spend Analysis with BI Tools
Business intelligence can help companies to better control costs and align expenditures with revenue. One focus is the spend analysis because it provides the visibility and insights needed to pave way to many cost reduction and improved procurement performance
Microsoft Power BI
Power BI (Business Intelligence) is a suite of business analytics tools to analyze data and share insights. It is a cloud based data analysis which can be used for reporting and data analysis from wide range of data source. Power BI dashboards provide a 360-degree view for business users with their most important metrics in one place, updated in real time, and available on all of their devices. With one click, users can explore the data behind their dashboard using intuitive tools to make finding answers easier. With hundreds of connections to popular business applications, and with prebuilt dashboards, doing analysis is simple and quick.
Power BI, with all its portals and applications, can unify all of your organization’s data. With better data management and access companies can get the visibility and insight they need to improve procurement performance. These are some questions that can be addressed:
- What materials has the procurement organization purchased this period? In what volumes and for what prices? How has that changed over time?
- How many vendors have we purchased from this year? On average how much is spent per vendor in a specific period?
- How many transactions are performed for various stages in the procurement cycle?
- How many requisitions, contracts, and purchase orders are processed across the organization by buyer? What is the average value of each transaction?
Image source: Microsoft Dynamics
Tableau is an industry leading business intelligence tool that focuses on data visualization, dashboards and data discovery. As a leader in the Gartner magic quadrant for the past couple years, it is an interactive tool that provides side by side analysis of spend data with tons of visualization possibilities. It is very simple for non-technical people to easily create customized dashboards that provide insights that can be used for company strategies. With its easy user-friendly interface, drill-down capabilities and intuitive way of working with data, it transforms the way people use data to solve problems. It also comes with real-time data analytics capabilities and cloud support.
Who are your most profitable customers? What are they buying and how much do they spend in different categories? Those are the kinds of relevant questions you can ask and answer easily with Tableau. You can look at sales by region, segment, category, and year with just a few clicks. Hover over data to see the details instantly. With dashboards that are this easy to understand, everyone in your organization can make more data-driven decisions.
Image source: Tableau Business Intelligence
QlikView is a Business Intelligence (BI) data discovery tool for creating guided analytics applications and dashboards tailor-made for business challenges. Exposing data that is not found in query-based tools, the software enables user to uncover data insights and relationships across various sources. Because it offers guided and collaborative analytics, even non-professional users without IT skills can build and deploy analytics apps easier and in shorter time. This results to a faster response in changing business requirements and driving more insights across the organization.
A flexible platform, the tool consolidates data from multiple sources to provide centralized data for high level reporting. The intuitive click through dashboards makes it easy for users to understand hidden trends and gather insights from them. With Qlikview, possibilities are endless for making adhoc queries because it does not require tedious defined structures and hierarchies. Effective and accurate decisions are made faster with the right and easily accessible information available.
Image source: Executive Dashboard Best Practices
Pros and Cons of BI Tools in Spend Analysis
|Data visualization is easier, quicker and nicer||Data security is questionable|
|Manage big data in real time||People can see different conclusions from the same data|
|People can go ‘hands-on’ with the data||There might be a need for multiple BI applications|
|More possibilities for customization||More expensive|
|Many solutions available today that can let you operate at a scale that is right for your organization|
|The platforms usually give content developers and line-of-business analysts a more rapid approach to defining, executing and saving queries|
Spend Analysis Reports
Here are some data visualization techniques:
Pivot tables are a convenient way to build intelligent, flexible summary tables. You can look at the same information in different ways when analysing large amounts of data.
When you start nesting more dimensions into pivot tables, they tend to become very large and cumbersome. In this case, you can use a cross-tabular report, which shows the same information but with dimensions both as rows and columns.
Information in pivot tables and cross-tabular reports can also be presented in a variety of graphs, including several types of 3D-bar, 2D-bar, line, area, pie, box, plot and error bar charts.
Waterfall charts are usually not part of the standard charts, but are extremely useful in depicting information in a very simplified manner.
In spend analysis, Pareto charts are very useful in opportunity identification because they visually show the 80/20 rule; which refers to the top 20% commodities (or suppliers) that account for 80% of the spend.
Treemapping is a method of visualizing hierarchical data with proportionally sized squares. For spend analysis, this plot shows relative spending by the size of a block. Treemaps can be very sophisticated and interactive. They are also very powerful for visualizing the relative spend across a single dimension such as commodity, suppliers, etc.
A multidimensional repost is probably the most powerful type of interactive report. These reports show spend across all dimensions at the same time. The interactive nature of this report means that when the user drills into the cube, all of the dimensions refresh simultaneously to show the spend corresponding to the drill point.
A map report is a new type of chart that shows spend on a geographical map. Map reports are usually interactive, so clicking on a particular country or geography will open a specific chart into which the user can further drill.
Best Practices in Spend Analysis
Here are some strategies common among organizations with the most successful spend data management programs:
- Classify spend data at a detailed level and adopt a common classification schema in the company.
- Pursue a permanent solution versus one-time efforts.
- Have an automated approach to cleansing and classification.
- Access all spend-data sources within and outside the organization.
- Continuously improve and expand scope of spend data management program.
- Collaborate with IT and other key stakeholders like finance in the whole process.
- Define category strategies and measure impact.
- Take actions based on data insights to deliver savings opportunities/ savings program management.
Classify spend data at a detailed level and adopt a common classification schema in the company.
A spend analysis that is categorized at the item level is the most effective, as it provides visibility and allows comparisons of detailed attributes across suppliers and commodities. Aim for at least 95% accuracy. Higher-level classification has its own benefits, but item-level proves to be more effective as it gives a precise view of spending with each supplier and for each commodity. Organizations should adopt a common internal taxonomy or industry-standard classification schema. For example, UNSPSC provides a universally accepted metadata layer for organizing and controlling spend data. This standardization is key to driving accurate organization and correlation of spend data and to enabling actionable analyses. Often broader than internally developed classification codes, these standards allow organizations the ability to map all spend data to a single schema.
Pursue a permanent solution versus one-time efforts.
Using traditional, labour-intensive procedures and systems are not recommended due to the volume and complexity of spend data within an organization. External services usually provide a temporary solution, which requires the organizations to engage with the consultants on a continuous basis to keep data up-to-date. Outsourcing also limits the transfer of the process knowledge and expertise to the organization, leading to dependence upon consultants in the future. Adopting a more sustainable and standard procedure can help organizations get monthly refreshes of their spend data, and a more efficient operation of examining the spend categories.
Have an automated approach to cleansing and classification.
Automated spend analytics solutions capture data classification rules and attributes for a wide range of spend categories. Because of the self-learning abilities, these solutions can present what the sourcing experts know into the system. But there will be a need for commodity managers to classify exceptions from time to time. Establishing automated extraction routines to aggregate and refresh data on a regular basis allows accurate and repeatable spending analyses. Automation also increases the frequency of your analysis which is critical as the business environment is dynamic, with prices changing and contracts expiring all the time.
Access all spend-data sources within and outside the organization.
There are times when your vendors, suppliers or other affiliates have better data than you. Organizations that access spend data from all relevant sources can gather a more comprehensive and accurate idea of the total spending.
Continuously improve and expand scope of spend data management program.
Spend data is a work in progress. Continuously improve your spend analysis. Organizations should constantly look for ways on how to expand the uses and scope of spend and its data cleansing and classification capabilities. Conducting reviews will help identify immediate areas for improvement and illustrate the positive impact that a particular initiative has on performance of the organization.
Collaborate with other key stakeholders like finance in the whole process.
To achieve full potential savings, a collaborative partnership between procurement, and other business units must be created, and everyone should be held accountable for results. Leveraging spend data requires cooperation within the entire procurement organisation. When procurement and ﬁnance work together, they can create systems that reliably capture and deliver real cash savings to management. This in turn creates a loop for improving performance.
Define category strategies and measure impact.
Develop category plans aligned to the business objectives and key stakeholders with a strategic approach to maximize value, reduce risk and effectively manage the supply of goods and services. These plans should influence sourcing strategies and and initiatives. A careful review of these strategies will assess and confirm the business impact and determine if a revision or repetition is required.
Take actions based on data insights to deliver savings opportunities/ savings program management.
Procurement teams can provide valuable data that inﬂuences what a company buys and how it buys. With the data on hand, there should be necessary steps to unlock the potential of these insights. The ideas generated must be implemented into actual strategies that will drive savings to the bottom line. Act on these strategies and make sure that they will be translated into savings opportunities.
Why Spend Analysis Projects Fail
There are organizations tackling the problem of spend visibility. Several projects tend to fail in delivering the value that was expected initially, despite the significant need that the organization had for effective spend analytics. Here are some reasons why spend analysis projects fail:
- Poor quality data/ dirty data
- Complex and labour-intensive cleansing and classification process
- Leaders without data-driven mindset
- Lack of plan results to unrealistic expectations, unclear goals and misplaced priorities
- Wrong tools or having too many tools to choose from
- Lack of skills and user competence
- Fear of losing relevance or control of data
- Limited analytics solutions
- Spend analysis as a one-time effort
Poor quality data/ dirty data
The most common reason why most spend analysis projects fail is because of the poor quality of data. There are times that suppliers have better data than the systems the organizations can provide. Many organizations spend 80% of their time cleaning up data. Common examples of dirty and inconsistent data include basic hygiene issues like misspellings and empty data fields which can interfere analysis. The detailed information needed for effective spend data classification and analysis is often found in unstructured data within ERP and other business systems. The information is often rife with errors and discrepancy in different departments or missing critical data fields, such as supplier name, product attributes, or account codes. Part/item descriptions for the same category might vary significantly, words will be abbreviated, supplier names misspelled.
Complex and labour-intensive cleansing and classification process
For most large organizations, classifying the billions of dollars of spend is not easy. The problem is not just in volume, but also in the fact that the data is extremely immense to the point that it could take years to properly classify all of the spend. But this granularity is required to achieve the necessary business actions that generate value. Some methods to overcome this problem has been proven not effective, like classifying spend data at the highest level commodity class. This, however, provide insufficient insight and often inaccurate analysis. One method collaborates with humans, but it is also not sustainable as the tremendous efforts exerted would require repetition of the process frequently and this would render the newest data out-of-date. No solution will give you 100% classified data all the time. The key thing is to build in appropriate checks and balances so most errors can be caught and corrected immediately. Making sure that this is done consistently will maintain trust in the data and in the classification process, and enable the data to be used consistently for ongoing decisions.
Leaders without data-driven mindset
The leadership team also has a role to play in why some spend analytics projects fail. There’s a lack of agility and continuous involvement or sponsorship by executives in the analytics process. Many business leaders trust the more familiar way of doing things. Instead of basing their decisions on actionable results, they want to review the old fashioned way which is a time-consuming process. At the same time, the top management has little knowledge of how to maximize and link the insights gained from spend analysis with the strategy and objectives of the organization. The solution to this is to adopt a more lightweight approach. This does not necessarily mean the management team needs involvement all the time but there has to be periodic, short feedback loops. Letting them know of the progress will ensure they see immediate, incremental results. Getting them in the loop drives greater engagement.
Lack of plan results to unrealistic expectations, unclear goals and misplaced priorities
Part of the reason that many spend analytics projects fail is that organizations rush to accumulate and analyze as much data as possible all at once and without much of a plan. This usually leads to huge costs and an overwhelmed team. Starting big isn’t always the way to go. With more data and more heavyweight tools and capabilities to rationalize data across silos, it can feel like there are more opportunities than there are resources to exploit them. These organizations would fail to see the insights for the data. Start small. It is not only much more fruitful and has lower cost, but also minimizes risk. Some of the most valuable business insights have been derived from surprisingly small data sets. It’s time to focus not on big data but on the right data at the right time and find a way to ask the right questions of that data. Starting small also leads to a clearer path to smarter business decisions and priorities ensuring data analytics success. Spend analytics is not a one-time project that you set-up everything and reap the benefits right away. It need a plan, and everything has to be transparent with immediate, disciplined, and regular feedback loops.
Wrong tools or having too many tools to choose from
A spend analysis is not the kind of project you want to take on without the right tools. It is always about understanding what your organizations need and getting the proper solutions that will address the current situations. Attempts on doing spend analysis incorrectly and without the proper solution have put the validity of analysis in jeopardy. Organizations should make base their initiative on a proper spend analysis tool weighing all the considerable shortcomings of each before deciding. Most spend analysis initiatives fail to deliver additional results after 12 to 18 months because they have insufficient or ineffective systems in place. Challenges are daunting and many solutions fail to address all of them. An organization should ensure that the solution selected addresses all issues and associated challenges that are relevant to its own situation.
Lack of skills and user competence
Correcting spend-data classification errors requires deep domain knowledge in both products and data attributes. This expertise varies across the company, resulting in different and unpredictable results. Many organizations put data cleansing and classification duties in the hands of IT professionals who may not have complete understanding of the parts and services that require review. There is lack of ability among existing staff to access, organize and analyze spend data for sustainable use. For example, when you do a deep dive on classification on some categories, where the knowledge is limited to a few people, there needs to be the right expert associated with the right spend items. As a result, the initial data is mapped out poorly which leads to many repeated efforts before the reports will be useful. Very often category teams are the ones with the right information but they are usually not involved. When this happens, the sourcing analysts might have already missed out the valuable opportunities
Fear of losing relevance or control of data
When you’ve had control of something for a long period of time, it is often hard to let go and lose control of it. Data owners like the IT team feel like they are forced to share data sets with other departments. More so when an external expertise is brought in to support the data analytics project. The number one challenge that needs to be addressed regarding this is the data silo problem. To resolve that, it is important to note that analyzing data requires clean integration. If the technology is packed into a container that gives the owners access to the relevant data, silos are then conquered. After errors in the data are found, actionable insights start to come out and the fear is overcome.
Too many data sources/ disparate systems
Multiple disparate systems drive complexity and confusion. Spend data is often times sprinkled throughout different systems across the organization, including AP, GL, ERP, and many others. These employ different classification schemes, making it difficult to extract and analyze. When there are too many or incompatible data sources, organizations cannot efficiently leverage their spend analytics efforts in sourcing activities. To reap the full benefits of spend analysis, spend data must be migrated to one centralized repository in a standardized fashion.
Limited analytics solutions
Spend analysis is not a black box effort. Therefore, using basic spreadsheet applications as primary analysis tools limits the possibilities that analyses can offer. Home grown systems are not spend analysis solutions. Some organizations have powerful data warehouse solutions and a well-equipped IT team who can build their own spend analysis solutions by acquiring report builders. But even this powerful typical solution also has its limited flexibility. This often results to canned reports because of the lack in expertise in the construction of analytics solutions. So if an organization wants more return on investment, and receive real value from spend analysis, they need to consider a solution that is built on proper technical foundations and capabilities.
Spend analysis as a one-time effort
Spend analysis should be a continuous process. It is time-consuming but is an evolving part of your long-term procurement transformation. It is a project that will continue to yield incomplete and inaccurate results so it has to be done several times to achieve the results desired. Doing it just once yields only a one-time benefit. Repeated analysis is often required to identify changes in organization’s spend and monitor progressive spend against contracts to ensure that the real value is delivered.