A spend analysis is the process of collecting, cleansing, classifying and analyzing spending data to get a better understanding of spending patterns. Its purpose is to identify savings opportunities and gather the necessary information to make informed and better spending decisions, increase efficiency, and gain leverage in negotiations.
A spend analysis can be performed on several different levels. The most common one being an organizational level, identifying and covering all types of spend. But it’s used just the same on a more detailed level covering specific products/parts/services/etc. Regularly performing a spend analysis on all levels is the foundation of driving a long-term optimization spending strategy.
The spend analysis is a key tool procurement organizations use to proactively identify their saving opportunities, manage potential risks, and optimize their buying power. It strives to answer the WHO, WHAT, WHEN ,WHERE, WHY and HOW of your organization’s spendings:
- WHO are you buying from?
- WHAT are you buying?
- WHEN do you buy?
- WHERE do you buy?
- WHY are you buying?
- HOW often do you buy?
- HOW much do you pay?
What types of spend analysis tools are there?
There’s several different ways to perform a spend analysis, the most basic one using Excel as a spend analysis tool. While Excel is a powerful tool that’s been on the market for over 30 years, it lacks flexibility, scalability and a holistic spend analysis dashboard. To be able to achieve a high-quality and detailed spend analysis you’ll have to put countless hours of manual work into it.
The alternative is to use a so-called “BI Tool” (Business Intelligence Tool) – a spend analytics software. With a BI tool the cost data visualization becomes both easier and quicker where big data can be handled in real time. A BI spend analysis tool allows for more customization than Excel through its spend analysis dashboard, where instead of having to sort through the data yourself, the BI tool will do it for you; allowing you to focus on other things.
Depending on the size and complexity of your company, the best suited spend analysis tool for you will vary. Small, local companies with very few spendings might very well do fine with just an Excel spreadsheet as the data is very limited. Using spend analytics software is often considered a competitive necessity for bigger, international companies as they need a holistic and scalable spend analysis software/tools to handle large amounts of data.
The process of a spend analysis procurement
The process of performing a spend analysis report can be divided into a 7-step repeatable cycle:
Step 1: Identify
The first step of performing a spend analysis is to check the extent of your spend by identifying relevant data sources. This allows you to narrow down the scouting to just a few sources you deem important instead of several thousands. From this point you can segment into different groups, and continuing from there, determine what spend data sources there’s available from all your departments, plants, and business units. It’s recommended to start identifying areas within your organization that handles purchases such as the procurement, finance and marketing division.
Step 2: Extraction
When the scope has been narrowed down, it’s time to extract your spend data from the data sources and gather all of it in one database. The data is in most cases in several different formats, languages, and currencies. While the process of collecting all the data into one source might seem like a harrowing task, there are tools to help you sort through them.
Step 3: Cleansing
Data cleansing consists of detecting inaccuracies and removing corrupt records and redundancies from a set of data. Data cleansing allows you to identify which contacts in your database are either incomplete or irrelevant. This step also includes removing typos or fixing missing codes.
Step 4: Enrichment
The process of data enrichment refers to enhancing, refining, and improving your raw spend data, as well as standardizing it for easy viewing. The data enrichment process strives to make sure all headers, names and details are accurate according to your specific naming standard. Missing data from specific fields, and misspellings, abbreviations and incorrectly coded fields are fairly common which needs to be fixed.
Step 5: Classification
After all the data has been cleansed and enriched, it’s time to classify it, for example by suppliers, or into meaningful groupings such as marketing, office supplies, software, etc. By unifying heterogeneous data nodes into concretely defined categories, it makes it easier to identify how and where you’re spending your money. This gives you a better understanding of your spend patterns and allows you to easier address and manage your spendings across the whole organization. Data classification is about having all purchasing transactions harmonize to form a single taxonomy, allowing for better visibility to your global spending to make better sourcing decisions
Step 6: Analysis
When the data has been extracted, cleansed, enriched and classified, we arrive at the analysis. Through the analysis you’ll be able to identify opportunities for saving and other procurement improvements, for example to ensure you’ve got the best contract deals per supplier. In the end: the best method for cost saving can only be identified and made reality after confirmed estimates from your data have been calculated properly.
Step 7: Take action!
Now that you’ve been able to identify all potential spending improvements, it’s time to take action, implement new processes and/or start up negotiations with your suppliers arguing the points of your spend analysis. After you’ve taken all measures to improve your spending methodology based on your spend analysis data, it’s time to do it all over again, or dig further down and perform a should-cost analysis on specific products/parts/services/etc. By regularly performing a spend analysis, you’ll be able to adjust according to the market’s constant changes and always stay on top of things, identifying all your potential saving opportunities.
How can Prognos support my spend analysis process?
We want to be clear that Prognos is NOT a spend analysis tool/spend analytics software capable of automating the process of creating a spend analysis. Prognos can however be a vital part of the success of your overall spend analysis solution and process where we’re able to support your procurement spend analysis process in two possible ways:
- Consultancy services: We offer end-to-end spend analysis consultancy services where we help you create a spend analysis manually – identifying and classifying complex spend patterns to give you a better overview of all your spending.
- Taking action: A spend analysis helps you get an overview of WHAT spendings you currently have. While this is a great insight to have, it’s nothing you can act upon directly, you need something to compare it with. That’s where Prognos Online and Prognos Tailored comes into play.Through Prognos Online and Tailored you get access to all the necessary spend data to compare with your current spending regarding cost drivers such as raw materials, construction, logistics, labour, manufacturing, currencies, transportation rates, and taxation tariffs. It allows you to see how much you SHOULD be spending on certain things, giving you insight on how your current spending patterns hold up to the market standard prices, and help you identify ways to improve your spending.
Benefits of a spend analysis
Performing a spend analysis is an important process for any company, however big or small, to acquire a better insight into their overall spending habits. When conducting a spend analysis you can expect the following benefits:
- Full spend visibility: Having to rely on gut feeling is something you want to avoid at all costs. The key benefit of performing a spend analysis is that you will get access to a concrete overview of all your spending patterns, allowing you to make informed decisions based on data and facts.
- Savings opportunities identification: With a spend analysis, everything is laid bare, giving you the ideal opportunity to find opportunities to optimize your spending patterns and identify potential saving opportunities.
- Streamline and centralize procurement: Having access to detailed information organized around multiple dimensions will allow you to improve, optimize and streamline your procurement processes, finding the best option for your organization.
- Risk Management: With access to enriched data, including suppliers credit scores and other revenue information, it allows you a better standpoint overview of potential supply chain risks for your organization where you can plan accordingly to deal with them.
- Spend forecasting: A spend analysis does not only benefit the here and now, but can also benefit your future endeavours by using the spend data to forecast future spending, detect patterns, and plan ahead.
- Supplier evaluation: The starting point of all supplier relationships starts with information: what supplier has the cheapest prices, the highest quality wares/products, is the most value-adding, etc. Based on the gathered data you will be able to compare the different suppliers with each other, and based on that, identify the supplier best fit for your needs.
- Internal performance benchmarking: The data accessible in a spend analysis gives you the opportunity to benchmark your own internal performance across the whole organization in different locations. This allows for meaningful comparisons that will benefit you in strategic decision-making.
- Leveraging spend data across ALL business sections: While most associate a spend analysis with procurement, it can benefit your organization as a whole within all divisions. For example, the finance department can leverage the spend analysis data to gain a better understanding of the corporate spending.
Types of spend analysis reports
There’s a great range of different spend analysis a company can perform depending on their current situation that gives a better insight into one’s spending patterns:
Tail spend analysis
The tail spend is the spend of an organization that falls outside of the normal ongoing and large purchases an organisation makes. These are purchases that are often too small to go through procurement and don’t happen often enough to be included in the catalogued systems. The tail-end spend usually represents around 20% of an organization’s spend and is often considered an untapped well in regards to saving optimization due to the lack of data visibility.
Vendor spend analysis
Vendor spend is the spend that comes from critical vendors. The report includes creating a detailed profile for each vendor using historical data, which in turn can be used to compare them between each other and new vendors.
Category spend analysis
Category spend is simply the spend of different goods and products you buy. By sorting your spend by category it makes the data easier to navigate, interpret and understand when trying to identify and forecast potential saving opportunities.
Item spend analysis
Item spend refers to the analysis of a single item/product. It takes into account every individual purchase to classify them to be able to identify what department it was for and what supplier was used. An item spend analysis will highlight the ways of purchasing a specific item in the business and potentially identify spend leakage issues, for example, purchasing from non-preferred vendors, or maverick spend.
Payment term spend analysis
A payment term spend analysis provides companies with insights to analyze payment practices and terms for the purchase-to-pay (P2P) processes.
Contract spend analysis
Through a contract spend analysis you can analyze your spend with different vendors by contract to identify spend leakage stemming from non-compliant contracts, allowing you a better insight if they are actually complying with the existing negotiated contract terms.
What is Prognos spend analysis solution?
We want to be clear from the start and preface that Prognos is NOT a spend analysis tool capable of automating the process of creating a procurement spend analysis. We can, however, on a consultary level, help you create one.
Prognos is an interactive platform giving you access to continuously updated indices on raw materials, components, wages, and currencies. As such, these indices can be compared with the price developments you identified in your spend analysis, giving you a good reference point on how the price development SHOULD look. It allows you to compare and analyze data spanning across multiple years, quarters and months where we give you access to data tailored for your specific situation to get the most out of your suppliers.
How can Prognos spend analysis solutions help me as a purchaser?
- For negotiations: Prognos gives you access to underlying, necessary data from multiple sources to back up fact-based negotiations. With our tool you can see how the price development SHOULD have looked up til now and use it to argue for a better price from your suppliers (identify GAP between actual price adjustments and main cost-drivers).
- For established agreements: Having to open up new negotiations year after year with one’s long lasting big suppliers is a tedious process. Instead, the sophisticated purchaser can use Prognos as a framework for predetermined price adjustments, giving you access to continuously updated price indexes based on numerous different sources which the price development will follow.
- For identifying saving potentials: By comparing your own price development with Prognos data on market cost trends, you’ll be able to identify the status of different areas (low performance / high potential, low performance / low potential, etc.). This gives you the facts on what areas are the most profitable for you, and helps you decide on what the most appropriate action is to take (start negotiations with your suppliers, start looking for new suppliers, change your purchasing patterns, etc.)
Prognos should-cost/spend analysis solutions
Prognos is available as two different solutions: Prognos Online and Prognos Tailored.
Prognos Online is an interactive online platform capable of transforming the data to fit your needs. Using Prognos Online gives you access to over 8 000 continuously updated indices on raw materials, components, wages and currencies to compare with your current spending patterns to identify potential saving opportunities.
Prognos Tailored gives you access to interactive, continuously updated reports tailored to you and your organization needs and purchasing behaviour. It allows you to drill down in your materials, compare the prices to your own cost development, export graphs, or export underlying data for further analysis.
It’s the more sophisticated version of our where Prognos Tailored customizes the reports according to your need with the option to mix and match price data in whatever way you want.
Prognos spend analysis software data
Prognos Online and Tailored gathers cost data for the indices from multiple sources all over the world, giving you access to relevant up-to-date data all gathered in one convenient place. The following cost-data is available through Prognos:
- Raw materials: Raw materials data gathered from multiple sources all over the globe, combined into one central source.
- Manufacturing Costs: Manufacturing costs calculated from hourly wage development, equipment costs, and real estate prices.
- Tax & Transport: Taxation tariffs and transportation cost rates obtained from a country’s official sources.
- Labour Costs: Labour costs gathered from different sectors and in different countries over time.
- Currencies: Currency data with the option to view all transactions in different currencies, and be able to see what the currency effects might have on your portfolio.
Drive prosperity through professional negotiations with Prognos
By now you’re hopefully fully aware of what a spend analysis is, and how a procurement spend analysis can benefit you and your company. For more information about Prognos Online and Tailored, and our spend analysis consultancy service – contact us today and we’ll give you a demo on how it works.
Frequently Asked Questions
Why is a spend analysis important?
Regularly performing spend analysis is important for a business to obtain a better insight into their spend patterns giving them complete spend visibility. Based on the analysis the organization can then identify potential saving opportunities and use the reports, data and graphs as leverage in negotiations with their suppliers.
What is direct spend?
Direct spend is the purchase of goods and services DIRECTLY incorporated in manufacturing a product. E.g. raw materials, components, hardware, 3rd-party manufacturing services, etc.
What is indirect spend?
Indirect spend is the purchase of goods and services NOT DIRECTLY incorporated in the manufacturing of a product. E.g. computers, office supplies, furniture, equipment, etc.
What does strategic sourcing mean?
Strategic sourcing refers to a procurement process that is continuously improved upon and re-evaluates the purchasing process of a company. It seeks to improve and develop such things as: strategic planning, supplier development, contract negotiation, and outsourcing models.
Within the services industry, strategic sourcing is often called “strategic partnership”, which specifically aims to meet their clients individual needs. Within a production environment, strategic sourcing is often called “supply chain management”.
How to do spend analysis?
Performing a spend analysis consists of 7 steps:
- Identify relevant data sources
- Extract the spend data from the sources
- Cleanse the spend data (e.g. correct inaccuracies or remove corrupt records)
- Enrich, refine and improve the spend data, as well as standardize it for easy viewing (e.g. make sure headers, names and details are accurate according to a specific naming standard)
- Classify the spend data (e.g. by suppliers or meaningful groupings such as marketing, office supplier, software, etc.)
- Analyze the spend data to identify saving opportunities and other potential procurement improvements (e.g. ensure one get the best contract deals per supplier)
- Take action and implement the new processes and improvements and/or start up negotiations with supplier arguing the points of the analysis
What is Spend Management in Procurement?
Spend management in procurement refers to a strategic process that involves the assessment of different key areas within procurement processes. It analyzes and strives to improve/re-evaluate areas such as: the technology being used, how the organization is structured, the skill level of the practitioners, as well as the different processes being used throughout the procurement process.
It’s sometimes incorrectly used interchangeably with the term spend analysis which is a more structured and well-defined phrase revolving (loosely) about answering three broad main questions:
- HOW much does the company spend?
- WHO is the company buying from?
- WHAT is the company getting from the spend?