What is a Spend Analysis?

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.