5 Questions You Should Be Asking During a Spending Analysis
Spend analysis has become an expected exercise in today’s digital procurement world. However, it’s still a relatively new practice. So procurement professionals don’t always know how to get the information they’re looking for. In fact, many times they don’t know what they should be looking for. As a result, they end up focusing on their spend profile and surface level concerns. Once they’ve picked the low hanging fruit, they often feel that they’ve exhausted their savings opportunities and believe that it’s time to move onto the next project.
In truth, savings cultivation is an endless practice of continuous improvement. Once you’ve taken advantage of simple, surface-level opportunities, there’s a deeper world of savings waiting underneath. However, to reach this new realm, you’ll need to know which questions to ask and when to ask them. Here are five starter questions you can leverage to make the most of your spending analysis.
Question 1: Why have we been spending in these areas?
Leveraging a procurement taxonomy to understand where you’re spending is a crucial first step to getting spend under management. However, an additional factor to understand is why your organization has been spending in these categories and subcategories.
This method is more efficient than simply identifying and attempting to cut down large areas of spend because it questions whether or not spend is necessary in the first place. In many cases, the largest areas of expenditure come from necessary businesses expenses. However, almost every organization has pockets of spend that are outdated, forgotten, or completely unnecessary. If you can eliminate these, you may be able to save more than by cutting back on necessary expenses.
Question 2: Are there more efficient ways to operate?
Questioning the necessity of operating expenses won’t just help you find pockets of unnecessary spend. It can also help you locate operational inefficiencies and establish Procurement as a critical business strategy partner.
Continuous improvement culture has long been an underpinning principle of manufacturing, but it’s critical to indirect procurement as well. Every business has processes that were established long ago and given a “don’t question it” status. Many of these processes remain in place today with teams abiding by them simply because they’ve always been there. However, business has changed drastically even since 2020 and the COVID-19 pandemic. Processes that are more than 3 years old are likely outdated and can be improved.
During a spend analysis, you’ll have a unique, top-down window into your organization that you can use to find and optimize these inefficient processes. In some cases, this will mean eliminating unnecessary expenses. In others, it may mean upgrading services, which can increase costs but also improve efficiency and profitability. If you’ve developed strong relationships with Finance and other key stakeholders, then you can position these cost increases as what they are: net benefits to the organization.
Question 3: What insight do I have into my suppliers and risk?
Not everything is about direct cost savings and cost avoidance. One of Procurement’s most critical responsibilities is risk mitigation. A spending analysis is a perfect opportunity to take a deep look into the security of your supply chain including:
- Information and data security
- Risk along supply chain tiers
- Supplier diversity and sustainability
- Vendor depth and redundancy
- Vendor contract compliance and gamesmanship
While spend analyses have traditionally focused on cutting costs and identifying contract opportunities, they also give you a chance to take inventory of the factors that can spike costs in a sourcing emergency. If your supplier lineup lacks depth, a spend analysis can reveal it by giving you a top-down view of all your suppliers in a given category. Spend analysis won’t answer all of your risk questions, but it’s by far the best way to start understanding your supplier base and the risks it presents.
Question 4: What should goods and services cost?
On a recent Art of Procurement podcast episode, Yushiro Kato explained that one of Procurement’s biggest missed opportunities lies in conducting a should-cost analysis. As he explained, many businesses wildly overpay for goods and services because they assume that they’re getting fair prices. The reality is that just because you’ve negotiated with a supplier, that doesn’t mean you’re paying a good price. A spending analysis is a great chance to discover price inflation and take action against it.
To conduct a should-cost analysis, start by identifying the goods and services you source most often. For physical materials, you can reverse engineer the ingredients to understand the raw cost of production and labor. If you’re dealing with something more indirect like software, labor, or maintenance, you can break the process into steps or deliverables and calculate the cost of each. Then you can compare these costs to what you’re paying.
Understanding your spend is the foundation of should-cost modeling. It allows you to identify and prioritize areas to analyze. At the same time, fitting a should-cost analysis into your spend analysis prepares you to prioritize and investigate the areas where you may be over-spending. Together, the two exercises will likely reveal hidden savings opportunities that add up over time.
Question 5: Do I have full spend visibility?
Diving into a large data set can be exciting for anyone interested in analytics and leveraging information to drive strategic change. However, before you jump in, you should verify how all-encompassing your data set actually is.
While modern suites have made it easier to keep a large amount of spend data in one place, they don’t aggregate as much cost data as you may think. After analyzing more than $7 trillion of spend over decades of Procurement consulting experience, we’ve learned that most suites only aggregate about 40% of an organization’s spend data.
That means the rest is sitting on various P-cards, POs, spreadsheets, and fragmented software solutions. Leveraging only the data from your ERP or P2P suite for a spending analysis is like reading less than half of a book and then writing a summary. Your analysis will be incomplete at the very best. At worst, you’ll make decisions based on misleading data, which can critically impact your organization’s ability to achieve financial and non-financial goals.
Comparatively, a best-of-breed spend analysis solution will present a holistic, categorized view of your spend and give you visual representations of your data. It will allow you to slice and dice without setting up your own graphs or configuring complex BI dashboards. Most importantly, you’ll be able to analyze and execute confidently, knowing that all of your spend data is accounted for.
Bonus: Do I know how to analyze my data?
A thorough analysis of an organization’s spend isn’t a process that just anyone can sit down and accomplish on a whim. It’s a skill-based endeavor, so if you want to get the most out of your efforts, you’ll need to be sure that you know how to analyze data.
In a 2018 podcast interview with Art of Procurement, ISG Founder, Tom Beaty, explained that one of the most important procurement skills is data analytics. As he explained, a spend analysis won’t accomplish much if your team doesn’t have someone who can turn procurement data into insights. You need to be able to understand what you’re looking at, what it means, and what you can do with it. That episode may be from 2018, but Tom mentioned some important points that are still relevant today. We highly recommend giving it a listen.
Conclusion: Take your time
Establishing spend analysis as a regular exercise is an important step towards procurement maturity. Not only does it give you visibility into spend and opportunities for financial improvement, but it also establishes Procurement as a strategic partner capable of driving the business forward.
Because spending analysis is the first step towards strategic procurement operations, it’s essential that you take your time. If you approach spend analytics focused on discovery instead of task-completion, you’ll be prepared to dive deep and uncover improvement opportunities you never dreamed of.
Of course, to truly capitalize on analytics, you need the right solution to simplify the process, power your search, and highlight the most important data. We built Spend Intelligence around these three core pillars. If you’re ready to see what you can do with a spend analytics platform built for Procurement, by Procurement, click below now and schedule a demo. You’ll be amazed when you see for yourself how 450+ businesses have transformed their spend profiles.