Procurement Spend Analytics 101
You already know that your greatest opportunities lie in your spend data, but how do you find them, what should you look for, and what can you do with them? This guide to leveraging procurement spend analytics will get you started.
What is spend analysis?
Spend analysis is the process of investigating organizational spend data to gain perspective on purchasing behavior across the business. The practice usually reveals trends and insights that show Procurement teams
- Efficiency improvements
- Problems requiring attention
- Cost reduction opportunities
- Strategic initiatives
- Upcoming costs
- Developing trends
- Emerging situations, both positive and negative
In short, procurement spend analytics is the foundation of Procurement’s impact. It allows teams to launch effective projects, make informed decisions, and guide purchasing across the business in a direction that will benefit the organization.
So how can you begin analyzing your spend?
Step 1: Unlock your data
To analyze organizational spending, you need to have access to all of your spend data. If only a fraction of it is accessible, you’re painting a picture of organizational behavior with information from a subset of the company.
Even if you have access to 70% of your spend, which is more than most suites and ERPs contain, you’re missing millions of dollars of activity that could change your understanding of the situation completely. Even worse, there are trends and situations that you won’t know about at all.
Listen – Our podcast with Art of Procurement on assembling your data dream team
In addition to being complete, your spend data should also be formatted in a unified manner if you want to analyze it. This means that vendor names, data fields, and other information should be normalized. Otherwise, you’ll waste a lot of energy comparing apples to oranges.
Finally, your data needs to be categorized in a consistent format, called a spend taxonomy. There are multiple ways to organize your data, but in the 20+ years we’ve worked in and with procurement teams around the globe, we’ve found that a category and sub-category approach is the best way to organize spend in the way Procurement needs to see it, because it
- Organizes spend by what the company bought, not by who bought it
- Helps Procurement see like purchases across the organization
- Simplifies the search for contract opportunities
- Makes maverick spend impossible to hide
- Reveals tail spend
On the flip side, grouping spend by only GL code or another Finance and Accounting-based taxonomy forces Procurement to look at spend by business unit, which isn’t helpful for the way teams need to interact with and understand it.
Getting spend data ready for analysis can be a lot of work. See how AI removes manual effort from the process and makes it ten-times faster.
Step 2: Know what you’re looking for
Once you can interact with your spend data, you need to know what you’re looking for when you analyze it.
Procurement’s responsibilities have grown since the COVID-19 pandemic started, but that means there are more ways Procurement can positively influence the business than ever before. For the most part, you can find all of them in your spend:
- Cost reduction opportunities
- Contract opportunities
- Supply chain gaps
- Supplier fragmentation
- Non-compliance (maverick buying)
- Price increases
- Purchase price variance
- Payment term improvements
- Emerging risk
The list above is a small selection of the actionable information you can find in your spend data. In general, you should look for trends and information that point to improvement opportunities, potential strategic impact, or glaring/arising problems.
Step 2.5: Go beyond spend analytics
Spend management isn’t Procurement’s only concern. But even in today’s world, where Procurement has to juggle risk, scope-3 emissions, supplier diversity, disruptions, and a host of other concerns, procurement spend analytics is still the best place for your impact and ideation to start.
Especially if you enrich your spend data with ESG data from various sources, you can compile a relatively complete inventory of strategic opportunities with little effort.
Your analytics will tell you the story of what the business is doing now, and using your knowledge of best practices or independent procurement benchmarks, you can devise a plan for action.
Here’s a starter list of non-financial factors to look for in your spend cube:
- Diverse supplier spend
- Scope 3 emissions
- Sustainable supplier spend
- Fair trade spend
- Certified humane spend
- Anti-slavery spend
Step 3: Prioritize your opportunities
Once you know what to look for when you undertake procurement spend analytics, you’re going to have more opportunities than you know what to do with. It’s a good problem to have, but if you want to make the most of it, you need to know how to prioritize and execute effectively.
First, organize your projects by financial impact. You don’t always need to know the specific amount for each project, but you should have a general understanding of what a project is worth.
Alternatively, you can rank projects by their qualitative impact, since some of your most impactful undertakings will have a non-financial focus. Don’t forget ease of execution, either. If you identify 100 high-impact projects, but each will take 6 months of all-hands effort, you should spread some of them out on your roadmap.
In the same way, low-hanging fruit can add up. If your team completes hundreds of easy tasks in a year, their net impact could revolutionize the business. So however you prioritize projects, be intentional about your approach. Simply having visibility should increase your contribution significantly.
Step 4: Track the progress and repeat
Perhaps the best part of procurement spend analytics is that you can use it to track your wins and areas for improvement. As you initiate changes, your updated data will reflect their results. As you track these results over time, you’ll be able to spot where you succeeded and where you can make more changes to course correct or drive even greater results.
And because organizational spending never stays perfect, you can catch new opportunities and problems as they inevitably emerge. Procurement spend analytics will enable you to prevent problems instead of reacting to them, further raising your value in the organization.
Spend analytics is the foundation of Procurement’s ongoing value, which is why leading teams establish it as a cultural ritual and not an infrequent exercise.
Moving from analytics to intelligence
Procurement spend analytics empowers teams to cut through the fog of complicated data and operationalize their impact. But as you can see, analytics can be a manually intensive process.
As fast-moving teams receive more and more responsibility, they need visibility and analytics that run and grow with them. In response, many are switching to spend intelligence and the ready-made insights that allow them to execute without slowing down for data maintenance.
To see what Procurement can do when opportunities are obvious, click below to download the independent research from Hobson & Company revealing seven benefits procurement teams can unlock when they can analyze and master their spend.
