The Role of Spend Analysis in Optimizing Procurement Strategy 

In 2023, a study from analyst firm Ardent Partners found that 40% of CPOs don’t have the data they need to identify sourcing opportunities and work with Finance. Unfortunately, those numbers haven’t undergone a radical increase since. 

So how can Procurement teams evolve beyond approving P.O.s and hoping they’ll stumble across strategic opportunities? Let’s explore the power of spend analysis and how easily you can harness it to create a comprehensive opportunity of strategic projects. 

What is spend analysis in Procurement? 

In Procurement, a spend analysis is the process of evaluating an organization’s entire spend profile to understand how, where, and with whom they are spending. Using this data, Procurement can find opportunities to reduce costs, improve supplier relationships, negotiate contracts, eliminate savings leakages, and mitigate third party risk.  

Importance of spend analysis 

A spending analysis reveals the entire organization’s spend profile from the individual sub-categories all the way up to a 10,000-foot view of the spend cube. This multi-level view gives Procurement the spend intelligence it needs to find cost savings and supply chain improvements in every corner of the business. 

What are the benefits of spend analysis 

A spend analysis is the foundation of Procurement’s contribution to the profit and loss (P&L) statement. As such, it drives and improves all of the function’s core responsibilities. Below, we’ve outlined the benefits of conducting a spend analysis. 

Cost reduction 

A comprehensive analysis of spend will give Procurement a picture of the entire organization’s purchasing behavior. This view helps teams understand what behaviors and supplier relationships are driving costs. By extension, it will also reveal areas that they can better manage spending and reduce costs by reducing non-compliance, consolidating suppliers, negotiating contracts, and more. 

Enhance visibility

A spend analysis starts by consolidating data into spend visibility. From there, an analysis further evolves this information by surfacing insights, KPIs, and custom dashboards to place important data front and center.  

The results of analyzing spend leave teams with insights that they can use to inventory their opportunities. From there, they can turn these opportunities into a pipeline for tracking projects and forecasting the function’s overall impact. They can also track trends over time to evaluate the function’s performance and opportunities for improvement. 

Time saving 

With the right tools, you can go from almost no visibility to fully embedded intelligence in a matter of weeks. From there, subsequent spending analyses become almost instantaneous. As a result, Procurement can establish a never-ending list of “kick-off ready” projects. 

Improved decision-making 

Procurement has too much on the line to make decisions based on hunches or educated guesses. Analyzing spend will often make the “right” decisions obvious and keep them aligned with organizational goals. It will also highlight the potential effects of decisions, so you don’t have to worry about unexpected ripple effects or disruptions.  

Data-driven sourcing and category management 

Spend analysis organizes related purchases into categories, which allows Procurement to manage them as a “sourcing group” like MRO or small parcel shipping. Analyzing these categories independently reveals ways that Procurement can cut costs by negotiating contracts. Analyzing categories will also help managers prevent supply chain disruptions that come from single-sourced spend and supplier fragmentation. 

Risk mitigation 

Third-party risk is one of the most consequential issues businesses face, yet much of it is undiscovered and waiting to erupt. Enriching a spend analysis with third-party risk management (TPRM) data is the fastest way to uncover issues like: 

• Vendor financial risk  
• Human rights violations 
• Cyber risk – GDPR violations can incur fines of up to 4% of your company’s annual revenue 
• Scope-3 emissions risks 
• Other pollution and environmental risks 

As countries around the world, especially in the EU, adopt new regulations, these areas of risk will continue to grow in importance. Regularly analyzing 100% of your spend is the only way to prevent scandals and emergencies that could sink your consumer trust or incur massive fines. 

Improved supplier performance 

How can you hold vendors accountable if you can’t see what you’re buying and how much you’re paying? On the flip side, how can your vendors trust your company if you can’t guarantee the revenue volume you promised in a contract? A regular spend analysis makes sure neither supplier gamesmanship nor maverick spend go unnoticed and uncorrected. 

How to conduct spend analysis 

Analyzing spend is crucial to reducing costs, upholding your supply chain, and reducing the business’ exposure to risk. The following seven steps will help you kick off and execute a spend analysis. 

1. Identify all sources of spend data 

Spend visibility is the first, non-negotiable step in analyzing spend. Leaving any data out limits Procurement’s spend management potential and can even misrepresent trends, opportunities, and decisions. So start by exporting data from every source. Typically, this will include suites, ERPs, and P-cards, but it’s worthwhile to make sure you haven’t overlooked a source of procurement data. 

2. Clean spend data 

Every file you export will likely have a different formatting system. You will also have multiple naming conventions for each supplier. Before consolidation, reconcile your data into one format where every vendor has a single, normalized name. 

3. Collect spend data in accessible, centralized storage 

For procurement spend analytics, you need to consolidate your data and centralize it in one file or database. This is crucial, because you need to form a single picture of your spend, not multiples that you have to try piecing together. 

4. Categorize and group spend data 

Now organize everything into categories and sub-categories. Depending on the complexity of your business, you may need multiple tiers, even down to the line item. 

NOTE: There are many ways to categorize your data. GL and UNSPSC codes are among the most popular, but they almost always create inaccurate categories because they are not designed for sourcing and Procurement. We highly recommend a sourcing taxonomy, which you can learn more about here. 

5. Automate the analysis of spend data, including reports 

At this point, you will have a tremendous amount of data—too much to analyze manually. Use AI or another kind of predictive analytics to automate your analysis. Otherwise, you will need consultants or specialized analysts to find your spend trends, categories, compliance rates, risk scenarios, etc. We also recommend having dashboards that streamline reporting and make important information easy to access.  

6. Decide about savings opportunities and better procurement processes 

Using the information from your analysis, prioritize your projects based on their time to value, required resources, and forecasted impact (both financial and non-financial). You should also use this information to make decisions on each project, like the suppliers you want to contract with, which sourcing options will reduce spend, etc. 

7. Implement decisions 

Once you have your strategic procurement plan built, you can put it into motion. The best way to execute it is to build a pipeline and manage each project alongside stakeholders in each category. work with stakeholders, actively communicating the status of each project, and working to bring their perspectives and market expertise into the decision-making process. Also be sure to log your results so they are easy to find and backed up by realized financial data. 

Final insights on effective spend analysis 

As you can see, analyzing spend data manually is so involved that it’s practically impossible, regardless of how large and qualified your team is. The good news is that you can erase nearly all of these steps from your to do list. 

Our spend analytics solution consolidates 100% of your data and uses an internally developed machine learning model to clean, categorize, and refresh the data monthly or quarterly. The result is uninterrupted insights into strategic opportunities across the entire business. 

Automating spend analysis is one of the most worthwhile investments a procurement team can make. It places your value levers in your hands, setting the stage for perpetual bottom line impact.  

The financial value of these benefits has been studied extensively—independent research firm Hobson & Company found that users of SpendHQ’s spend analysis and intelligence platform can secure 660% ROI in only three years.