Why Does the Right Spend Taxonomy Matter to Procurement?
Spend is spend… it doesn’t really matter how you classify it, as long as it gets classified, right? Not necessarily, especially when it comes to making a strategic impact on top-line growth. In fact, while there are generic, standardized spend taxonomies readily available, the best-in-class Procurement organizations often steer clear of them.
But what makes some spend taxonomies better than others and why does that matter to your CFO?
Not everything that looks right is right
It’s true that you can categorize spend in several different ways. There are SIC Codes, NAICS Codes, and even the UNSPSC taxonomy.
Each of these tools work well for their intended purposes, but do they seem purpose built for Procurement?
SIC – Organizes economic activity into 10 categories. The first two digits describe the business’ general activity and the rest describe products and sub-industries.
NAICS – Up to a six-digit code that divides businesses into industries and business process instead of simply end-products.
UNSPSC – A five-level hierarchy based on a granular division of goods and services into thousands of specific segments, families, classes, and individual commodities.
The truth is that we often see companies that use these spend taxonomies conform their operations to accommodate the taxonomy instead of the other way around. It’s a lot like buying a suit that you assume you’ll grow into.
But Procurement’s most important goals aren’t focused on individual commodities, vendor industries, or GL codes. In fact, that information can become counter-productive since similar products from different vendors can end up separated in these taxonomies.
Businesses evaluate Procurement on its ability to use supply chain insights to save money and mitigate risk. Leaders make strategic decisions to this end based on answers to practical questions:
- What is the business using the product or service for?
- How much money did the business spend with that vendor?
- How has that amount changed over time?
So if you use a spend taxonomy that makes you look at spend in any other way, you’ll be left with a lot of unactionable information. According to our recent study with Procurious, 79% of non-procurement executives are already hesitant to rely on Procurement’s data for strategic decisions. The way it’s categorized is a large reason.
The best way to uncover actionable supply chain insights is to organize spend from a sourcing-level perspective and customize it for your business.
At first, this approach may seem to strip away the specificity that other taxonomies offer. But think about the three most important pillars of strategic sourcing—supplier, contract, and category management.
This approach to spend organization accounts for each by grouping spend according to what it’s doing and who it’s coming from. This gives far deeper insights than simply knowing that the company spent on seven different variations of black ink from three different vendors.
So don’t settle for a one-size fits all approach to your taxonomy. Buying a suit a size too big will throw off your entire wardrobe, and a spend taxonomy built for anything other than Procurement will do the same thing to your operations.
If you’re ready to organize your spend in a way that empowers strategic impact, click below and schedule a demo today. Our in-house sourcing experts will tailor our spend taxonomy, built on 20+ years of hands-on Procurement experience, to give you the insights you need to drive financial performance.