What is Spend Analysis? Best Practices, Types, Examples & Benefits

Senior Writer: Joydeep Das

Reading Time: 10 Minutes

Published : October 17, 2022

 Analyzing how we spend money and how to save more is intrinsic to humans. Be it at an individual or an organizational level, we all aim for the best results at the best price for our own interests. Put simply, expense analysis is done by all of us regularly, but for companies dealing with multiple goods/services, vendors, locations, business units, departments, and categories on a regular basis, analyzing the best deals, discounts, regulations, etc., can be critical.

This blog will explore what spend analysis means, where it is applicable, and why organizations use it. We shall also discuss several approaches to spend data analysis and the role of spend analysis software in present times.
So let’s begin!

What is Spend Analysis? 

Spend Analysis is the process of analyzing expenses to save money, boost efficiency and improve customer relationships. Using data about organizational expenditures on services and goods purchased from external suppliers, spend analysis helps firms make better purchasing decisions with minimal risks.

Why is Spend Analysis Important? 

Spend analysis makes sense of, and collates organizational spend data to improve vendor selection, contract pricing, cash flow, contract pricing, and payment terms. By identifying all the sources of spend data across each business unit and throughout the organization, adding standard formatting, cleaning out errors, and centralizing spend analysis data, various trends and forecasts can be made about vendor behavior, payment circles, and quantity of purchased inventory.

Source: Seivo

Spend analysis is crucial for organizations since poor visibility into spend data, strategic sourcing, vendor selection, runaway costs, and supply chain in procurements over time can result in massive losses and reduced profitability. This can prevent organizations from fulfilling their business and financial goals.

With in-depth insights into spending, procurement activities can be optimized significantly, resulting in higher cash flow and reduced spending from a new set of best practices. This results in better decision-making through spend analytics and reduces organizational risks significantly.

Spend Analysis in Procurement

There is a massive role of spend analysis in procurement activities. There are several key performance indicators (KPIs) that need to be considered to gauge the efficacy of the procurement process. Such KPIs can help you identify saving opportunities, streamline sourcing activities across business units and manage supplier risks.

Such KPIs can be classified into the following five categories:

1. Cost Savings
2. Operational KPIs
3. Employee-related KPIs
4. Supplier Performance
5. Spend Under Management

Source: Seivo

These and a few other KPIs contribute to the visibility of spend management, allowing you to have a comprehensive overview of the metrics contributing to process efficiency, cost savings, and supply-chain performance. In addition, spend data analysis helps you picture how money circulates throughout your organization and provides in-depth insights into paying patterns, suppliers, and compliance.

How to Conduct a Spend Analysis in 6 Steps?

Let us now learn how to do spend analysis with an overview of the processes and steps involved. Of course, the scope and scale of spend analytics activities may vary greatly depending on the organization’s size and type. However, the following six steps should be expected in any spend analysis process.

Spend analysis steps

Source: Seivo

1. Identify Data Sources

The very first step in spend analysis is to identify the type of spend to be covered and segment them based on a few key sources. By allowing you to restrict purchases to only a few key data sources, you can segregate your expenses into different groups (e.g. direct spend and indirect spend)) and discover the spend data sources available from your business units, departments, and plants. 

A good point of starting is to identify the areas where your business has made significant purchases, such as procurement, marketing, and finance.

2. Data Extraction

Once the scope of spend analysis is narrowed down, you can capture and consolidate your data into a single database. Spend analysis data that is present in different formats, languages, and currencies need to be collected into a single source using software programs, and the unified data is sent for cleansing.

3. Data Cleansing

Data cleansing involves detecting inaccuracies and removing redundancies and corrupt records from datasets. This includes detecting and eliminating discrepancies and errors in transactions and descriptions to ensure data accuracy. Data cleansing helps you identify incomplete or irrelevant contacts in your datasets, remove typos, and correct missing codes, allowing you to process the most updated information that can yield accurate results.   

4. Data Enrichment

The process of refining, enhancing, standardizing, and improving raw spend data is known as data enrichment. It ensures that line-level, header names, and other details are accurate and adhere to a specific naming convention. All data missing from particular fields, abbreviations and misspellings, and incorrectly coded fields are corrected during this spend analysis process.

5. Classification

This spend analysis process involves grouping multiple suppliers of the same parent organization. You can also categorize the spend data into meaningful categories (like software, office supplies, marketing, etc.) to identify where your business is spending its money.
Unifying heterogeneous data into well-defined categories makes addressing and managing expenses across the organization easier. In addition, by harmonizing all purchasing tractions into a single taxonomy, procurement visibility is enhanced significantly, facilitating better strategic sourcing decisions.

6. Analysis of Data

The final step is to identify cost-saving and procurement improvement opportunities. Spend analysis can investigate a slew of business issues, such as ensuring proper negotiations with the best contract deals per supplier or confirming that buyers purchase from the firm’s preferred suppliers. This helps you identify opportunities to reduce the number of suppliers in each category and negotiate better rates. The ideal cost-saving method can only be realized after the confirmed estimates are calculated properly.

What are the Different Types of Spend Analysis?

Depending upon the type of insights and opportunities to be discovered, there can be six types of spend analysis, which are discussed below:

1. Tail Spend Analysis

Tail spend is an organization’s total amount on purchases that make up almost 80% of transactions but 20% of the aggregate spend volume. Tail spending is where procurement firms leave money on the table and may utilize the given resources inefficiently.

Tail spend is considered to be low-value purchasing since it makes up a tiny portion of the total spend (10-20% in each category). Though organizations can spend millions on purchases yearly, minor and infrequent purchases can often go overlooked. Procurement teams invest heavily in core spend areas, with the tail-end area lying largely untapped for most organizations.

It is crucial to understand how much money is involved in tail spending and how it can be managed. Firms could save millions of dollars annually through an in-depth analysis of tail spend, curbing non-compliant spending. This is often done by identifying smaller suppliers that make up to 20% of the total spend.

2. Supplier Spend Analysis

Supplier spend analysis identifies the total spend coming from critical (major) suppliers. It involves creating detailed spending profiles for each vendor using historical data on consumption. This can help you get the best value from your preferred vendors and cement relationships through supplier management.

Source: Simfoni

Different supplier spend analytics reports can help visualize spending insights in different ways (e.g., by geography, category, vendor, etc.). Detailed vendor reports can help make year-on-year comparisons and analyses for data-driven decision-making. Spending can be further optimized by recognizing and implementing opportunities for consolidation.

Supplier spend analysis helps reduce the number of vendors in each category and facilitates the identification of buying patterns and purchasing trends. They can also monitor the utilization and expense consolidation of key strategic sourcing suppliers.

3. Category Spend Analysis

Identifying direct spend leakage issues and exploring expenses according to a well-defined spend category hierarchy is termed category spend analysis. By understanding the breadth and scope of each category, you can easily identify if you are buying similar products and services from too many different vendors.

Consistent allocation of spend data into different categories makes data easier to navigate, understand and interpret. Prioritizing top spending categories helps firms recognize and forecast opportunities for cost reduction by allowing better negotiations to ensure more favorable pricing and contracts.

A bird’s eye view of spending by category makes it easier to identify categories that can deliver better savings and projects that have strategic importance to the organization. It also makes it easy to make decisions that can impact staff, operations, and the organization based on the risks associated. Spend analytics also allows you to allocate resources more judiciously and prioritize them for the highest return on investment on the effort given. 

4. Item Spend Analysis

This type of direct spend analysis involves analyzing spending at an item or SKU level. It considers every individual purchase, classifying which items are from which supplier and used in which department.
Item spend analysis helps you know if a particular item is being sourced from multiple suppliers in multiple locations and at different prices. It highlights various opportunities in purchasing, improves supplier management, and identifies spend-leakage issues.

5. Payment Term Spend Analysis

Organisations can analyze payment terms and practices in their P2P (purchase-to-pay) process through payment term spend analysis. It allows organizations to leverage all possible discount and interest types from the invoicing process while enhancing the working capital.

Source: Seivo

Payment term analytics uses spend data to provide a comprehensive idea that helps identify potential discounts or opportunities for negotiating unrealized interest. It also reviews payment patterns to determine activities/practices that are not appropriately done or are non-compliant.

6. Contract Spend Analysis

Contract spend analysis informs organizations if they comply with their presently negotiated contract terms. It identifies spend-leakage through contracts that are non-compliant and ensures that the best contracts per supplier have been negotiated. Additionally, it ensures that buyers are purchasing from suppliers that are the best fit for them and the organization.

7 Spend Analysis Best Practices 

There are several spend analysis best practices that most procurement firms around the world adhere to. These best practices help transform their spend analysis data into actionable insights that benefit the organization. 

1.Classify the spend data at a detailed level

The most effective way to do spend analytics is to categorize goods at the item level. This offers a precise overview of spending for each commodity with each supplier. The classification should be done with at least 95% accuracy.

2. Adopt a common classification schema in the company 

Organizations must adopt an industry-standard classification schema or common internal taxonomy to facilitate accurate calculations through spend analytics. This helps you to map all spend data into a single schema.

3. Pursue a permanent solution versus one-time efforts 

Due to the sheer volume and complexity of spend data within a firm, using old-school or labor-intensive processes is highly discouraged. External services and outsourcing can often limit the transfer of expertise and process knowledge to organizations, leading to a dependency on consultants. This is why a more sustainable and standardized process is vital to companies for getting monthly updates on their spend data and regular spend analysis of expense categories. 

4. Have an automated approach to cleansing and classification 

Spending analysis software solutions are highly recommended for their auto-cleansing and self-learning features. Though there would be a need for commodity managers to classify expectations often, automated and real-time extraction routines, allow for accurate and speedy spend analysis in a dynamic real-world setting. 

5. Access all spend-data sources within and outside the organization 

Often your suppliers, vendors, or affiliates have access to better and more updated data as compared to you. Hence accessing spend data from such sources allows you to get a more accurate and comprehensive dataset about your spending.

6. Continuously improve and expand the scope of the spend data management program.

Since spend data management is evolving continuously, firms should persistently keep looking for better ways to expand the scope and use of their expenses, along with their classification and data cleansing capabilities. This is why reviews should be conducted regularly to gauge the efficacy of the systems in place. 

7. Collaborate with IT and other key stakeholders, like finance, in the whole process 

Having a collaborating partnership between the procurement team and other business units is  management software that calculates the expenses of all saas applications within a firm. 

Spend analysis is essential to manufacturing and assembling business units that deal with suppliers offering multiple products under separate categories. It also involves dealing with different pricing levels, negotiations, compliances, risks, and supply-chain issues. 

How to Select the Best Spend Analysis Software?

The use of software in spend analytics has greatly benefitted organizations by offering accurate forecasts and reducing manual efforts. Spend analysis software can help process huge datasets in very less time and offer in-depth insights into spending by categories, business units, etc. In addition, such software can manage multiple compliance sets and record audit trails, which isn’t possible through regular excel files.

Spend analysis software are highly secure and come with dedicated dashboards to assess trends in enterprise resource planning, buying behavior, compliance, average spending, variation, etc. They also have the power to generate automated reports, which lead to a hassle-free experience for organizations. However, for the best results, you need to choose the perfect spend analysis software for your firm.

Below are a few tips that can help you pick the best spend analytics software for your organization:

1. Decide on the type of hosting

Before zeroing-in on your spend analytics software, choose where you want your spend analysis data to be hosted. You can choose between on-premise, private cloud, or public cloud. While on-premise solutions offer better control and security, they can take up much space. On the other hand, cloud servers can be scaled as per the load and demand, providing greater flexibility.

2. Seek expert advice

If you aren’t sure about the software type to be used for spend analysis, it would be best to ask for professional advice from procurement consultancies. Such consultancies can evaluate you needs and budget to help you pick the best solution.

3. Learn what current users have to say 

If you are considering a spend analysis solution for your firm, it is wise to ask its current users about it. This could be particularly helpful if the users have similar needs as your firm so that you can discuss how effective the software is towards solving the challenges that you face regularly. You can also look for the solutions that are being used by your competitors for a better match. Verified reviews posted by independent analysts/reviewers can also be helpful.

4. Conducting an RFP

Conducting a spend analysis request for proposal (RFP) with a detailed set of questions can help you choos the best solution providers. To create an RFP, you need to consult your internal teams regarding their pain areas, challenges and expectations from the new solution. The software vendors would then let you know how their solution can address these concerns and the best solution would appear before you in no time.

5. Developing a proof of concept

Creating a proof of concept (POC) involves providing some test spend data to vendors for analysis within a record amount of time. This can allow you to know how different vendors or solutions approach such problems, how fast they are and what kind of accuracy they can provide, which can help you assess their suitability for your organization.

Spend Analysis Examples 

Spend analysis is used by most procurement-centered organizations but can be used in all fields, irrespective of their scale. A good spend analysis example would be a SaaS spend management software that calculates the expenses of all saas applications within a firm. 

Spend analysis is essential to manufacturing and assembling business units that deal with suppliers offering multiple products under separate categories. It also involves dealing with different pricing levels, negotiations, compliances, risks, and supply-chain issues.