Spend analysis is an important business process that helps organizations identify ways to reduce costs and get better value from supplier relationships. It provides a magnifying glass for examining and tracking expenditures across an organization at a detailed level, revealing patterns and insights that help companies reduce waste and strengthen their buying power. Continuously analyzing spending helps businesses ensure that when it comes to procurement, they never leave money on the table.
What Is Spend Analysis?
Spend analysis is the process of reviewing current and historical spending to reduce costs, increase efficiency and improve sourcing and supplier relationships. It involves identifying and gathering spending data from all sources, cleansing and classifying the data, then analyzing the information to understand how the organization is spending its money and where improvements can be made. Spend analysis enables organizations to answer crucial financial questions such as: What are we spending money on? Who are we spending money with? Are we getting value for money? Are there better procurement options?
- Spend analysis is the process of collecting, cleaning, classifying and analyzing expenditure data from across the organization to identify patterns and trends within vast amounts of transactional data.
- Spend analysis helps companies reduce costs and extract the maximum value from their procurement expenditures.
- This analysis can reveal opportunities to streamline and consolidate purchases and renegotiate supplier contracts.
- Financial management software that includes real-time dashboards and business intelligence reporting can help organizations conduct spend analysis tasks more quickly and efficiently.
Spend Analysis Explained
In most companies, spending data is distributed across multiple systems throughout different departments and business units. This makes it difficult to gain an overall view of spending. Spend analysis corrals this data so companies can gain a better understanding of key spending areas and trends.
Traditionally, comprehensive, organization-wide spend analysis was often a labor-intensive process involving many manual steps to pull together data from different sources, then analyze and present it. Today, it’s often possible to complete this task much more quickly, thanks to advanced analytics tools and enterprise resource planning (ERP) suites that manage data from across the business.
Why Is Spend Analysis Important?
Spend analysis is a key step toward improving the sourcing of materials, products and services. It’s often viewed as a key part of a broader spend management process that also encompasses spend control and automated procurement. By gathering insights that reveal who the company buys from and how much it pays, spend analysis can result in lower procurement costs for goods and services. It helps companies track key spending metrics and provides a baseline for measuring the impact of new strategies and efforts to reduce spending. By comparing spending metrics against industry benchmarks, companies can focus on areas where they may be able to trim costs and improve profitability.
How Does Spend Analysis Work?
The spend analysis process starts with defining key objectives, such as finding savings opportunities, monitoring spending trends or identifying strategic vendors. The next step is to identify all relevant data sources — spend data may be scattered among multiple systems used by different departments. When combining information from these systems, it is often necessary to cleanse and convert it to a common format. This can be the most time-consuming aspect of spend analysis. Finally, businesses can analyze and visualize the data using business intelligence or reporting tools. The results of the analysis enable the company to make strategic business decisions.
Sources of Spend Analysis Data
To conduct spend analysis, companies usually need to assemble data from multiple sources. These typically include internal business applications and may also include external sources, such as bank accounts and benchmarking data.
What is included in spend analysis?
Examples of internal and external sources of the data used in spend analysis include:
- Accounting systems.
- Enterprise resource planning (ERP) systems.
- Expense management systems.
- Procurement software.
- Payroll software.
- Bank and credit card accounts.
- Industry benchmarking information.
Direct vs. Indirect Procurement Spend
Spending can be divided into two overarching categories: direct and indirect. Direct spend refers to goods and services directly connected to making products. These may be raw materials, machinery used for manufacturing, direct labor costs, production services and shipping costs.
Indirect spend refers to goods and services that are not directly related to production but enable the company to maintain and develop its operations. Examples of indirect spend categories include accounting and legal services, travel and lodging, maintenance and utilities for administrative facilities, and human resources.
Companies may manage these two categories differently. With indirect procurement, the primary goal is often cost savings, which translates into higher profits. For direct procurement, there can be complex considerations since direct spending can affect revenue as well as profitability. For example, higher-quality raw materials may cost more but also enable the company to make better products that generate higher revenue and increase customer loyalty.
Benefits of Spend Analysis
Performing regular spend analysis delivers key benefits in areas such as cost savings, better supplier relationships, more efficient procurement and better expense forecasting. Companies can:
- Gain full visibility. The most immediate benefit of spend analysis is clear visibility into how the company spends its money. This information can then be used in multiple ways throughout the company by a variety of staff, from the CEO and department heads to procurement specialists. Greater transparency into the money spent on materials and services provides the company with the intelligence to develop initiatives that reduce cost, drive revenue and improve relationships with suppliers.
- Realize savings. Spend analysis enables the organization to identify areas for cost reduction and process improvement, leading to a lower overall cost for procuring goods and services. It provides the data to understand spending at a granular level, while also highlighting spending patterns and potential savings across spend categories. Businesses can then cut costs by using alternate products, finding ways to consolidate suppliers, renegotiating contracts and reducing unnecessary departmental spending.
- Implement administrative efficiencies. The knowledge gained from a spend analysis allows the procurement group to become more productive and efficient. For example, they can focus on consolidating purchasing contracts to reduce administrative effort and get better discounts.
- Improve supplier relationships. Companies can use spend analysis to evaluate and compare suppliers. Providers that offer good value can be rewarded with more contracts, and poorly performing suppliers can be eliminated. Reducing the number of suppliers can make procurement more efficient, allowing the company to focus on forging stronger relationships with a smaller number of strategic vendors. A spend analysis can also reveal whether multiple departments are utilizing the same suppliers; the company can use this information to negotiate better volume discounts and payment terms.
- Reduce maverick spending. Spending analysis can shine a light on cases where employees are purchasing items from unapproved suppliers. Maverick spending often leads to higher costs because these purchases are not based on negotiated contract pricing. In addition, it can cause compliance problems because suppliers have not been adequately vetted.
- Improve forecasting. Spend analysis provides baseline data that enables the organization to forecast future spending more accurately and make better long-term plans. Once companies have a clear grasp of spending in specific areas, they can better understand the potential overall impact of rising costs or new business initiatives in those areas.
- Support benchmarking. With a good understanding of costs, organizations are better able to compare their performance with that of other companies or against current market trends to see where they need to improve. For example, companies can contrast spending as a percentage of their revenue in specific categories against that of other businesses within their industry. They can also compare spending patterns across different business groups to see whether there’s any potential to increase efficiency.
8 Steps in Spend Analysis
Spend analysis is a highly detailed job that is best spread across a few teams, when possible. But the savings, insights and efficiencies highlighted by the process make it well worth the effort. These steps can get your financial team started down the right path:
- Define your objectives. A clear set of goals will help the team gather the right data and design the analysis. Goals might include finding ways to save money, establishing a baseline for future monitoring of trends or identifying strategic vendors.
- Identify information sources. Spend insights are only as good as the data that goes into the analysis so it’s important to take a comprehensive approach to identifying every source of spend data — encompassing all departments and facilities.
- Gather data into a central database. Once the data sources have been identified, pull all the data together into a single database. The data should be converted into a common format and a single currency.
- Cleanse the data. Comb through the data and correct errors in transactions and their descriptions. Standardizing the data is essential for analysis. For example, different groups within the company may describe the same product or supplier in different ways. The more thorough you are at this stage, the more accurate and usable the results will be. High standards and consistency are the keys to success.
- Link related suppliers. Spend data often includes multiple suppliers that are, in reality, different divisions of the same company. Linking these suppliers reveals a more accurate picture of the total number of suppliers and the business conducted with each one. With knowledge comes power: This step can enable you to negotiate better volume discounts and better manage suppliers.
- Categorize spending. This step is essential to enable actionable insights to be extracted from massive amounts of spend data. You can classify spending using company-specific categories or standard classification systems like the United Nations Standard Products and Services Code (UNSPSC) or ECLASS. Example categories include legal, marketing, office supplies and direct and indirect spending.
- Analyze the data. Many organizations establish key performance indicators (KPIs) to track spending. Besides monitoring spending by category, department and function, you could track the percentage of spending that is directed to your preferred suppliers and the percentage of maverick spending. Many companies monitor spending as a percentage of revenue. Tracking these KPIs over time enables you to monitor progress against spending goals.
- Repeat and refine the process. Continually update the data to ensure that everyone is sticking to contract terms, working with preferred suppliers and recognizing savings opportunities. Analyze spending regularly and identify additional best practices for the business each time you dig into the data.
Example of Spend Analysis
A manufacturing company places parts orders with hundreds of vendors. The company’s spend analysis process aggregates this spending data from all sources, cleans the data for errors and consistency and centralizes the data in a database. The process categorizes all purchases and groups suppliers by their parent company. The data is then analyzed to identify trends and outliers. As part of this analysis, the company compares purchase order payment terms, prices and quantities of inventory purchased from competing vendors in the system.
The analysis process reveals that several of the parts suppliers are owned by the same Fortune 500 parent. The manufacturing company’s procurement team detects a savings opportunity to renegotiate with the parent for better discounts, based on the company’s total purchasing volume. If the negotiations are not successful, the company may select different competing vendors identified during the spend analysis.
Gain Spend Clarity and Control With NetSuite
NetSuite cloud accounting software provides real-time visibility into financial data from across the business, helping organizations analyze and control spending. By automating repetitive tasks and eliminating the need to collect and normalize data from different departments, NetSuite cloud accounting software saves financial teams time every month, allowing them to focus on reviewing transaction details, investigating anomalies and analyzing trends. Comprehensive reporting capabilities and real-time dashboards found in ERP systems help financial teams track spending metrics and KPIs to monitor and improve progress toward spending goals.
Spend analysis is a critical step in the broader process of managing and optimizing an organization’s spending. Collecting, categorizing and analyzing spend data helps organizations identify cost-reduction opportunities, improve strategic sourcing and reduce overall procurement costs.
Spend Analysis FAQs
How is spend analysis used in procurement?
Spend analysis is one of the key methods procurement organizations use to proactively identify savings opportunities, manage risks and optimize their organization’s buying power. Spend analysis enables companies to visualize spending patterns and trends to save money. Companies can use the information to compare spending across departments and categories and to improve supplier management.
Why is spend analysis important?
Spend analysis provides visibility into an organization’s procurement activities and expenditures, allowing the organization to identify areas for cost reduction and process improvement. This, in turn, could result in a lower overall cost to procure goods and services.
How do you do a spend analysis in Excel?
Performing spend analysis in Excel involves multiple manual steps. The data needs to be imported from its original sources into a spreadsheet, then reviewed, cleansed and categorized to ensure consistency. Pivot tables can then be used to analyze spending by category or department.
What is spend data?
Raw spend data consists of transactions recording a company’s expenditures on goods and services purchased from external suppliers. This information is then consolidated and categorized for analysis.