What Is Spend Analytics?
Spend analytics is the process of collecting, cleansing, classifying, and analyzing data to gain insights into your organization’s spending behavior. These analyses provide essential information on how much your organization is spending, where your money is being spent, and with which suppliers. It generates a spend analysis report that identifies overspending areas and opportunities for cost savings. This enables you to optimize your procurement processes.
Understanding Spend Categories
When conducting a spend analysis, you need to aggregate data from various sources, called spend categories. These are groups of similar products or services purchased from suppliers, typically categorized as direct or indirect spend.
As you might expect, direct spend categories are those that are, well, directly involved in your
procurement processes. This can include the raw materials, machinery, and tools you need to create a finished product for end users. Indirect spend categories, on the other hand, refer to items that are not inherently related to production but are necessary for your organization’s daily operations. Indirect spend categories typically include items such as office supplies, travel, and marketing expenses.
5 Spend Analytics Best Practices
You need to optimize your spend analysis to ensure that you gain effective, actionable insights into your procurement processes. Here are five of the best practices to follow during the spend analysis process.
Use a Taxonomy That’s Right for Your Business
A taxonomy is a hierarchical classification system used to categorize your spend data. Different organizations have different needs when categorizing their spend, so it’s important to select a taxonomy that works best for your business. Typically, a good one provides you with a clear understanding of the goods and services being purchased and allows you to leverage that understanding to make informed decisions regarding your spend management.
A taxonomy that’s aligned with your strategic sourcing strategies helps you successfully identify opportunities for cost reductions and supplier consolidation, as well as areas for improvement within the rest of your procurement process. On the other hand, a commodity-oriented taxonomy may be too general and may not provide the level of detail needed to identify these opportunities.
Review All Spend from Different Systems
To get a complete picture of your organization’s spending, you need to analyze spend data from a variety of sources throughout your organization, such as ERPs, CRMs, procurement systems, and supplier systems. Failing to gather data from all spend sources can result in an incomplete or inaccurate data set, leading to flawed analyses and ineffective decision-making. By pulling data from all relevant sources, you can ensure that your spend analysis is as accurate as possible and delivers valuable insights.
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Ensure Your Data and Strategies Are Fresh and Aligned
Similarly, the data you use from these spend categories needs to be up to date and aligned with your current procurement strategy. Relying on outdated data can significantly impact your spend analysis. Old data may rely on different units of measurement, currency, or other metrics that are unaligned with your current processes. This can swiftly lead to misinterpretations and improper analysis, which may cause you to miss critical cost-saving opportunities or make uninformed decisions.
Know How Your Data Influences Spend Management
Understanding how to interpret and use your spend data in an effective spend management strategy is essential for identifying areas of opportunity, optimizing spending, and negotiating better contracts with suppliers. You need to be able to take the information from your spend analysis report and apply these insights to your decision-making processes.
For example, if your spend analysis tools detect an uptick in late payment fees and penalties from suppliers, you need to know how to adjust your process to avoid them. This may involve addressing delays in your supply chain or automating the internal processes of your general ledger.
Perform Regular Assessments for Ongoing Improvement
Spend analytics is not a one-time event. It’s essential that you conduct periodic assessments of your spend management to track progress toward your goals accurately, identify new opportunities for cost reductions and process improvements, and make necessary adjustments. These ongoing assessments ensure that your procurement strategy is continuously improving and that you are able to exceed your objectives consistently.
Leverage the knowledge of an Industry Expert
When it comes to spend analysis, there’s no substitute for experience. While implementing spend analytics best practices can certainly help your organization achieve a more accurate and actionable understanding of your data, there are often nuances and complexities that can only be fully understood and addressed by an industry expert.
By partnering with an experienced consultant, you can leverage their knowledge and expertise to help guide your organization toward more informed and effective decision-making. This can include everything from providing insight into the latest industry trends to helping you identify and analyze spend categories that may be particularly complex.
In addition to their technical expertise, a good consultant will take the time to understand your organization’s unique needs and goals to the fullest extent. They’ll ensure you follow spend analytics best practices and can drive value across your entire procurement operations.
Find Your Procurement Solution With Velocity
With decades of proven experience, Velocity Procurement has the resources and expertise to help you optimize your spend analysis process. We strive to help organizations eliminate errors and inefficiencies within their procurement processes, ensuring they have the means to make strategic, informed decisions that help them reach their goals.
Get in touch with us today to learn more about improving your spend analytics.