4 Key Steps to Performing an Effective Spend Analysis

August 25, 2021

Gaining visibility into organization-wide spending requires good spend analytics. The ability to analyze spend helps companies make better business decisions when working with vendors and capturing previously unknown efficiencies in their procurement process. It helps organizations identify opportunities to cut costs, make their sourcing more strategic, and reduce expenses throughout the procurement process. 

But good spend analysis doesn’t just happen. There are essential steps to preparing your organization to evaluate its spending and ensuring that it will be able to make use of the insights that you glean. Here’s how.

Performing truly effective spend analysis requires four key steps:

  1. Making spend visible
  2. Examining the spend
  3. Improving the procurement process based on the analysis
  4. Doing it all over again.

Here are the key steps you need to successfully optimize your procurement.

Step 1: Gain visibility into your spending

Before you can conduct any analysis on your spend, you first need to make your spending transparent. To do this, you need to ask yourself and your team some key questions:

  • What are we purchasing?
  • How much are we spending?
  • What is the reason for the purchases we’re making?
  • Who are our suppliers (and are they diverse enough)?
  • Besides the purchase price, what are the other costs associated with each purchase?

Once you’ve asked and answered these questions—not just from the procurement team, but from all the different buyers around the organization—aggregate all the data to prepare it for analysis. Put it all in one place and standardize it; ensure that it’s all in the same format, with all the fields that are needed to compare items across departments.

Next you need to put this data into an analysis tool that can perform the spend analysis. The best tools for the job are procure-to-pay (P2P) systems like Fairmarkit, which not only provide spend analysis but also the ability to identify efficiencies and act on them.

Step 2: Perform a detailed spend analysis

Once you have your consolidated data, it’s time to analyze your spend. The goal is to produce a single source of truth for your spend reporting so that you can identify underlying trends in your organization’s spending habit and find areas for improvement.

To do this, you need to develop key performance indicators that you can use to measure your data against targets and ascertain how your organization is performing. KPIs for spend management should include:

  • Cost savings
  • Procurement cycle time
  • Vendor performance
  • Percentage of spend under management

Track your savings and cost reductions, but also try to understand the flow of spend to your suppliers.

Spend analysis is a vital tool to help you better manage your relationships with your vendors. The best spend management software provides visibility across suppliers to help you ascertain where savings (or overspend) is occurring and how spend can be improved. It gives you the data to work with your vendors to build collaborative relationships and strengthen your supply chain.

The insight gleaned from spend analysis also helps you negotiate better contracts, since you’re able to understand your spend per supplier. Educate your buyers on the importance of using preferred suppliers by showing them the data, and then monitor their compliance to your new policies. As much as possible, use the data to identify your best suppliers and cut suppliers that don’t meet your criteria.

Step 3: Improve your procurement process

Spend analysis is all for nothing if it doesn’t provide keen insight to help you perform better as a team. Use your lessons learned to make the right changes to your procurement process. Here are some of the ways your team might be able to streamline your processes and save your organization money:

  • Improve pricing contract terms by bundling together contracts with one or two suppliers for all your business units
  • Increase your efficiency and mitigate the risk of increased costs by reducing the number of venders on your supplier roster for particular items or categories
  • Negotiate with suppliers from a stronger position by using internal and external pricing benchmarks
  • Be quicker to respond and add value to your organization by reducing how long it takes to process purchase orders.

And don’t forget that key to any spend management is incorporating as much tail spend—the incidental and indirect spend that account for a large portion of an organization’s outgoing—into the managed spend. Tail spend management software like Fairmarkit’s is invaluable for curbing and managing the most elusive of indirect spend categories.

Step 4: Do it all over again!

Spend analysis isn’t just a one-off task. It should be baked into the procurement process as a regular and recurring activity so that procurement teams can continuously improve their processes and identify cost savings and value-adds as they occur.

For more advice on using spend analysis to reduce waste in your procurement process, check out Fairmarkit’s blog, The Source.

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