What Is Spend Analytics And How Do You Implement It?
A recent report from Deloitte Consulting, the Deloitte Global Chief Procurement Officer Survey 2021, found that 91.67% of “high performing” procurement teams are regularly and systematically measuring their ability to achieve cost savings more so than any other KPI. Cost-savings are a top priority for procurement teams of all sizes, and spend analytics is the first step toward achieving a more streamlined budget.
Spend analytics can help procurement teams gain visibility into organization-wide spending, make better business decisions when working with vendors, and capture previously unknown efficiencies in their procurement process. Technology is a key part of practicing spend analytics. Here’s what this practice entails and how your organization can benefit from spend reporting.
What is spend analytics?
Spend analytics or spend analysis is the process of identifying areas where you can cut costs, improve strategic sourcing, and ultimately reduce expenses throughout the procurement process. There are three parts to the spend analysis process:
- Spend visibility: first, gather data and KPIs to understand what you are spending and where the biggest costs are in your procurement process.
- Spend analysis: assess which costs are necessary and where you can reduce costs without sacrificing efficiency or results.
- Procurement improvement: implement changes in your procurement process that allow you to meet performance goals while reducing expenses.
Ideally, procurement teams go through these three steps regularly — at least once a year, if not more often. Depending on the size of the organization, implementing a spend analytics tool that automates spend analysis is crucial to making improvements and adjustments in real-time.
A recent report by McKinsey found that perhaps the most important element in the spend analytics process is spend visibility.
“The most immediate task for spend analytics is to provide transparency and insight into where cash is spent. After all, a procurement organization’s primary objective is usually to optimize external spend with suppliers—commonly 40 to 80 percent of a company’s total cost—and realize a source of competitive advantage in terms of cost, quality, availability, and (increasingly) sustainability,” wrote McKinsey. “This begins with achieving visibility into external spend, making it easier for the organization to identify opportunities to reduce spending across supply markets (even across multiple categories and subcategories), suppliers, and locations, as well as volumes and prices.”
Spend visibility requires creating a detailed spend analysis report that answers questions such as:
- What is being purchased?
- How much is being spent?
- What is the purpose of each purchase?
- Are the suppliers delivering as promised?
- What ancillary costs are associated with each purchase?
Spend visibility is a complex task in that you are aggregating data from many different sources. Consolidating and standardizing data from different teams within a global enterprise will be time-consuming, but it’s crucial to get a baseline of your organization’s past and present spending patterns to identify where you can improve.
Once you have a single source of truth for spend reporting with standardized, cleaned data, you can dive into the numbers to see underlying trends and identify areas for improvement. Procurement leaders can easily review direct and indirect spend to gain actionable insights for better business decisions. Spend analysis provides a way to improve purchasing efficiency, reduce costs, and manage risks in the supply chain.
In addition, greater transparency from spend analysis also gives procurement teams leverage when working with suppliers. “An important longer-term impact of greater transparency is to increase negotiation efficiency and effectiveness. Having easily accessible supplier-related spend information, such as historical trends, sources of value leakage, price-development patterns, and prior agreements, can transform a negotiation into more of a fact-based conversation,” wrote McKinsey.
The last step in procurement spend analysis is to optimize procurement spending to keep margins healthy and allow the company to grow sustainably.
Optimizing procurement spend
The tactics you take to improve your procurement process will be determined by your spend analytics. There are several common approaches that your team might take to streamline procurement and save money.
- Bundle contracts for business units to improve pricing contract terms;
- Reduce the number of suppliers for particular items or categories to increase efficiency;
- Use internal and external pricing benchmarks to negotiate with suppliers from a stronger position;
- Reduce the time it takes to process purchase orders.
Technology like Fairmarkit’s tail spend management software can help you easily implement spend analytics and begin to see the benefits of clear, transparent spend data. By one estimate, teams that use a digital solution to manage tail spend can cut their annual expenditures by 5% to 10%, on average. Fairmarkit’s software can provide deeper visibility into your procurement spending — without minimal manual labor required.
Fairmarkit has a range of tools that can help you optimize your procurement budget. For more advice and resources, check out Fairmarkit’s blog, The Source.