Updated: Dec 5, 2022
Spend analysis is the practice of analyzing procurement spend to decrease costs, increase efficiency, or improve supplier relationships. In this guide, you’ll find everything you need to know about spend analysis and procurement spend analytics including the basics as well as some hot topics, filled with plenty of examples, infographics, and best practices. This guide is for people of all skill levels who want a refresher on the most important aspects of analyzing procurement spend. It doesn’t matter whether you’re a CPO or CFO, Head of Global Purchasing, or Category Manager, this guide is filled with helpful information. All the key topics are organized into easy-to-follow chapters. You can skip ahead to the most relevant areas or download the whole guide for future reference as a PDF. Welcome to Spend Analysis 101! Here are some basic definitions and key concepts to get started. Spend data (also known as procurement spend data) is information dealing with a company’s expenditures on goods and services purchased from external suppliers. Spend data management is the process of collecting, sorting, and managing that spend data. Spend analytics is the process of collecting, cleansing, classifying, and analyzing spend data through either dedicatedsoftwareor one-offspend cubes. Spend analysis is the practice of analyzing spend data to decrease costs, increase efficiency, or improve supplier relationships. FYI:Spend analytics and spend analysis are sometimes used interchangeably, but they are not the same thing. Without spend analytics, you won’t have the relevant information you need to do spend analysis. You can think about it like this: spend analytics gets you the information you need, and spend analysis is what you do with it. Let's dig a little deeper into the differences. What is spend analysis and why is it important? Spend analytics is the art behind spend data management. It begins with the collecting and cleansing of data. Then, there are the important steps of classifying and consolidating the data, so it’s grouped and named in understandable ways. After that, the data can be merged with external data, and be ready for the analysis stage. With spend analysis, you examine a specific part of the spend data to identify and extract valuable information that gives you strategic insights. It’s one of the key methods procurement organizations use to proactively identify savings opportunities, manage risks, and optimize their organization’s buying power. Spend analysis is often regarded as the fundamental foundation of sourcing. It is a tool that sourcing executives can utilize to engineer superior performance. The insights from spend analysis can improve visibility into corporate spend, as well as drive performance improvement, contract compliance, and most importantly, cost savings. Analyzing procurement spend provides a baseline to measure improvements and provides a reliable reference for deciding strategies to realize short- and long-term savings. As procurement moves to a more strategic function in the company, spend analysis is its fundamental strategic technique which establishes a parallel process that guides senior leaders and budget holders in maximizing value for the organization’s dollar. To extract valuable information out of spend analysis involves pulling together purchase history data to look at all angles of an organization’s expenditures. This includes considering products, prices, quantities, suppliers, business units, and payment terms. By following these guiding questions, spend analysis can help you look back at past performance and help you perform an assessment of future performance as well as trends. These are the basic questions we are asking when performing spend analysis: What are we buying? How much have we paid? How much have we bought? Who are we buying from? Who is buying? On what terms did we buy? How often do we buy? When did we buy it? Are we getting what had been promised? Where were the items delivered to (geographical location)? How does the data compare to previous years? Any spend visibility project starts with the identification of relevant spend data sources. So where do you start? Here are some of the most common sources of procurement spend data. enterprise resource planning (ERP) tools general ledger information (i.e., an organization’s financial data) purchase orders data shared by suppliers risk reviews credit ratings transaction data other internal systems andexternal sources Extracting data from multiple sources is a very complex and technical procedure...a topic we can't go into too much detail on in a 101 course. If you want to dig even deeper into how we do it at Sievo, you can watch this on-demand webinar on smart data extraction! Spend data can be lumped into two big categories: direct and indirect. The difference between direct and indirect spend often causes confusion. Let’s review definitions and examples for both key areas of procurement. Direct spendin procurement refers to goods and services that are directly related to making products. Examples may include raw materials, components, hardware, and services related to manufacturing processes. Indirect spend in procurement is the sourcing of goods and services not directly related to the manufacturing of products. Indirect procurement enables businesses to maintain and develop their operations. Examples of indirect spend categories include: marketing services (media buying, agency fees) professional services (consultancies, advisors) travel and lodging MRO (maintenance, repair, and operations) information technology (hardware, software) HR-related services (recruitment, training) transportation and fleet management utilities (gas, electricity, water) In manufacturing industries, direct material spend covers most of the total spend – sometimes it may account for up to 80% of the total spend. But what is the difference between direct spend and direct material spend? Both direct and indirect procurement spend can be grouped into categories, enabling analysis and management of similar goods or services. Aspend categoryis the logical grouping of similar expenditure items or services that have been clearly defined on an organizational level. For example, “information technology” may be considered a spend category covering both IT software and hardware. Thespend taxonomyis the way a procurement organization classifies spend into hierarchies. One way to view spend categories is like a tree with many branches for different levels or sub-categories of spend. The number of levels in a spend taxonomy depends on the procurement organization’s needs, ranging from three to six levels of categories and sub-categories. Whendesigning a taxonomy it needs to be thoroughly communicated and aligned internally with key stakeholders such as Finance and local/global Category Managers. A clear definition and understanding of each subcategory in the taxonomy helps in classifying your data accurately. Accuracy is important because you eventually want to see what you are spending on, how much you are spending, to whom, and what the scope for cost savings is. Therefore, it is important to be cautious when creating subcategories that are vague or ambiguous such as a subcategory called ‘Miscellaneous items’, or subcategories that are not MECE (Mutually exclusive, collectively exhaustive). There are also standard taxonomies such as theUNSPSC(United Nations Standard Products and Services Code) which is a common coding system to describe goods and services. It may be used to categorize procurement spend, but these are often not ideal for strategic sourcing. Nonetheless, standard taxonomies can be used as a starting point to create an organization-specific spend taxonomy. To see a full list of the specific codes, visit this page on the United Nations Global Marketplace website. The generic procurement categories from the UNSPSC are: Raw Materials, Chemicals, Paper, Fuel Industrial Equipment & Tools Components & Supplies Construction, Transportation & Facility Equipment & Supplies Medical, Laboratory & Test Equipment & Supplies & Pharmaceuticals Food, Cleaning & Service Industry Equipment & Supplies Business, Communication & Technology Equipment & Supplies Defense, Security & Safety Equipment & Supplies Personal, Domestic & Consumer Equipment & Supplies Services Procurement data can be sliced and diced based on a number of key performance indicators (KPIs), or metrics, relevant to the procurement organization. They exist to measure the effectiveness and performance of procurement management. In addition, proper KPIs help you also to identify savings opportunities, manage supplier risk, and streamline procurement activities across business units. Typical important KPIs among businesses fall into these five groups: Cost savings Spend under management Supplier performance Operational KPIs Employee related KPIs
The basics of spend analysis
Key terms and definitions
Spend analytics vs. spend analysis
Asking the right questions
Where does spend data originate?
Direct vs. indirect procurement spend
Spend categories in procurement
Spend analysis in procurement
KPIs and metrics
Spend analysis is the practice of analyzing procurement spend to decrease costs, increase efficiency, or improve supplier relationships.
In this guide, you’ll find everything you need to know about spend analysis and procurement spend analytics including the basics as well as some hot topics, filled with plenty of examples, infographics, and best practices.
This guide is for people of all skill levels who want a refresher on the most important aspects of analyzing procurement spend.
It doesn’t matter whether you’re a CPO or CFO, Head of Global Purchasing, or Category Manager, this guide is filled with helpful information.
All the key topics are organized into easy-to-follow chapters. You can skip ahead to the most relevant areas or download the whole guide for future reference as a PDF.
Welcome to Spend Analysis 101!
Here are some basic definitions and key concepts to get started.
Spend data (also known as procurement spend data) is information dealing with a company’s expenditures on goods and services purchased from external suppliers.
Spend data management is the process of collecting, sorting, and managing that spend data.
Spend analytics is the process of collecting, cleansing, classifying, and analyzing spend data through either dedicatedsoftwareor one-offspend cubes.
Spend analysis is the practice of analyzing spend data to decrease costs, increase efficiency, or improve supplier relationships.
FYI:Spend analytics and spend analysis are sometimes used interchangeably, but they are not the same thing. Without spend analytics, you won’t have the relevant information you need to do spend analysis.
You can think about it like this: spend analytics gets you the information you need, and spend analysis is what you do with it.
Let's dig a little deeper into the differences.
What is spend analysis and why is it important?
Spend analytics is the art behind spend data management. It begins with the collecting and cleansing of data. Then, there are the important steps of classifying and consolidating the data, so it’s grouped and named in understandable ways. After that, the data can be merged with external data, and be ready for the analysis stage.
With spend analysis, you examine a specific part of the spend data to identify and extract valuable information that gives you strategic insights. It’s one of the key methods procurement organizations use to proactively identify savings opportunities, manage risks, and optimize their organization’s buying power.
Spend analysis is often regarded as the fundamental foundation of sourcing. It is a tool that sourcing executives can utilize to engineer superior performance. The insights from spend analysis can improve visibility into corporate spend, as well as drive performance improvement, contract compliance, and most importantly, cost savings.
Analyzing procurement spend provides a baseline to measure improvements and provides a reliable reference for deciding strategies to realize short- and long-term savings.
As procurement moves to a more strategic function in the company, spend analysis is its fundamental strategic technique which establishes a parallel process that guides senior leaders and budget holders in maximizing value for the organization’s dollar.
To extract valuable information out of spend analysis involves pulling together purchase history data to look at all angles of an organization’s expenditures. This includes considering products, prices, quantities, suppliers, business units, and payment terms.
By following these guiding questions, spend analysis can help you look back at past performance and help you perform an assessment of future performance as well as trends. These are the basic questions we are asking when performing spend analysis:
What are we buying?
How much have we paid?
How much have we bought?
Who are we buying from?
Who is buying?
On what terms did we buy?
How often do we buy?
When did we buy it?
Are we getting what had been promised?
Where were the items delivered to (geographical location)?
How does the data compare to previous years?
Any spend visibility project starts with the identification of relevant spend data sources.
So where do you start?
Here are some of the most common sources of procurement spend data.
enterprise resource planning (ERP) tools
general ledger information (i.e., an organization’s financial data)
data shared by suppliers
other internal systems andexternal sources
Extracting data from multiple sources is a very complex and technical procedure...a topic we can't go into too much detail on in a 101 course.
If you want to dig even deeper into how we do it at Sievo, you can watch this on-demand webinar on smart data extraction!
Spend data can be lumped into two big categories: direct and indirect.
The difference between direct and indirect spend often causes confusion. Let’s review definitions and examples for both key areas of procurement.
Direct spendin procurement refers to goods and services that are directly related to making products. Examples may include raw materials, components, hardware, and services related to manufacturing processes.
Indirect spend in procurement is the sourcing of goods and services not directly related to the manufacturing of products. Indirect procurement enables businesses to maintain and develop their operations.
Examples of indirect spend categories include:
marketing services (media buying, agency fees)
professional services (consultancies, advisors)
travel and lodging
MRO (maintenance, repair, and operations)
information technology (hardware, software)
HR-related services (recruitment, training)
transportation and fleet management
utilities (gas, electricity, water)
In manufacturing industries, direct material spend covers most of the total spend – sometimes it may account for up to 80% of the total spend. But what is the difference between direct spend and direct material spend?
Both direct and indirect procurement spend can be grouped into categories, enabling analysis and management of similar goods or services.
Aspend categoryis the logical grouping of similar expenditure items or services that have been clearly defined on an organizational level. For example, “information technology” may be considered a spend category covering both IT software and hardware.
Thespend taxonomyis the way a procurement organization classifies spend into hierarchies. One way to view spend categories is like a tree with many branches for different levels or sub-categories of spend.
The number of levels in a spend taxonomy depends on the procurement organization’s needs, ranging from three to six levels of categories and sub-categories.
Whendesigning a taxonomy it needs to be thoroughly communicated and aligned internally with key stakeholders such as Finance and local/global Category Managers. A clear definition and understanding of each subcategory in the taxonomy helps in classifying your data accurately.
Accuracy is important because you eventually want to see what you are spending on, how much you are spending, to whom, and what the scope for cost savings is. Therefore, it is important to be cautious when creating subcategories that are vague or ambiguous such as a subcategory called ‘Miscellaneous items’, or subcategories that are not MECE (Mutually exclusive, collectively exhaustive).
There are also standard taxonomies such as theUNSPSC(United Nations Standard Products and Services Code) which is a common coding system to describe goods and services. It may be used to categorize procurement spend, but these are often not ideal for strategic sourcing.
Nonetheless, standard taxonomies can be used as a starting point to create an organization-specific spend taxonomy. To see a full list of the specific codes, visit this page on the United Nations Global Marketplace website. The generic procurement categories from the UNSPSC are:
Raw Materials, Chemicals, Paper, Fuel
Industrial Equipment & Tools
Components & Supplies
Construction, Transportation & Facility Equipment & Supplies
Medical, Laboratory & Test Equipment & Supplies & Pharmaceuticals
Food, Cleaning & Service Industry Equipment & Supplies
Business, Communication & Technology Equipment & Supplies
Defense, Security & Safety Equipment & Supplies
Personal, Domestic & Consumer Equipment & Supplies
Procurement data can be sliced and diced based on a number of key performance indicators (KPIs), or metrics, relevant to the procurement organization. They exist to measure the effectiveness and performance of procurement management. In addition, proper KPIs help you also to identify savings opportunities, manage supplier risk, and streamline procurement activities across business units.
Typical important KPIs among businesses fall into these five groups:
Spend under management
Employee related KPIs
Read the complete list of Procurement KPIs
Tip: By visualizing KPIs in adashboardyou can analyze and keep track of your performance in real-time. A dashboard can also help you identify improvement opportunities.
Learn how Sustainability Goals can become KPIs for your procurement organization
Spend analysis is often viewed as part of a larger domain known as spend management. Visibility in the spend management area refers to the ability of an organization to have a comprehensive view of the metrics that drive improved cost savings, process efficiency, and supply-chain performance.
Having spend visibility allows for analyzing past spend which can be utilized for planning future direction.
Spend visibility goes beyond tracking spending, as it gives both a detailed and holistic picture of how money is moving through your company. By cleansing, categorizing, and analyzing expenditure information, consistent spend visibility lets you clearly see information on suppliers, spend, and compliance.
Say you’re a CEO of a mid-size company, with about 300 employees. Let’s say you’ve run out of paper and pens. What would you do if you knew that the allocated budget for office supplies was close to maxed out?
To answer that, you need to determine what portion of your budget for office supplies has already been spent, and if more can be spent without exceeding the budget. This in essence is what visibility into spend it.
Without spend visibility — in this case, a real-time count of how much of your budget has already been spent — most companies would have ordered the office supplies anyway. They would only find out later that they exceeded the budget for office supplies after finance publishes a quarterly report.
Spend visibility is the cornerstone of superior procurement performance. It provides a view into the core components of spend categories. Organizations with clearer spend visibility into their sourcing activities can utilize their reports and insights to drive better performance and make more informed business decisions.
Spend analysis benefits
Spend analysis offers procurement organizations several key benefits. Let’s break them down to give more detail into each of the benefits.
Achieve full visibility into all corporate spend
The key benefit that spend analysis can provide to an organization is better visibility and actionable spend intelligence. Spend analysis offers an organization greater transparency into the amount of money it spends purchasing materials and services.
It allows the procurement organization to have a look into the core of their expenses and purchases.As the data needed for spend analysis is often extracted from multiple systems across an organization, a lot of removal of duplication, cleansing, and classification may be needed before analysis can be performed.
Data accuracy and consistency can only be achieved if organizations take full advantage of spend analysis. Spend analysis not only gives them a more effective way to collect, store, and manage the enormous amount of data they have but also provides a deeper understanding that can be used to develop initiatives and make confident spending decisions.
Identify savings opportunities and realize incremental savings
As a sourcing manager, one reason why you want to conduct a spend analysis is to meet your cost reduction goals. When all the numbers have been crunched, the resulting metrics will show the spending patterns and the potential savings in several categories.
Depending on the reports conducted, purchasing managers may then be able to cut costs using alternative products, supplier consolidation, and merging products that were purchased separately into groups that can be negotiated on and contracted together.
Price reductions can be achieved through contract buying, improved contract compliance, and reductions in maverick spending. Organizations can also achieve additional savings on indirect items ranging from office supplies to temporary staffing, contractors, and consulting services.
Streamline and centralize procurement process and other administrative efficiencies
Spend analysis has been proven to contribute to driving cost-effectiveness and process efficiency in a lot of organizations. Every process from financial reporting to budget preparation will vastly improve with detailed information organized around multiple dimensions.
A more productive and efficient procurement function conducting spend analysis will build deeper relationships with fewer key suppliers and need fewer employees for unnecessary delegated tasks.
There will be a significant reduction in cycle time for creating reports and ad-hoc analyses, therefore reducing labor costs, or freeing up time for more productive work.
Manage risk and maverick spending to ensure compliance
When your spend data is enriched with suppliers’ credit scores and other revenue information, you can better assess the overall supply chain failure risk of your organization. Good spend analysis data will also allow you to track and identify suppliers who have non-contracted spend, as well as spend with non-contracted vendors.
You can identify the categories of spend where there may be too many suppliers with no contract in place. The risk in the contract is reflected in the pricing, and that can be from a lack of orders being made or alternatively not being able to scale up fast enough to deliver the volume of goods and services required.
The reduced contract risk to the vendor often translates into lower costs. Contract compliance information can drive savings while enriching spend data with supplier risk information helps the organization in utilizing spend data to avoid supply chain disruptions.
Evaluate supplier performance for better relationship management
The starting point for superior procurement performance and supplier relationships is information. Spend analysis provides data and insights into the potential value of improved supplier relationships. Once the organization determines which suppliers offer the best value, it can work with them to establish more evolved procurement processes and inventory programs.
Procurement professionals can peer into the performance of their suppliers to encourage proactive supplier development. At the same time, they can root out non-performing suppliers and help boost contract compliance by monitoring pricing on a continuous basis.
Scorecards help evaluate suppliers and vendors by capturing metrics that evaluate performance. With comprehensive spend analysis, more information is available on the amount of money an organization spends and with which suppliers it spends the most.
This information is useful in contract negotiations and can be used to maximize the money the organization spends on procurement. When successfully implemented, this reduces the number of unnecessary suppliers, creating greater value and establishing a more efficient and leaner procurement process.
Spend analysis gives you the opportunity to benchmark your performance internally across business units in different locations. This paves the way for meaningful comparisons that can be used for strategic decision-making.
Collecting and organizing spend data together in one place enables you to answer a wider range of questions such as the average number of vendors or spend by category, and which vendors are generating the highest cumulative revenues. Understanding this is crucial to set targets for improvements that are realistic and achievable.
Leverage spend data across business units
Data extracted and analyzed in spend analysis systems plays a major role in the strategic planning of the procurement function. However, other internal business units can also leverage spend analysis to achieve their business objectives.
For example, the finance department can leverage spend analysis in the same way as procurement: to gain a better understanding of corporate spend. Finance professionals can leverage spend analysis systems to analyze data from purchasing card, invoice, requisition, or invoice sources as a means of generating more accurate accounting reports.
Work collaboratively with other organizations
Each individual organization should develop its own blueprint to deliver savings and efficiencies. However, working with a group can help generate a more powerful strategic plan. A group of organizations can decide to make purchases of commonly procured goods and services together to achieve savings and/or better contract terms.
A collaborative spend analysis project provides the group with the visibility to plan the most effective time to carry out a joint competitive solicitation for those commonly procured goods and services. Having a firm understanding of which members of the group are buying those goods or services can already go a long way towards delivering savings and efficiencies for all involved.
Having all spend data in the same, consolidated format makes it easier to get everything in one place. This generally has the effect of making your collaborative efforts more strategic. When you can easily identify common suppliers, you can more quickly see savings opportunities. Collaborative spend analysis provides the basis for more proactive and strategic discussions with other members of the buying group.
How to do Spend Analysis
This brief chapter will provide you with an overview of the steps of spend analysis. While spend analysis projects vary in shape and size, they typically include six key steps from spend identification to analysis.
Spend Analysis in Six Steps
1. Identify Data Sources
To start a spend analysis, the first step is to get an overview of what spend will be covered. Doing this allows you to restrict those purchases to just a few key sources.
You can segment your spend into different groups and from there determine all the spend data sources available from your departments, plants, and business units. Start by identifying the areas of your business that make significant purchases, such as procurement, finance, and marketing.
2. Data Extraction
Once you have narrowed the scope down, you can now capture your spend data and consolidate all of it into one central database. Data is usually in different formats, different languages, and different currencies, so collecting it into one single source might be challenging. There are, however, software programs available to make this step easier.
3. Data Cleansing
Cleansing is about detecting inaccuracies and removing corrupt records and redundancies from a set of data. This includes finding and eliminating errors and discrepancies in descriptions and transactions to ensure accuracy. Through data cleansing, you can identify which contacts in your database are incomplete or irrelevant. Typos are removed and missing codes are validated and corrected for up-to-date information.
4. Data Enrichment
Data enrichment refers to the process of enhancing, refining, and improving raw spend data. It also includes standardizing the spend data for easy viewing. Enriching the spend data makes sure that all the header and line-level names and details are accurate and to a specific naming standard. Data is often missing specific fields, and misspellings and abbreviations are common — as are incorrectly coded fields.
Classification typically involves grouping several suppliers of the same parent company or organization. For example, Microsoft purchases like Microsoft 365, Azure, and Surface should all be grouped together. At the same time, you can also categorize the data into meaningful groups (like marketing, office supplies, software) to identify how and where the business is spending its money.
Unifying heterogeneous spend data into clearly defined categories makes spend easier to address and manage across the whole organization. Classification is about harmonizing all purchasing transactions to a single taxonomy, enabling procurement to gain visibility of the global spending to make better sourcing decisions.
6. Analysis of Data
The last step is to identify opportunities for savings and other procurement improvements. Analysis can be geared towards investigating all sorts of business problems, such as ensuring that you have negotiated the best contract deals per supplier, or confirming buyers are purchasing from preferred suppliers.
With this, you can identify opportunities for reducing the number of suppliers per category and negotiating better rates. The best probable method for cost savings can only be realized after the confirmed estimates have been calculated properly.
Types of Spend Analysis
There are countless opportunities and insights to discover in your spend data. This chapter will cover six of the most fundamental procurement analytics exercises you can use.
Tail Spend Analysis
Tail spend is defined as the amount of money that an organization spends on purchases that make up approximately 80% of transactions but only 20% of total spend volume. Tail spend is easy to ignore but at a big cost. It is the place where procurement organizations may be leaving money on the table and utilizing their resources inefficiently.
Tail spend is generally considered low-value purchasing, as it makes up only a small portion of spend (usually 10-20% of each spend category). However, it is a significantly important area of any organization’s spend management.
With companies making millions of purchases every year, purchases that are too small or too infrequent can go overlooked. Procurement teams invest heavily in their core spend areas, but the tail-end remains a largely untapped opportunity for most companies.
There is little understanding of how much money is involved in tail spend, and even less knowledge of how to manage it. This can lead to potentially losing millions of dollars annually.
Doing an in-depth spend analysis on tail spend helps encourage compliance and identify maverick spend, which refers to non-compliant transactions. The most common way of doing this is carrying out a simple spend analysis, and then ranking the suppliers based on annual spend. The smaller suppliers that add up to around 20% of total spend are defined as the tail.
The figure above illustrates the simplest approach to analyzing a company’s tail spend, which is calculating the ratios of spend to suppliers at various points along the purchasing range. Here, the Y-Axis represents spend per supplier ("Total Spend by Supplier") and the X-Axis represents the total supplier base ("Supplier"), with suppliers ranked in descending order of size from left to right.
So, to the furthest left will be the suppliers where you buy the most goods and services from. On the farthest right will be the suppliers where you spend the least. The rule suggests that about 80% of your spend will be in the top 20% of suppliers. Everything else is "tail spend".
Tail-end spend management has been growing recognition and increasing importance within procurement. Putting a significant effort into it may not only yield potential savings but also reduce costs and get more spend under management.
A recent CPO survey conducted by the Hackett Group found that most respondents believe tail spend management can lead to 7+% savings. When there is enough visibility into the tail spend, it is easier to identify areas that need to be sourced strategically.
Organizations that are successfully managing tail spend often start by segmenting the tail spend away from strategic sourcing managers, and allocating dedicated resources with the right incentives, tools, and capabilities to manage the tail.
Supplier Spend Analysis
Supplier spend analysis is the task of identifying the amount of spend coming from critical vendors. It involves creating a detailed spend profile for each vendor using historical consumption data. Knowing this can help focus efforts on getting the best value from these preferred vendors and consolidating the relationships.
Different types of vendor reports visualize spend insights in several ways: by vendor, by category, and by geography, for instance. Vendor reports enable year-on-year comparison and analysis for data-driven decisions. Spend can be optimized by identifying and implementing opportunities for consolidation.
There are usually many low-value transactions with multiple vendors across many business units. The total number of one-off and small value vendors is usually big. Knowing this can help in streamlining and leveraging spend by identifying contract leakages and maverick spending. The aim is to reduce the number of vendors in each category.
Every dollar spent is important and savings opportunities can be missed through off-contract purchases. Vendor spend analysis will facilitate the identification of purchasing trends and buying patterns, as well as monitoring utilization and spend consolidation of key strategic suppliers.
Category Spend Analysis
Category spend analysis allows you to explore spend in a defined spend category hierarchy. This is useful in identifying spend leakage issues.
The first step in doing a category spend analysis is understanding the scope and breadth of the category. Are you buying similar goods and services from too many different vendors? This analysis is built on hierarchies, and the spend transactions are categorized into the most appropriate category.
Allocating spend consistently into categories makes the data easier to navigate, interpret, and understand. When organizations can focus on prioritizing their top spend categories, it helps them identify and forecast savings opportunities.
Prioritization will allow better negotiations for key spend categories to ensure more favorable contracts and pricing. By drilling into their spend data, procurement professionals are also gaining a deeper understanding of their spend categories.
When you have a high-level overview of spend by category, it is easier to identify categories that help in delivering savings and to realize which projects bring strategic importance to the organization. With this, you can easily figure out which action to take based on what gives the most impact on staff or operations, and what the risks associated are.
Access to detailed information on spend by category gives you the data to determine priorities and allocate resources to deliver the highest return on investment for the level of effort required.
Item Spend Analysis
Item spend analysis refers to analyzing expenditure at an item/ SKU level.It takes into account every individual purchase, classifying each one of them to identify what department it was for and what supplier was used.
This analysis gives the ability to know whether a specific item is being purchased from various suppliers, or in several locations and at different item prices.Doing this analysis can highlight the different opportunities for purchasing in the business and potentially identify spend leakage issues, such as purchasing from non-preferred vendors and maverick spend.
Payment Term Spend Analysis
Payment term spend analysis provides excellent insights for companies to analyze payment practices and terms within their purchase-to-pay (P2P) processes. It explores the opportunities of leveraging all possible discounts or interest from the invoice payment process while increasing working capital.
Suppliers may reward early payment of invoices with discounts, but early payment of invoices may also mean lost interest in working capital. Payment term spend analysis utilizes data and gives a comprehensive view that enables you to identify unrealized discounts through late payments of invoices or opportunities to negotiate better payment terms to capture unrealized interest. It also covers the review of payment patterns to identify practices and activities that are not done properly.
Contract Spend Analysis
Finally, contract spend analysis tells companies if they are complying with their existing negotiated contract terms. It analyzes spend with vendors by contract to identify spend leakage through non-compliant contracts.It ensures that the best contract deals per supplier have been negotiated and that all the buyers are purchasing from preferred suppliers.
Spend Analysis Dashboards
A dashboard in the software context is referred to as a user interface or view that captures and presents a holistic view of information about a series of predefined topics.
A spend analytics dashboard is a dashboard that visualizes sets of spend data into charts for the purpose of analysis. These sets of data are selected based on predefined parameters, business targets, or KPIs.
The benefit of a dashboard is an instant high-level picture of spend data. Spend analytics dashboards are also referred to as charts or reports in some contexts.
In this chapter, we will cover 9 basic types of spend analysis dashboards used in Sievo. If you'd like to see a broad overview of all that Sievo can offer, check out this two-minute demo video to see it in action.
Spend overview dashboard
Example of Sievo's Spend Overview Dashboard
ASpend Overview Dashboard provides an overview of your spend performance by comparing data of one selected period to the previous one. In the example above, this view is filtered by year-to-date and presents the data by three key aspects: category, organization, and supplier.
It shows multiple charts that visualize different sets of spend data. You can see in this example the distribution of spend by categories (raw materials, indirect, packaging, and undefined), distribution by organization (Americas and EMEA) as well as the distribution of spend by top 10 suppliers.
With a dashboard like this, you can track the top suppliers by region, spend changes by category, purchase process developments, as well as supplier count developments.
A proper spend analytics dashboard should be interactive, meaning you can select and filter data directly on the charts. Depending on what your responsibilities are, you can use a spend analytics dashboard to gain insights to questions or goals in mind with just one click.
Let’s say you are interested in your spend performance in Americas. You simply select Americas in the organization chart and the view automatically filters the data by Americas. Now you see a more defined view of the dashboard covering charts that visualize spend data that was classified to the specific organization level.
Below, you can see an example of the same Spend Performance Dashboard filtered by the Americas region with one click.
Example of Sievo’s Spend Overview Dashboard after filtering by organization Americas
Supplier Performance Dashboard
Example of Sievo’s Supplier 360° Dashboard
A Supplier Performance Dashboard visualizes all relevant data of a specified supplier, giving you a 360-degree perspective. In this example, you can see relevant analytics on the top supplier by spend ranking.
This provides transparency to what you are purchasing from a specific supplier as well as the relevant payment terms across business units. By having an overview of supplier spend data, you are also able to compare a supplier against its peers, gaining insights into performance opportunities.
A Supplier Performance Dashboard is useful in, for example, strategizing supplier meetings to re-negotiating payment terms or ensuring compliance for better payment terms across all your business units.
Category Performance Dashboard
Example of Sievo’s Category 360° Dashboard
The Category Performance Dashboard is similar to the Supplier Performance Dashboard, but instead of a specified supplier, it shows all relevant data of a selected category. With the Category Performance Dashboard, you can analyze the spend distribution throughout your categories, keep track of purchase order development, material price development, and see which suppliers your business units are sourcing from.
The Category Performance Dashboard is especially useful in providing category management insights. You can identify price opportunities or find materials sourced from a single supplier which may result in a business risk such as a single point of failure. On top of that, you can track how much was purchased with or without a PO and assess purchase price development by drilling down to the lowest category level.
Supplier Base Performance Dashboard
Example of Sievo’s Supplier Tail Dashboard
A Supplier Base Performance Dashboard gives you the ability to analyze data from the whole supplier base. You can keep track of your top suppliers and identify tail-spend suppliers, giving you transparency on consolidation opportunities and helping you tackle the tail spend to mitigate risks or create savings.
The Supplier Base Performance Dashboard is great for when you want to do a tail spend analysis but can also be used for internal benchmarking purposes. You do this by looking at how fragmented or consolidated your supplier base is in different business units in a single category.
Sourcing Performance Dashboard
Example of Sievo’s Sourcing Geography Dashboard
With a Sourcing Performance Dashboard you can immediately see from which regions your business units are sourcing. You can also gain transparency into which materials are sourced internationally vs domestically and evaluate potential regional risks. All this helps you assess and anticipate the impact of trade or geopolitical turmoil.
A Sourcing Performance Dashboard is useful in managing regional risks as well as identifying where certain goods or services are coming from. You can for example identify savings in logistics costs from imported goods by switching to suppliers that are geographically closer.
Process Performance Dashboard
Example of Sievo’s Process Optimization Dashboard
A Process Performance Dashboard shows the areas of possible improvement on small POs/invoices. This refers to the costs involved in processing transactions. By finding suppliers with small value POs/invoices, you can potentially gain savings.
It also allows you to see any category differences in terms of the quantity and amount of invoices/POs expected. When filtering by a specific category, discrepancies between business units or suppliers can be identified and assessed for strategic process optimization.
A Process Performance Dashboard is useful when you want to analyze invoice and PO counts development, do an internal benchmark on average invoice/PO values between different business units as well as find suppliers with small value POs/invoices. These performance insights help you identify opportunities in streamlining your purchase process.
Price Performance Dashboard
Example of Sievo’s Price Opportunities Dashboard
A Price Performance Dashboard helps you analyze price discrepancies between different suppliers. When filtering by a specified region, category, and supplier, you can determine price opportunities. A Price Performance Dashboard allows you to identify such price opportunities globally as well as regionally, helping you to discover the price range of your specified category.
The price opportunities presented in a Price Performance Dashboard are useful when you are negotiating for cheaper prices or want to find the cheapest suppliers in a category.
Currency Performance Dashboard
Example of Sievo’s Currency Portfolio Dashboard
A Currency Performance Dashboard gives a proper overview of spend distribution in different currencies and helps you recognize which categories or suppliers are purchased using different currencies. You gain transparency on risks associated with different currency purchases such as foreign exchange risks.
A Currency Performance Dashboard is useful when you filter by a specified category or supplier, as this helps you to determine materials or suppliers that could get more expensive when the purchasing currency would strengthen in relation to the local currency.
This chapter has reviewed just some of the basic spend analytics dashboards. The ready-made charts in the above-mentioned dashboards can give you a great overview with only one click. But what if you cannot find one matching your goal in mind?
What you will need is a Custom Dashboard, where you can mix and match any dimension, measure, and chart type for any report you need and slice and dice with any data point you want. This is especially useful for your presentations.
The image below shows how Sievo's Self Service Dashboard allows you to build reports to meet your specific needs.
Example of Sievo’s Self Service Dashboard
Best Practices in Spend Analysis
Now that we’ve covered all the basics, here are some strategies common among organizations with the most successful spend data management programs.
These best practices in spend analysis come from our close to 2 decades of experience helping enterprise companies transform their spend data into actionable insights.
1. Classify spend data at a detailed level
Categorizing at the item level proves to be the most effective way to do spend analysis. This not only provides visibility but also enables more details of all the attributes, enough to do estimates and comparisons. Aim for at least 95% accuracy.
Higher-level classification has its own benefits, but item-level proves to be more effective as it gives a precise view of spending with each supplier and for each commodity.
2. Adopt a common classification schema in the company
Organizations should adopt a common internal taxonomy or industry-standard classification schema. For example, UNSPSC provides a universally accepted metadata layer for organizing and controlling spend data.
This standardization is key to driving accurate organization and correlation of spend data and to enabling actionable analyses. Often broader than internally developed classification codes, these standards allow organizations the ability to map all spend data to a single schema.
3. Pursue a permanent solution versus one-time efforts
Using traditional, labor-intensive procedures and systems is not recommended due to the volume and complexity of spend data within an organization. External services usually provide a temporary solution, which requires the organizations to engage with the consultants on a continuous basis to keep data up-to-date.
Outsourcing also limits the transfer of the process knowledge and expertise to the organization, leading to dependence upon consultants in the future. Adopting a more sustainable and standard procedure can help organizations get monthly refreshes of their spend data, and a more efficient operation of examining the spend categories.
4. Have an automated approach to cleansing and classification
Automated spend analytics solutions capture data classification rules and attributes for a wide range of spend categories. Because of their self-learning abilities, these solutions can present what the sourcing experts know into the system. But there will be a need for commodity managers to classify exceptions from time to time.
Establishing automated extraction routines to aggregate and refresh data on a regular basis allows accurate and repeatable spend analyses. Automation also increases the frequency of analysis, which is critical as the business environment is dynamic, with prices changing and contracts expiring all the time.
5. Access all spend-data sources within and outside the organization
There are times when your vendors, suppliers, or other affiliates have better data than you. Organizations that access spend data from all relevant sources can gather a more comprehensive and accurate idea of their total spending.
6. Continuously improve and expand the scope of spend data management program
Spend data management is an ever-changing process. Organizations should constantly look for ways to expand the uses and scope of spend, and their data cleansing and classification capabilities.Conducting reviews will help identify immediate areas for improvement and illustrate the positive impact that a particular initiative has on the performance of the organization.
7. Collaborate with IT and other key stakeholders, like finance, in the whole process
To achieve full potential savings, a collaborative partnership between procurement and other business units must be created, and everyone should be held accountable for results. Leveraging spend data requires cooperation within the entire procurement organization.
When procurement and ﬁnance work together, they can create systems that reliably capture and deliver real cash savings to management. This in turn creates a positive feedback loop for improving performance.
8. Define category strategies and measure impact
Develop category plansaligned to the business objectives and key stakeholders with a strategic approach to maximize value, reduce risk, and effectively manage the supply of goods and services.
These plans should influence sourcing strategies and initiatives. A careful review of these strategies will assess and confirm their business impact and determine if a revision or repetition is required.
9. Take actions based on data insights to deliver savings opportunities/ savings program management
The data provided by the procurement teams can provevaluable as it generates insights about what the organization buys and how it makes purchases.These insights and ideas must be implemented into actual strategies that will drive savings to the bottom line. Act on these strategies and make sure that they will be translated into savings opportunities.
Why Spend Analysis Projects Fail
Many organizations tackle the problem of spend visibility, but these projects often fail in delivering the value that was expected initially, despite the significant need that the organization had for effective spend analytics. Here are some reasons why spend analysis projects fail.
Poor quality data/ dirty data
The most common reason why most spend analysis projects fail is because of the poor quality of data. There are times when suppliers have better data than the systems the organizations can provide. Many organizations spend 80% of their time cleaning up data.
Common examples of dirty and inconsistent data include basic hygiene issues like empty data fields and wrong spellings which can interfere with analysis. An effective spend data classification and analysis requires detailed information but often has unstructured data within different business systems.
The information is often rife with errors and discrepancies in different departments or missing critical data fields, such as supplier name, product attributes, or account codes. Part/item descriptions for the same category might vary significantly, words can be abbreviated, and supplier names may be misspelled.
Complex and labor-intensive cleansing and classification process
For most large organizations, classifying their billions of dollars of spend is not easy. The problem is not just in the volume of spend, but the immense sets of spend-related data, which could take years to properly classify.
However big the challenge of classification, this granularity is necessary to generate value.
Human work hours alone are not sustainable, as it would be impossible to keep up with constantly incoming data while repeating the same long processes. Other methods like classifying spend data only at the highest-level commodity class provide insufficient insights and often give inaccurate analysis.
No solution will give you 100% classified data all the time. The key thing is to build in appropriate checks and balances so most errors can be caught and corrected immediately. Making sure that this is done consistently will maintain trust in the data and in the classification process and enable the data to be used consistently for ongoing decisions.
Leaders without a data-driven mindset
The leadership team also has a role to play in why some spend analytics projects fail. Failure may be due to a lack of agility and continuous involvement or sponsorship by executives in the analytics process. Many business leaders trust the familiar way of doing things and may resist adopting a more data-driven approach.
The top management may not be the people who literally put spend analysis insights into strategic practice. The management team doesn’t necessarily need to be directly involved in the spend analysis project, but there must be periodic short feedback loops.
The solution is to adopt a more lightweight approach. Letting them know of project progress will ensure they see immediate, accumulative results. Getting them in the loop drives better engagement and management buy-in.
Unrealistic expectations, unclear goals, and misplaced priorities
Part of the reason that many spend analytics projects fail is that organizations rush to accumulate and analyze as much data as possible all at once and without much of a plan. This usually leads to huge costs and an overwhelmed team.
Starting big isn’t always the way to go. Beginning the spend analysis process with new robust software can feel like there are more opportunities than there are resources to exploit them.
Start small. It is not only much more fruitful and lower cost, but also minimizes risk. Some of the most valuable business insights have been derived from surprisingly small data sets. Starting small also leads to a clearer path to smarter business decisions and priorities ensuring data analytics success.
Spend analytics is not a one-time project for you to set up and reap the benefits right away. It needs a plan and must be transparent with immediate, disciplined, and regular feedback loops.
Wrong tools or having too many tools to choose from
Spend analysis is a project that should start with the right tools. It is always about understanding what your organization needs and getting the proper solutions that will address the current situation.
Attempts to do spend analysis incorrectly and without the proper solution will put the validity of analysis in jeopardy. Organizations should compare their options and weigh the pros and cons of each solution before deciding.
Most spend analysis initiatives fail to deliver additional results after 12 to 18 months because they have insufficient or ineffective systems in place. Challenges are daunting and many solutions fail to address all of them. An organization should ensure that the solution selected addresses all issues and challenges that are relevant to its own situation.
Lack of skills and user competence
A deep product and domain knowledge are needed for correcting spend data classification errors. This expertise varies across the company, resulting in different and unpredictable results.
Many organizations put data cleansing and classification duties in the hands of IT professionals who may not have a complete understanding of the parts and services that require review. There may be a lack of ability among existing staff to access, organize, and analyze spend data for sustainable use.
For example, when you do a classification deep dive in some categories, where the knowledge is limited to a few people, the right expert needs to be associated with the right spend items. If the initial data is mapped out poorly, repeated efforts may be required before the reports will be useful.
Very often category teams are the ones with the right information, but they are usually not involved. When this happens, the sourcing analysts might have already missed out on valuable opportunities.
Fear of losing relevance or control of data
Data silos inhibit productivity and waste resources. They can happen for many different reasons, including cultural, structural, and technological factors. Fears over losing relevance or control are at their core cultural barriers to effectively spend data analysis.
When you’ve had control of something for a long period of time, it is often hard to let go. Data owners like the IT team may feel like they have no choice but to share data sets with other departments. More so when external expertise is brought in to support the data analytics project.
Silos are conquered when technology is contained in a place that lets the owners have access to the relevant data. We are big believers in the democratization of data, something we’ve dedicated a whole chapter to in one of our eBooks, Procurement Loves Data.
Too many data sources/ disparate systems
Multiple disparate systems drive complexity and confusion. Spend data is often sprinkled throughout different systems across the organization, including accounts payable, general ledger, ERPs, and many others. These employ different classification schemes, making it difficult to extract and analyze.
When there are too many or incompatible data sources, organizations cannot efficiently leverage their spend analytics efforts in sourcing activities. To reap the full benefits of spend analysis, spend data must be migrated to one centralized repository in a standardized fashion.
Limited analytics solutions
Using basic spreadsheet applications as primary analysis tools limits the possibilities that analyses can offer. In-house BI systems are not spend analysis solutions. Some organizations have powerful data warehouse solutions and a well-equipped IT team who can build their own spend analysis tools by acquiring report builders, but even the most powerful of these types of solutions have limited flexibility. This often results in preformatted reports that don’t meet the analysis needs of the procurement organization.
So, if an organization wants more return on investment and real value from spend analysis, they need to consider a solution that is built on proper technical foundations and capabilities for the needs of procurement.
Spend analysis as a one-time effort
Spend analysis should be a continuous process. It is time-consuming but an evolving part of your long-term procurement transformation.Doing it just once yields only a one-time benefit. Repeated analysis is often required to identify changes in an organization’s spend and monitor progressive spend against contracts to ensure that real value is delivered.
There are many tools available for analyzing procurement spend ranging from simple Excel Spreadsheets to advanced analytics software.
Here you can find the pros and cons of each alternative.
Spend Analysis in Excel
Microsoft Excel, though it’s been on the market for over 30 years, is still an excellent tool for making powerful dashboards that can provide analysis and deliver insights in a timely manner.
A lot of people use Excel to analyze spend data but fail to do so in the most effective and efficient way. The spend data that is categorized by the supplier or by name is usually found as raw data.
When this data is in an Excel spreadsheet, it provides a company with an overview of its spend structure and helps it understand which part of supply chain needs to be prioritized.
While doing spend analysis on Excel is doable, most organizations will still encounter issues. For example, Excel is not scalable for spend data in the hundreds and thousands of rows.
Challenges like over-generalized classification, data inconsistencies and data formatting issues, same supplier different names, and regional settings causing inconsistency will cause a normal analyst to do more data cleaning work than actual data analysis.
Even if you’ve been able to do all this properly, it can take hours or even days of work, and you will then need to update and classify new data each month, which will not be scalable. There are solutions in the market that have developed technology for just this and provide their service as a cloud solution.
Spend analysis processes run on Excel and Access-based tools don’t benefit from the repeatable process that spend analysis automation enables. Manual processes lack timeliness and speed of data updates and refreshes, as well as present the risk of limited reporting and analysis capabilities.
Without the ‘slice-and-dice’ ability of many spend analysis systems (the ability to cut spend data in a myriad of ways for efficient analysis), the reporting process of the spend analysis function is limited.
Pros and Cons of using Excel in Spend Analysis
Spreadsheets are within procurement’s comfort zone. They’re inexpensive and work with templates and formulas to aggregate data.
Spreadsheets are time-consuming and users spend a significant amount of time collecting spend data.
Spreadsheets are good for documenting and reporting very simple stand-alone requirements.
They become exponentially difficult to manage when multiple compliance sets and multiple locations are involved.
It is easy to create data collection tools and simple to create charts.
Spreadsheets are not designed to record an audit trail of accountability and struggle to assign owners to processes.
No need to extract data from external systems, all data is right at your fingertips.
They do not deliver automated workflow-driven processes and require manual intervention to deliver reports that are more prone to error.
Using Excel, reporting is usually easier and more hassle-free.
This is not a secure process due to people using email to send updates and creating different versions of the spreadsheet.
Spend Analysis with BI Tools
Business Intelligence (BI) tools are a type of application software used to collect, structure, and visualize large amounts of data. While BI is broadly used for many business purposes, they are a little less flexible than analytics software.
Using business intelligence (BI) tools for spend analysis enables companies to have a better understanding of their costs, which makes it easier to align expenditures with revenue.
Let's look at three good choices for BI tools: Microsoft Power BI, Tableau, and QlikView.
Microsoft Power BI
Power BI is a suite of business analytics tools used to analyze data and share insights. It is a cloud-based data analysis platform that can be used for reporting and data analysis from a wide range of data sources.
Power BI dashboards provide a 360-degree view for business users providing them the ability to see all of the most important metrics in real-time, and usually on different kinds of devices. Users can examine the data behind the dashboards with just one click. The intuitive tools help make finding answers easier. The pre-built dashboards and hundreds of connections to known business applications make doing analysis simple and quick.
Power BI, with all its portals and applications, can unify all of your organization’s data. With better data management and access, companies can get the visibility and insight they need to improve procurement performance.
These are some areas of spend that can be addressed:
Materials (volumes and prices included) that the procurement organization purchased during this period and if there are any changes within a specific period of time
The number of vendors whom the company has purchased from during a particular year and the amount of money spent per vendor in a given time
The number of transactions done in several stages of the procurement cycle
The number of requisitions, contracts, and purchase orders processed across the organization by the buyer and the average value of each transaction
Image source: doc.Microsoft.com
Tableau is an industry-leading business intelligence tool that focuses on data visualization, dashboards, and data discovery. As a leader in the Gartner Magic Quadrant for the past nine years, it is an interactive tool that provides a side-by-side analysis of spend data with tons of visualization possibilities.
It is very simple for non-technical people to easily create customized dashboards that provide insights that can be used for company strategies. With its easy user-friendly interface, drill-down capabilities, and intuitive way of working with data, it transforms the way people use data to solve problems. It also comes with real-time data analytics capabilities and cloud support.
Tableau provides information easily on relevant questions like who the most profitable customers are, what they buy, and how much is spent in different categories. You can look at sales by region, segment, category, and year with just a few clicks and hover over data to see the details instantly. Having easily understandable dashboards paves the way to more data-driven decisions.
Also, Tableau Public offers free user-generated templates to visualize your data, like the one shown below.
Image Source: Pulic.Tableau.com
QlikView is a Business Intelligence (BI) tool that enables a user to create reports and dashboards for any use case. It is commonly used by business users who consider the power of modeling the data as well as data preparation before doing the analysis and visualizations/dashboards as a key differentiator.
On top of that, Qlik and its patented associative technology allow a user to unearth relationships within the various data sources. It also encapsulates the data into compressed memory for faster analytics vs. other providers who mainly rely on direct connections to data sources.
Because it offers guided and collaborative analytics, even non-professional users without IT skills can build and deploy analytics apps easily and quickly. This results in a faster response to changing business requirements and driving more insights across the organization.
A flexible platform, the QlikView consolidates data from multiple sources to provide centralized data for high-level reporting. The intuitive click-through dashboards makes it easy for users to understand hidden trends and gather insights from them.
With QlikView, possibilities are endless for making ad hocqueries because it does not require tedious defined structures and hierarchies. Effective and accurate decisions are made faster with the right and easily accessible information available.
Image Source: Qlik.com
Pros and Cons of BI Tools in Spend Analysis
Data visualization is easier, quicker, and nicer
Data security is questionable
The ability to manage big data in real-time
People can make different conclusions from the same data
People can go ‘hands-on’ with the data
There might be a need for multiple BI applications
More possibilities for customization
More expensive than lightweighttools like Excel
Many solutions are available that can let you operate at a scale that is right for your organization
The platforms usually give content developers and line-of-business analysts a more rapid approach to defining, executing, and saving queries
Spend Analysis Software
Spend analysis software provides a consolidated view of procurement spend including data from invoices, purchase orders, and other business financial records.
Spend data may be collected from a number of different sources such as enterprise resource planning systems (ERPs), purchase-to-pay suites, or even shared excel reports.
Compared to the other spend analysis tools mentioned (Excel and BI), spend analysis software is the most robust tool for performing this type of analysis.
Spend Analysis Software Types
Spend analysis software is either bought from a specialized software vendor or created specifically for the needs of a procurement organization.
In-house solution– a custom software solution that is created for the procurement organization, either on top of an existing business intelligence solution or as a dedicated piece of software. Maintenance and upgrades are dependent on the organization’s information technology resources.
Licensed software– Software that is sold as a commodity, where a single-use license allows for the installation of the software for a set amount of machines. Depending on the updated agreement, larger updates might require a new purchase of a license. Most of the time licenses are sold as a lump-sum purchase.
Software as a service (SaaS) – Software that is sold as a subscription and is delivered flexibly. Often the software is hosted in a separate location, allowing for centralized management by the provider. Updates are carried out as part of the software subscription agreement.
Enterprise vs. small business solutions
Spend analysis software comes in many forms, shapes, and sizes ranging from self-service solutions for small businesses to configurable dashboards for large enterprise organizations.
Small Business software –is designed for smaller operations with less data. These can be provided as self-service software, add-ons to ERP packages, or on-premise solutions with limited need for configurations or custom data processing steps.
Enterprise systems– are designed to handle a large amount of data and provide deep and bespoke insights from the organization's different source systems. Enterprise-level software deployed with larger software deployment projects is increasingly sold and maintained on the cloud under a Software-as-a-service (SaaS) model.
Where is spend analysis software data hosted?
There are a number of options for hosting spend analysis data ranging in complexity and resources of the team conducting spend analysis.
On-premise– Software installed inside a private user network and operated on a server location managed by the procurement organization. Updates are performed on a case-by-case basis, depending on the software license agreement scope. On-premise installations also include local installations of software.
Private cloud– software is accessed via a thin client or a web browser, while all the essential elements are hosted in a private cloud server maintained by the spend analysis software vendor. A cloud server is a centralized system that can be scaled according to load and demand to provide centralized software deployments.
Public cloud– Similar to private cloud hosting, but data is hosted on public cloud services, such as Amazon Web Services (AWS) or Microsoft Azure.
How to compare spend analysis software
With dozens of different types of spend analysis software to choose from, it may be challenging to compare different alternatives. Popular ways to evaluate alternatives include:
Seeking expert advice from procurement consultancies or management consultancies.
Reviewing customer reference cases or interviewing existing customers of different software vendors.
Investigating independent analyst benchmarks or reports, such as theSpend Matters SolutionMap for Spend and Procurement Analytics.
Conducting a spend analysis request for proposal (RFP) with a detailed list of questions for a shortlist of possible software solution providers.
Developing a proof-of-concept (POC) where one or more vendor is given a set of spend data to analyze with a limited scope and time period. In cases where spend classification speed or quality is an issue, POC can help identify suitable alternatives.
Spend Analysis Reports
Now that we have covered all the basics, including what spend analysis is and how to do it, it's time to look at the outputs: spend analysis reports.
To get a good idea of how spend data visualization looks in action, here are numerous examples.
Pivot tables are a convenient way to build intelligent, flexible summary tables. Unlike basic tables which only have rows and columns, pivot tables quickly summarize the information (e.g., totals, averages, count, etc.). In the example below, a simple pivot table of supplier count by product category provides a good overview of where raw materials are being purchased.
The most basic graphical report is a bar chart, which shows relative amounts of a numerical value visually. As a reporting metric, the small ticks are added on top of the bars to compare the spend to the previous year. This example shows the user spend by category compared to last year.
A stacked bar chart adds together multiple values, as in the example below. A stacked bar chart helps the user quickly see the relationship between spend development with PO and without PO.
Line graphs are also simple but effective spend analysis reports. They are usually effective in representing change over time. For instance, the line graph below can tell the user at a glance that June has the highest invoice-to-due average.
In spend analysis, Pareto charts are very useful in opportunity identification because they visually show the 80/20 rule: 80% of the spend is accounted for by the top 20% of suppliers (in the example below, it's closer to 3%!). Keeping an eye on this supplier Pareto chart can tell procurement how heavily they rely on their key suppliers.
A Sankey diagram is an at-a-glance representation of categorical breakdowns. The thickness of the lines changes as categories merge. Starting on the left at the thinnest level, the subcategories converge and form a larger category. In the example below, you can see the split of payment terms between the two organizational regions.
*By the way, in your spend analysis software, you can also view and zoom in on each thin line to see what's going on.
A map report is a chart type that shows spend on a geographical map. Map reports are usually interactive, so clicking on a particular country or geography will open a specific chart into which the user can further drill.
Map reports show hotpots and can be used to determine any type of country or region-based factors.
Treemapping is a method of visualizing hierarchical data with proportionally sized squares. For spend analysis, this plot shows relative spending by the size of a block.
Treemaps can be very sophisticated and interactive. They are also very powerful for visualizing the relative spend across a single dimension such as commodity, suppliers, etc.
Finally, the waterfall chart is used to show the cumulative effects of positive and negative values. This type of chart is commonly referred to as a "bridge" in finance.
In Seivo, we've created a special chart for finance and procurement use called the SavingsBridge™.
You've reached the end of essentials from Spend Analysis 101!
If you feel like learning more, below are some condensed articles on more advanced topics to get you started down your future Spend Analysis learnings.
Be sure to check our resources tab for other in-depth guides, eBooks, and reports.
OLAP (Online Analytical Processing), is the traditional approach used when resources are scarce, as it provides the ability to do a multidimensional analysis of data and to make the complicated calculations into consideration. As the foundation for many kinds of business applications, OLAP enables end-users to perform ad-hoc analysis of data in multiple dimensions, thereby providing the insight and understanding they need for better decision-making.
The OLAP engine is the core feature of Spend Analysis modules. It is the enabling technology that provides answers to the most analytical questions in spend analysis and enables users to easily extract and view data from different points of view. The OLAP capabilities of your spend analysis vendor can be categorized based on whether the product is endowed with its own OLAP engine or it relies on third-party analytical services- and therefore it only acts as a presentation layer on top of the third-party OLAP engine.
Providing a multidimensional conceptual view of data is one powerful key feature of OLAP. Covering full support for multiple hierarchies, allows users to analyze database information from multiple database systems at one time. Every data attribute is considered a separate dimension in this multidimensional database. This includes the product, time range, or even the sales location. The information can be compared in many different ways. Moreover, attributes such as time periods can be broken down into sub-attributes.
The spend cube is a unique way of taking a look at spend data, where the data is projected as a multidimensional cube. The three dimensions of the spend cube are suppliers, corporate business units, and category of items. The dimensions could include subcategories of the different units across the organization, from suppliers, categories, and cost centers.
The spend cube is typically the ﬁnal output of a spend analysis process. It allows you to look at all of the analyzed data from a variety of angles. A spend cube is usually needed if a company is not managing the full percentage of expenditures across all business units.
The 3 axes represent Category (What you are buying), Cost Center (Who you are buying it for), and Supplier (Who are you buying it from). These are the three legs of the stool – if any one leg is not there, the entire model falls apart.
Each axis of this cube contributes critical information.Category analysistells what specific types of goods and services you buy.Cost center analysis reveals which functions (or end-users) within your organization drive the demand.Supplier analysistells you which suppliers you’re buying from. One benefit is knowing if expenditures are scattered or cumulative, or if suppliers have simultaneous contracts with different units in the organization.
Once you’ve got this data together, you can set your strategies. You can slice and dice data to analyze it from many different directions. This ensures that you have just one sourcing strategy and not hundreds. Getting this data on hand lets you decide which high-spending end-users to align with, and which suppliers you want to target for renegotiation.
Machine Learning Spend Classification
Some of the greatest recent advancements in procurement spend analysis involve machine learning in spend classification.
Machine learning (ML) is the field of artificial intelligence where computer systems are given the ability to learn from large amounts of data without explicitly being programmed.
In the context of Procurement, machine learning techniques can be utilized to classify spend more accurately or efficiently than data classified by human practitioners alone.
Curious about AI in Procurement? Look no further than our complete guide!
Examples of spend classification techniques include:
Supervised Learning in Spend Classification– when humans train algorithms to detect patterns in spend, removing dull work of repetitive new spend classification.
Unsupervised Learning in Vendor Matching– when algorithms are programmed to detect new and interesting patterns in vendor relationships without intervention or support from humans.
Classification Reinforcement Learning– where spend classification actions taken by algorithms are reviewed by humans and rewarded or punished depending on the consequences.
While machine learning techniques can prove highly effective within procurement spend classification, human input is still required to capture category and customer-specific knowledge.
Example of unsupervised learning – vendor matching:
Procurement Big Data
What is Big Data?
Big Data describes extremely large sets of structured and unstructured data that can be mined for information and analyzed through complex data-processing techniques. The data can be collected from a number of internal and external sources and stored in Big Data repositories.
Internal Data Assets
Internal data assets typically refer to data gathered from an organization’s own IT infrastructure, such as the enterprise resource planning (ERP) systems, but can include data provided by suppliers, or collected through ad hoc processes using Excel or Sharepoint.
External Data Assets
Any data that originates from outside of an organization's existing IT framework can be considered external data assets. This includes data publicly available on the Internet, 3rd party proprietary assets, and data enriched and anonymized by external organizations.
Procurement Big Data
Procurement Big Data refers to the adoption of Big Data techniques and technologies within the framework of procurement performance optimization. In the context of procurement analytics, Big Data tools and techniques can be used to collect, organize and analyze internal and external data to identify savings opportunities and other value-adding activities.
We are the procurement analytics solution for data-driven enterprises.
We give procurement, finance, and leadership teams a single source of truth and radical transparency in all sourcing decisions. Our solution helps you choose the right suppliers, deliver savings and manage compliance with confidence. Not only that, we enable a sustainable, diverse, and resilient supply base.
We master the art of extracting, classifying, and enriching data across all ERPs, procurement systems, and external data sources, saving your valuable time.
Simply put, we’repretty damngood at turning even the crappiest data into actionable insights!
We’ve pushed the boundaries of spend analytics for two decades – and we’re just getting started. We bridge the data-to-action gap and power agile procurement by combining AI with procurement expertise.
Procurement organizations need an analytics partner they can trust.We’re large enough to deliver, small enough to care.
If you would like to learn more about Sievo you can request afree 30-minute demonstrationwith one of our product specialists.
Key Terms and Abbreviations in Procurement
Tail Spend Management in 5 steps
How to select a spend taxonomy | Spend data categorization
Everything you need to know about supplier negotiations
Direct procurement and direct material sourcing
Key differences between direct and indirect spend management
What is spend management and why is it important?
Get a free PDF copy of the guide Spend Analysis 101. Get a free PDF copy of the guide Spend Analysis 101. This guide explains the 5 major approaches to cost savings in procurement. 23 different savings methods are explained, from Hard Savings to Cost Avoidance. In addition, you'll learn how best to identify, measure, and communicate those savings to your organization. This free guide is based on our research into themost well-structuredRFPs we've received, containing hundreds of different types of questions. We created this comprehensive guide for establishing a best-in-class RFP for Spend Analytics based on our practical learnings. Explore our other guides to dive deeper into procurement topics! Sustainable procurement positively impacts the planet, profit, and people. Learn how to make a sustainable procurement policy! Read Guide This guide covers how procurement data can be extracted, refined, and analyzed for actionable insights and value. Read Guide The Ultimate Guide for Procurement Executives including Definitions, Examples, and Best Practices. Read Guide
Download a copy of this guide!
Download a copy of this guide!
Savings are still a #1 priority for CPOs.
Master the 7 steps of the RFP process
What's after Spend Analysis 101?
Sustainable Procurement 101
Procurement Analytics Demystified
AI in Procurement
Get a free PDF copy of the guide Spend Analysis 101.
Get a free PDF copy of the guide Spend Analysis 101.
This guide explains the 5 major approaches to cost savings in procurement. 23 different savings methods are explained, from Hard Savings to Cost Avoidance. In addition, you'll learn how best to identify, measure, and communicate those savings to your organization.
This free guide is based on our research into themost well-structuredRFPs we've received, containing hundreds of different types of questions. We created this comprehensive guide for establishing a best-in-class RFP for Spend Analytics based on our practical learnings.
Explore our other guides to dive deeper into procurement topics!
Sustainable procurement positively impacts the planet, profit, and people. Learn how to make a sustainable procurement policy!
This guide covers how procurement data can be extracted, refined, and analyzed for actionable insights and value.
The Ultimate Guide for Procurement Executives including Definitions, Examples, and Best Practices.