Spend analysis is an essential cost-saving component that also drives efficiency and continuous improvement.

Organizations that conduct spend analysis understand where the money goes and to what end, which gives them an edge when optimizing their procurement processes.

Spend analysis can seem daunting, which is why we prepared this comprehensive guide.

No matter if you’re a beginner or a seasoned procurement professional, by the end of this article, you’ll be equipped with new knowledge on spend analysis.

Let’s begin by defining what spend analysis is.

Spend Analysis Defined

Spend analysis is a multi-stage process that tells you all about your organization’s spending.

It involves collecting, sorting, and managing data on all goods and services purchased from external suppliers.

Source: Veridion

By analyzing total expenditures, and zeroing in on specific business units, products, quantities, payment terms, and more, you get the answers to four crucial questions:

• What are we spending money on?
• Who are we spending it with?
• Are we getting what we need?
• Is there a better way to do this?

The analysis can either be a comprehensive one or target just different categories of spend.

For example, tail spend analysis focuses on purchases that are often ignored due to their lower value overall, but typically reveal a lot of wasteful spend and inefficiencies.

Hint: It’s also where most maverick spending occurs.

Therefore, spend analysis acts as a guidepost on where to implement tighter controls to prevent unauthorized spending.

Spend analysis does wonders for overall spend visibility and efficiency of procurement operations, but don’t get it confused with spend analytics.

The main difference between the two? 

Spend analytics go beyond historical spend data analysis, allowing you to predict future spending trends and mitigate supplier risks more proactively.

Source: Veridion

These benefits shine through in the example of the largest European airline, Lufthansa.

After leveraging procurement software to get a 360-degree view of their procurement data, Lufthansa moved to refine SAP’s software further with McKinsey’s Spendscape.

The spend analytics solution enabled Lufthansa to access near-real-time data on price volatility and carbon emissions, helping them reduce costs and improve spend and carbon transparency.

It’s yet to be implemented across the whole group, but the goals include improved risk analytics, supplier negotiation, and performance monitoring.

Despite the forward-looking focus of spend analytics, the impact of spend analysis is no less remarkable, so let’s take a closer look at why it’s so important for procurement teams and organizations as a whole. 

Why Is Spend Analysis Important

Conducting spend analysis takes you closer to eliminating unnecessary expenses, uncovering cost-saving opportunities, and mapping areas for improvement.  

That way, you can optimize procurement strategies and achieve far better results.

A successful spend analysis leaves no stone unturned, and its value is evident in its effect on different types of cost savings, but also in the way it supports high-level strategic thinking.

That’s exactly the point of Diego De La Garza, a former Senior Director at procurement solutions company Corcentric.

Illustration: Veridion / Quote: Corcentric

Put simply, it’s integral to your organization’s financial health and strategic spend management because it delivers relevant data and insights.

And it seems many companies are recognizing the value of spend analysis. 

APQC’s research shows that nearly 70 percent of responding organizations conduct spend analysis and are reaping significant benefits for it.

Illustration: Veridion / Data: APQC

APQC’s findings suggest greater procurement efficiency and more robust supplier relationships among organizations that analyze their spend.

However, the most noticeable difference is the total cost of the procurement cycle. 

Regardless of business size, organizations with spend analysis programs have more cost-efficient procurement processes, taking up less of the total revenue.

Illustration: Veridion / Data: APQC

To illustrate this further, if both companies have $5 billion in revenue, the company that doesn’t engage in spend analysis pays an additional $11 million in procurement costs. 

Of course, spend analysis brings more than just financial benefits.

By identifying key areas of improvement, it enables you to enhance procurement operations and make data-driven decisions.

Source: Veridion

At the same time, the data pushes you toward suppliers you should prioritize, allowing you to strategically build relationships with a selected few. 

Ultimately, these efforts drive efficiency and long-term success. 

Best Practices for Successful Spend Analysis

Following the right practices makes all the difference when conducting spend analysis.

You want to ensure you are looking at accurate, relevant, and complete data. That way, the insights from the spending analysis will have the maximum effect.

So, let’s learn how to achieve that.

Regularly Update Spend Data

The only way to make good procurement decisions is to ensure your data is up-to-date.

Be aware that collecting and analyzing spend data is a part of one ongoing process.

Accuracy must be maintained consistently, which is what Niraj Chatwal, an IT strategy and digital transformation director for MorganFranklin Consulting, agrees with.

Illustration: Veridion / Quote: Supply Chain Management Review

Outdated information is a type of bad data that’s especially easy to overlook because it no longer reflects the current situation.

But it can lead to missed opportunities and poor choices.

Imagine you’ve reached out to a supplier based on last year’s data. You’re unaware that the costs and the delivery time have increased due to changing market conditions.

Because of that, you’ve stayed with that supplier and missed out on better rates and faster delivery with a different one.

What’s worse, your order won’t arrive anytime soon, meaning you’re now faced with costly delays. 

So, how do you avoid this scenario and keep your data fresh?

You can establish routine monthly or quarterly reviews to guarantee data accuracy, but the fastest way is to automate spend data management.

Source: Veridion

Besides avoiding time-consuming and error-prone manual processes, you’ll be getting continuous updates and have accurate data at your fingertips.

With the right solution, you can make full use of dashboards and reporting capabilities to visualize data and get clear, actionable insights.  

So explore which processes of spend management you could automate and which tools would help you out. 

Involve Key Stakeholders In the Process

Having spend data doesn’t mean much if key stakeholders and their objectives are not involved in the process.

Involving key stakeholders and means you have all the necessary perspectives in one place. 

Plus, you can easily communicate changes and findings, making sure everyone is kept in the loop. Then you’re more likely to get people to act based on the findings of your spend analysis

BIOTRONIK’s financial analysis expert, Fatih Karakurt, agrees with that notion, underlining that spend analysis needs to align with organizational goals, but also address the specific needs of different departments and stakeholders.

Illustration: Veridion / Quote: LinkedIn

In this scenario, key stakeholders usually involve team members from procurement, finance, and operations, creating a cross-functional team. 

This ensures you have all key information available for your analysis, from spend history, suppliers, budgeting, payment terms, inventory, supply chain data, and more.

Just keep in mind that input from other departments is important depending on which stage you’re in.

While the procurement team takes the lead in the analysis stage and coordinates others, the initial planning needs to involve executive leadership to ensure the right scope and metrics.

Similarly, departments such as IT, marketing, and sales should be involved in data collection and implementation of recommendations to ensure full visibility and alignment.

The bottom line is that clear, continuous communication between key stakeholders boosts the effectiveness of your analyses, so you better make full use of it. 

Benchmark Your Organization’s Performance

Benchmarking your performance against industry averages or other successful companies helps you evaluate your spend management, set better targets, and track progress.

There are a couple of ways you can approach benchmarking:

Internal benchmarking	Compare spend analysis practices across various departments or subsidiaries. For example, you can compare the practices of regional procurement teams.
Competitive benchmarking	Assess your spend analysis processes and overall spend management against competitors and industry leaders. That way, you can identify best practices and stay on top of trends.
Functional benchmarking	Compare spend management processes within specific functions (such as procurement or finance) across different organizations, regardless of whether they are direct competitors or in the same industry.
Generic process benchmarking	Evaluate the efficiency of individual spend analysis processes, like data collection, categorization, and reporting, compared to those used by other organizations.
Customer benchmarking	Examine how spending impacts customer satisfaction and service to ensure your spend management supports customer needs effectively.

Regardless of the angle you choose, the process you should follow is the same, and it involves:

• Defining your objectives and KPIs
• Selecting your benchmarks
• Collecting and analyzing data
• Implementing and monitoring actions
• Reviewing and updating benchmarks

The final step in the process is crucial, as underlined by freelance business consultant, Raja Rayshouny.

Illustration: Veridion / Source: LinkedIn

While this piece of advice applies to benchmarking in general, it’s no less true for spend analysis.

Spend Analysis KPIs You Should Track

Key performance indicators (KPIs) tell you how well you’re handling different procurement processes. 

Choosing the right metrics here helps you measure and monitor performance but also uncover opportunities for improvement.

Here we’ll examine key spend analysis KPIs you should track for maximum effect.

Spend Under Management

Spend under management (SUM) is a vital procurement metric and the starting point of your spend analysis.

It’s impossible to dive into deeper analysis before you understand how much spend is actively managed by the procurement team.

Tracking SUM tells you how many purchases happen outside of established procurement procedures, helping you catch maverick spend and map critical areas you need to work on.

Here’s a basic formula to get there.

Source: Veridion

Naturally, the more spend you have under management, the better.

Implementing effective procurement practices is the only way you can increase your SUM and gain good control over expenditures, but you can learn more about that here.

Spend Visibility

Visibility means knowing when, where, and how the money’s used at any given time. 

A company with high spend visibility can make better, more informed decisions about where to allocate its resources. 

On the other hand, those with low visibility are wasting time and money, being less efficient, and overall disorganized.

To measure and track visibility you need to know how much spend data you have, which categories it covers, and how accurate and detailed it is.

Source: Veridion

The data needs to come in from all relevant sources and be easy to access when needed.

Comprehensive and accurate data is necessary to make informed decisions, which is why this metric is so important.

Cost Savings

Tracking cost savings tells you how much money your procurement strategies and practices are saving.

It’s the difference that your strategic efforts make.

If you negotiated with a supplier and got a better price than the one initially quoted, the difference between the two would be your cost savings.

Source: Veridion

Naturally, measuring cost savings is rarely as simple as the formula above. 

It really depends on the type of cost savings and the methodology you use, so we’ve covered this topic in more detail here.

Spend by Category

This KPI gives you more insights into where money is allocated by breaking down spending into various categories. 

By tackling categories like direct, indirect or tail spend separately, or taking a look at specific departments, you can identify problematic high-spend areas. 

Source: Veridion

If a single category has high spend, it’s a clear signal you need to adjust your practices and procurement strategy to prioritize cost reduction. 

It’s also a sign you need to pursue cost-saving opportunities, such as supplier consolidation.

In any case, this metric is crucial for making data-driven decisions on your budget and approach.

Supplier Performance

Tracking supplier performance is crucial for identifying top-performing suppliers, and those that fall short of standards and expectations.

It brings numerous benefits, from cost-savings to mitigating supplier-related risks.

Detailed insights come from monitoring several areas, like compliance rates or lead times. 

Source: Veridion

You can streamline this process further with solutions like our Veridion, with abilities for supplier sourcing and supplier data monitoring.

Veridion uses AI to collect and organize data on more than 80 million companies across 60 different data points, and its Match & Enrich API keeps supplier data up to date.

Rich, weekly-updated data is precisely what gives Veridion its edge.

Even when suppliers don’t report potential risks, you’re able to detect and address issues as they arise.

Source: Veridion

And if you do detect problems, you can quickly find alternative high-quality suppliers that meet your specific criteria, all within minutes. 

Ultimately, consistent supplier monitoring keeps your supply chain resilient and costs in check. 

Conclusion 

You’ve now got everything you need to reap the benefits of spend analysis. 

Do it right and you’ll unlock cost-saving and efficiency insights that will help you make better decisions in the future.

But if you’re not careful, you’ll spend a lot of resources just to get inaccurate information.

That’s why it’s important to collaborate with others, track key KPIs, and regularly update spend data.

If you stick to these best practices and help yourself with some powerful software tools, you can transform your procurement processes and keep a competitive edge!