Keeping tabs on procurement spending and how it fits into your company’s overall operations can feel daunting. 

Without a clear picture of where your money’s going, it’s easy to miss inefficiencies that should be optimized, potential hidden savings, or even supplier info that can guide your sourcing process. 

If you’re looking for ways to gain more control and insights into your company’s expenditures, spend analysis might be the answer.

In this article, we’ll break down six key benefits of spend analysis and show you how this practice can transform the way you use your resources. 

Let’s get started.

Provides Insight Into Your Organization’s Finances

The very nature of spend analysis is to uncover more spending data, giving you a clear and detailed picture of your company’s finances. 

While this may seem like a fairly straightforward benefit of this process, many organizations still struggle with getting a real-time view of their spending.

According to Payhawk’s Spend Management Pulse Report, which surveyed over 100 senior professionals across more than 11 industries, more than one-fifth of companies lack real-time spend visibility.

In addition, the report shows that an even larger percentage of companies are actively working to improve their spend visibility.

Illustration: Veridion / Data: Payhawk

And for good reason, since spend visibility provides insights into a number of crucial areas, including:

• Spend by category
• Spend by supplier
• Spend by departments
• Maverick spending
• Contract compliance
• Invoice accuracy
• Supplier performance

Moreover, the vast majority of procurement leaders already use spend analytics tools in their processes, with emerging trends toward using platforms with AI and ML capabilities, as well as real-time spend analytics.

Illustration: Veridion / Data: KPMG

These tools often use automation to collect information like how much is spent in each category or with each supplier, doing it much more accurately and quickly than if it were done by hand.

And with all this data being gathered into one system, it can then be analyzed, providing valuable insights into spend through reports and intuitive visual dashboards like the one shown below.

Source: SAP Ariba

This level of insight empowers decision-makers to identify spending patterns, track budget performance, and uncover opportunities for savings and optimization. 

In short, spend analysis transforms raw data into actionable intelligence that can drive strategic spend management decisions.

Minimizes Unnecessary Spending

The more accurate and granular the data you collect, the more extensive the insights you can uncover. 

Spend analysis helps you identify those smaller, hidden purchases that might seem insignificant on their own, but can add up to significant costs over time, preventing you from achieving potential savings.

Strategic sourcing expert Chandan Somwanshi explains that the usual focus on big expenses and large contracts can leave tail spend undetected.

Illustration: Veridion / Quote: LinkedIn

Tail spend is the money a company spends on transactions that can make up about 80% of all purchases, but only account for 20% of the total amount spent. 

Think of it like buying lots of office supplies—each purchase on its own may be small, but they add up.

So, for a truly optimized procurement process, those smaller expenses matter. 

And a thorough spend analysis can help identify the various types of tail spend.

Source: Veridion

It does this by scrutinizing spending patterns and flagging any irregularities. 

While some of these types of spending are to be expected, the aim is to pinpoint unnecessary tail spending, such as duplicate or redundant purchases, non-compliant spending, and off-contract expenses.

Consider these simplified examples of how you could detect various types of maverick spend.

For instance, a simple missing purchase order (PO) linked to an invoice might signal an unauthorized purchase. 

But deeper analysis could reveal instances where contract terms have been violated, resulting in overpayments or missed discounts.

Source: Veridion

Spend analysis allows you to detect and address these issues, unlocking cost savings through improved compliance, supplier negotiations, and streamlined procurement processes.

By shedding light on hidden costs and areas for improvement, spend analysis enables organizations to make informed decisions, optimize their procurement processes, and gain greater financial control.

Identifies Inefficiencies In the Procurement Process

The previous section focused on the benefit of minimizing various types of unnecessary spending.

This hints at the broader benefit of spend analysis: identifying both large and small inefficiencies in the overall procurement process.

To truly illustrate the financial impact of these inefficiencies, let’s turn to data from APQC research. 

They visualize their findings by comparing two hypothetical companies of similar size, where one has implemented a spend analysis program, and the other hasn’t.

Take a look at what these companies might spend on the same procurement activities.

Illustration: Veridion / Data: APQC

That’s a striking difference of $11 million.

In fact, according to the same research, the typical company that has adopted spend analysis has 56.41% lower procurement cycle costs (as a percentage of revenue) compared to a company without it.

Why is this the case?

The spend analysis process naturally explores various aspects of procurement, such as spending patterns, supplier performance, contract compliance, and more.

Source: Veridion

This granular visibility allows procurement professionals to spot irregularities like recently inflated prices, inconsistent product quantities, or purchases with unfavorable contract terms.

For a more specific example, let’s say that the analysis has revealed multiple departments buying the same product at varying prices.

This signals a lack of standardization and a missed opportunity to save money through centralized purchasing.

Another powerful method that could then further explore spend is the spend cube, a multidimensional analysis technique that examines spending data across different categories, such as supplier, category, and time period.

Source: Sievo

This enables procurement teams to identify trends, outliers, and opportunities for optimization. 

For example, a spend cube might reveal that a particular supplier’s prices have been steadily increasing over time, prompting a negotiation for better terms or the exploration of alternative suppliers.

In summary, spend analysis goes beyond identifying specific instances of wasteful spending. 

Its true benefit is allowing you to gain a deep understanding of your procurement processes, pinpointing inefficiencies, and giving insights for improvements that lead to substantial cost savings and improved operational performance.

Helps You Benchmark Your Performance

Spend analysis can also provide valuable data you can use to benchmark your performance.

More specifically, by analyzing key spend data and calculating key performance indicators (KPIs), you can gain a better understanding of how your organization’s spending and procurement practices compare to industry standards and competitors.

Source: Veridion

For example, you might compare your maverick spend data to figures from reports like Basware’s Maverick Spend report, which states that companies can lose 10-20% of targeted savings due to maverick buying.

Or, you can use broader metrics like total spend under management. 

According to Ardent Partners’ report, the average enterprise has 67.4% of their total spend under management.

Illustration: Veridion / Data: Tradeshift

While these are just a couple of examples, the key is to identify the spend analysis data and KPIs that are the most relevant to your organization and compare them against your competitors or industry benchmarks.

It’s crucial to remember that, when benchmarking, you should focus on comparing yourself to your peers—companies of a similar size, location, and level of activity. 

This ensures a fair comparison and helps you identify areas where you may be lagging behind or excelling.

As Chris Sawchuk, procurement advisory practice leader at The Hackett Group, explains:

Illustration: Veridion / Quote: ISM

Benchmarking against similar companies can unlock the greatest benefits by providing a realistic assessment of your performance and highlighting areas for improvement. 

For instance, if your benchmarking analysis reveals that your procurement lead time is significantly longer than the industry average or local competitors, you might investigate ways to streamline your sourcing and procurement processes.

In essence, benchmarking with the help of spend analysis data allows you to gain a competitive advantage by identifying areas where you can optimize and achieve greater efficiency.

Identifies Underperforming Suppliers

Spend analysis can also lead to better supplier management and more strategic sourcing decisions. 

With the ability to gain insights into your spending per supplier, and connect that to metrics like supplier performance and quality, you can identify whether you’re overspending or underspending with certain suppliers.

Let’s illustrate this with a simple example. 

Imagine you procured the same product from two suppliers, Supplier A and Supplier B.

When conducting supplier spend analysis, you might have uncovered data like what’s shown in the table below.

Metric	Supplier A	Supplier B
On-time delivery	85%	95%
Lead time	14 days	9 days
Cost per unit	$12	$10
Overall performance score	70	90
Total spend with supplier	$100,000	$50,000
Spend per unit	$12	$12

As you can see, while the total spend with Supplier A is twice that of Supplier B, their performance metrics, such as on-time delivery, lead time, and overall performance, are worse than Supplier B’s.

Even if the differences in performance were seemingly minor, thorough spend analysis could reveal additional costs or missed opportunities associated with each supplier’s performance or quality metrics.

For instance, consider the potential costs linked to late deliveries.

Source: Veridion

Data like this can be invaluable for supplier contract negotiations and overall supplier management.

For example, sharing this data with other departments and evaluating your most valuable suppliers against those with recurring issues can guide decisions about reducing your supplier base through supplier rationalization.

Source: Veridion

Naturally, spend analysis will play a critical role in this process by providing the data-driven insights needed to identify underperforming suppliers and make informed decisions about consolidating your supplier base.

In short, spend analysis empowers you to make smarter choices about your suppliers. 

By identifying underperformers and optimizing your supplier relationships, you can improve efficiency, reduce costs, and enhance the overall value of your supply chain.

Aligns Finance and Procurement Departments

When it comes to spend data, it’s only natural to involve the finance department.

And the final benefit of spend analysis that we’ll discuss is how it can bridge the gap between finance and procurement teams.

Let’s start with an example.

Even a simple report like the one below, showing the distribution of spend by business unit, can be immensely helpful for finance teams.

Source: Oracle

This data can help procurement and finance teams align on overall spending and financial goals. 

The finance team can share company spending goals and offer the procurement team suggestions on cost control and efficiency, leading to optimized spending across the board.

Spend analysis can also provide insights that expand the limited perspective of the finance team, which often focuses solely on purchase price.

Source: Veridion

Imagine a scenario where the finance team questions sourcing from a supplier with a high purchase cost and pressures procurement to switch to a seemingly cheaper alternative. 

With limited data, this might seem logical. 

However, spend analysis might reveal that the total cost of ownership for the initial supplier is actually lower due to factors like minimal logistics costs, low maintenance requirements, or efficient disposal processes.

Sharing such insights with the finance team can align their understanding with the broader procurement strategy, leading to more informed decision-making.

And, as Deloitte data highlights, aligning finance and procurement departments through spend analysis can ultimately create integrated operations that bring significant benefits to the entire organization.

Illustration: Veridion / Data: Deloitte

These benefits include better alignment between departments, cost savings, and improved operational efficiency.

To conclude, it’s clear that spend analysis plays a pivotal role in fostering collaboration between finance and procurement, driving greater transparency, and ultimately enabling more strategic and cost-effective decision-making.

Conclusion

So, there you have it—six powerful benefits of spend analysis that can revolutionize your procurement process. 

As you’ve seen, spend analysis offers a wealth of advantages, from increased visibility and cost savings to improved supplier management and even strengthening the bond between procurement teams and the finance department.

We hope this article has inspired you to think about the potential of this practice for your organization. 

By implementing spend analysis tools and techniques, you can gain a deeper understanding of your spending patterns, identify areas for improvement, and make decisions that drive efficiency and profitability.

So, take the first step and start unlocking the hidden potential in your spending data.