How to Conduct a Spend Analysis: A Step-by-Step Guide

By Ashley FerroDecember 22, 2023
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Spend analysis is a crucial process in both procurement and finance.  

By thoroughly examining and understanding your organisation's spending patterns, you can make informed decisions, identify areas for cost savings, and optimise your procurement strategies.  

In this step-by-step guide, we walk you through:

What is Spend Analysis? 

Spend analysis is a methodical way of reviewing and organising a company's spending information. It involves:

  • Examining purchases: Carefully looking over the company’s spending records to understand where money is being spent.

  • Identifying spending trends: Detecting recurring patterns in how the company spends its money.

  • Assessing supplier performance: Evaluating the effectiveness and value provided by suppliers.

  • Uncovering cost savings: Finding areas where the company might reduce expenses and save money.

In the field of procurement and finance, spend analysis is essential for informed decision-making, enhanced supplier management, and optimising procurement efficiency. 

Objectives of Spend Analysis 

Objectives of Spend Analysis

  • Visibility: Understanding spending distribution within the organisation to identify both opportunities and potential risks. 

  • Compliance: Assessing adherence to contracts and procurement policies. 

  • Cost-saving opportunities: Identifying areas for potential savings, such as supplier consolidation or contract renegotiations. 

Spend analysis serves as a fundamental tool in strategic decision-making, not only aiding in cost reduction but also in ensuring effective procurement processes and supplier relationships. 

How to Prepare for Spend Analysis 

Before diving into the analysis process, it is crucial to prepare your data for accurate and insightful results.

How to Prepare for Spend AnalysisThe following steps will guide you through the preparation phase: 

1. Cleanse Your Data for Precision 

The first step in preparing for spend analysis is ensuring the precision of your data. Accurate data is the cornerstone of insightful analysis.  

Here’s how you can achieve data precision: 

  • Remove duplicates: This means looking through your data and taking out any repeated information. Think of it like double-checking a shopping list to make sure you don’t buy the same item twice. 

  • Correct errors: Now, go through your data and fix any mistakes. This could be anything from a wrong number to a misspelt name. It's like making sure all the pieces of a puzzle fit correctly. 

  • Validate data: Finally, make sure all your information is up to date. This step is like confirming that the addresses in your contact list are current. 

2. Enrich Your Data for Depth 

After cleaning your data, the next step is to enrich it. This is like adding colour to a black-and-white picture - it brings clarity and depth, allowing for a more detailed analysis. 

  • Add supplier information: Knowing your suppliers is crucial. Include their names, locations, and contact information. This helps you understand who your suppliers are and if you're relying too much on certain ones or specific regions. 

  • Categorise products: Organising your spending into categories like product types makes it easier to spot trends and areas where you can cut costs or improve efficiency. Make sure these categories are consistent and match your organisation's procurement needs. 

  • Integrate additional attributes: Adding details like how much you’ve spent over time, the terms of your contracts, and how well suppliers meet their delivery promises gives you a fuller picture. This information can be key in evaluating supplier performance and making better procurement decisions. 

3. Identify Key Sources of Spend Data 

The third crucial step in preparing for spend analysis is identifying and consolidating your data sources.

  • List your data sources: Start by figuring out where your spending data is located. This might include your ERP (Enterprise Resource Planning) system, financial records, and any procurement software you use. 

  • Consolidate data: Next, integrate the data from these various sources into a single, comprehensive dataset. It's like gathering all your bills and receipts in one folder so you can see everything at once. 

  • Ensure consistency: Finally, make sure that the data from all these sources is consistent. This means checking that the format and metrics are uniform across different datasets. Consistency is key because it ensures that you’re comparing apples to apples, making your analysis more reliable. 

How to Conduct a Spend Analysis in 4 Steps 

Once you've diligently prepared your data through cleansing, enriching, and source identification, you're ready to dive into the actual spend analysis process.  

How to Conduct a Spend AnalysisThis process will transform your meticulously prepared data into actionable insights. 

1. Collect and Aggregate Spend Data 

The first step is to collect and aggregate all relevant spend data from the identified sources. This may include: 

  • Purchase orders 

  • Invoices 

  • Contracts 

  • Transactional data 

By centralising this data, you create a comprehensive database for analysis. This process helps you see the full picture of your spending, revealing trends and opportunities for cost savings that might not be obvious when looking at separate data sources.  

2. Classify and Categorise Spend Data 

To gain meaningful insights, it is crucial to classify and categorise your spend data. This involves grouping similar expenditures based on predefined categories, such as:  

  • Office supplies 

  • IT services 

  • Raw materials 

When you categorise your spending, it becomes simpler to see where your money is going. You might notice that a lot of your budget is spent on one category, which could lead you to think about whether that's the best use of your funds.  

Are you investing too much in certain areas while neglecting others? Are there categories where spending has increased unexpectedly? These are the kinds of questions that well-categorised data can help answer. 

3. Analyse Spend Data 

During the spend analysis process, it is important to consider key metrics and key performance indicators (KPIs) that align with your organisation's objectives.  

Some common metrics to consider include:  

  • Total spend: This is looking at the big picture of how much your organisation is spending overall. It's like checking your total monthly expenses to see how much you're really spending. 

  • Spend by category: Here, you break down your spending into different areas like office supplies, IT services, or whatever categories make sense for your business. It's like sorting your monthly expenses into categories like groceries, utilities, and entertainment to see where your money goes. 

  • Supplier performance: This means evaluating how well your suppliers are doing. Are they giving you good value for your money? This could involve looking at things like if they deliver on time, the quality of their products, or if they stick to the agreed prices. 

  • Savings opportunities: This is about finding ways to save money. Maybe you're spending too much in one area and could find a cheaper option, or perhaps there's a way to negotiate better deals with your suppliers. 

These metrics can provide valuable insights into your organisation's spending behaviour. 

4. Visualise Spend Data 

Visualising spend data can make complex information more accessible and understandable. There are various charts and diagrams you can use, such as:  

  • Pareto charts: These are excellent for identifying the most significant factors in your spending. A Pareto chart will typically show the largest areas of spend first, indicating where small changes could have a big impact. It's based on the Pareto principle, which often finds that 80% of effects come from 20% of causes. In spending, this might mean that a large portion of your expenses comes from a few key areas. Learn more about how to use the 80:20 rule in your finance department here.

  • Sankey diagrams: Sankey diagrams are useful for tracing where your money goes. They visually display the flow of funds through different departments or categories. This can be particularly insightful for understanding how money moves through your organisation, from income to different types of expenditures. 

  • Spend cubes: Spend cubes allow for multidimensional analysis. They can show how different factors like time, supplier, and expense type interact with each other. This is helpful for spotting trends over time or how changes with one supplier might affect different parts of your organisation. 

Using these visual tools, you can uncover patterns in your spending, spot areas that are unusually high (outliers), and present your findings in a way that's easy for others to understand.

For example, you might find that a significant portion of your budget is going to a small number of suppliers, or that certain months have unusually high expenses. 

Benefits of Spend Analysis 

Benefits of Spend AnalysisConducting a spend analysis offers numerous benefits for your organisation, including: 

  • Improved decision-making and data-driven strategies: Spend analysis provides a clear understanding of your spending habits, which is crucial for refining procurement processes. With these insights, you can fine-tune your approach to resource utilisation, ensuring efficiency and effectiveness. A data-driven strategy empowers you to navigate procurement complexities confidently and align your purchasing decisions with your organisation's goals. 

  • Enhanced supplier management and procurement efficiency: Spend analysis is instrumental in evaluating supplier performance. It helps you to pinpoint potential risks and streamline your procurement processes for maximum efficiency. Understanding how your suppliers are performing enables you to foster stronger, more productive relationships and potentially leverage better terms and conditions. 

  • Opportunities for cost savings and better budgeting: One of the most tangible benefits of spend analysis is the identification of areas where costs can be reduced. This might be through renegotiating contracts or finding more cost-effective suppliers. Effective spend analysis also aids in smarter budget allocation. By understanding where money is being spent, you can redirect funds to higher-priority areas and ensure more strategic use of your budget. 

While spend analysis can be incredibly valuable, it's important to be aware of common pitfalls and know how to effectively address them.

Common Pitfalls in Spend AnalysisLet’s explore some typical challenges and how to overcome them: 

Inconsistent or Poor Data Quality 

Inconsistent or poor data quality, characterised by inaccuracies, incompleteness, or outdated information, can significantly distort the results of spend analysis. This leads to decisions based on faulty insights, much like constructing a building on an unstable foundation. 

Solution: Use automated data cleansing tools. These tools automatically find and fix common errors like duplicates or outdated information, ensuring your spend data is accurate and up-to-date. This makes your analysis more reliable and helps you make better decisions. 

Siloed Departmental Data 

When each department in your organisation manages its data independently, it leads to a siloed and incomplete picture of overall spending.  

This segmented approach can obscure the full financial landscape, making it hard to spot trends and inefficiencies that span across different areas of the business. 

Solution: Foster a culture of interdepartmental data sharing and collaboration. Encourage departments to regularly exchange financial information and insights. Utilising integrated software systems can be particularly effective for this. These systems gather and unify data from various departments, allowing for a holistic view of organisational spending. 

Limited Stakeholder Engagement 

When key stakeholders from different parts of the organisation are not involved in the spend analysis process, there's a risk of overlooking crucial insights.  

This lack of diverse perspectives can result in an analysis that doesn’t fully capture the company's spending dynamics or identify all opportunities for improvement. 

Solution: Actively involve stakeholders from a range of departments in the spend analysis. Encourage their participation and input from the beginning of the process. Their unique insights and knowledge about their respective areas can greatly enrich the analysis, leading to a more accurate and holistic understanding of spending patterns and potential optimisation areas. 

Overlooking Small Spend Categories 

When the analysis primarily concentrates on large spend categories, smaller but meaningful areas of expenditure can be inadvertently ignored. These smaller categories, although not as prominent, can cumulatively have a significant impact on the overall budget. 

Solution: Allocate resources to monitor and analyse smaller spend categories. These often-overlooked areas can be a source of surprising cost-saving opportunities and efficiency improvements. By scrutinising these smaller segments, you can uncover subtle spending trends and make adjustments that contribute to overall financial optimisation. This thorough approach ensures no potential savings area is left unexamined. 

Resistance to Change 

A common hurdle in implementing spend analysis findings is organisational resistance to change. Established processes and routines can be deeply ingrained and altering them based on new data can be met with scepticism or reluctance.  

This resistance can hinder the effective application of valuable insights gained from spend analysis. 

Solution: To counter this resistance, it's crucial to cultivate a culture that values adaptability and continuous improvement. Begin by clearly communicating the benefits of data-driven decision-making, emphasising how it can lead to more efficient, cost-effective, and competitive practices. By fostering an environment where change is seen as an opportunity for growth, rather than a threat, the organisation can more readily embrace and benefit from the insights offered by spend analysis. 

Lack of Expertise 

A major barrier to conducting effective spend analysis is the lack of in-house expertise. Without the necessary skills and knowledge, it's challenging to perform a detailed and accurate analysis of spending data. 

Solution: Enhance your team's capabilities by providing training in spend analysis techniques. This could include workshops, online courses, or in-house training sessions. Hiring external experts or consultants who specialise in spend analysis could also bring valuable expertise to your organisation. These professionals can offer insights, train your team, and set up processes for ongoing spend analysis. 

Wrapping Up: Mastering Spend Analysis for Organisational Growth 

Conducting a spend analysis is a vital process for organisations looking to optimise their procurement activities, improve decision-making, and identify cost-saving opportunities.

By following the step-by-step guide outlined in this article and adhering to best practices, you can unlock valuable insights from your spending data.  

Remember, spend analysis is an ongoing process that requires continuous monitoring and adaptation to ensure its effectiveness.  

Ready to optimise your procurement strategies and identify cost-saving opportunities? Gain meaningful insights about your company’s expenditure with ExpenseIn. Book a free demo today to see how it can streamline your organisation’s spend analysis process.