Spend Analysis – A Guide to Effective Cost Optimisation

Where does your business spend its money? When was the last time you conducted a spend analysis?

In most organisations, third party spend is the single biggest source of expenditure – representing anywhere between 40%-70% of turnover.

Reducing 3^rd party spend will have a direct positive impact on the bottom line – and effective cost optimisation depends on a business having a deep understanding of existing cost structures. The best way of achieving this is through detailed spend analysis.

What is Spend Analysis?

Spend analysis is a process that categorises and assesses the expenditure undertaken by an organisation.

Why Conduct a Spend Analysis?

An effective spend analysis highlights the structure of purchases or spend, and it is an important planning activity in cost management. It also helps to improve procurement efficiency and performance by addressing questions such as:

• What did the organisation spend over the past year?
• Which suppliers have the largest spend?
• Who are the critical suppliers?
• What is the maverick or non-compliant spend?
• Which categories have aggregation and consolidation opportunities?
• Which areas of spend can we rationalise?

How Do You Conduct a Spend Analysis?

Conducting a spend analysis is often perceived as a complex and tedious task! Deploying and following the logical steps below simplifies the process. It can be broken down into 6 key steps: define, extract, cleanse, categorise, analyse, identify.

Step 1 – Define

Gain full spend visibility by identifying and accumulating all sources of spend data across the organisation. Usual sources of spend are accounts payable, ERP systems, e-procurement platforms and procurement cards.

Step 2 – Extract

In most organisations, spend data exists in multiple sources and systems. Most of these are legacy systems with data existing in different formats. Pulling, extracting, or aggregating this data is crucial to achieving true spend visibility.

Step 3 – Cleanse

To make extracted data meaningful, it should be cleansed and normalised. This will also aid with further analysis. 

This step is mainly focused on identifying and eliminating errors in the extracted data. It is not uncommon to find inconsistencies in spend data, for example supplier name discrepancies, using different GL codes for the same supplier, use of acronyms, and spelling errors. 

If spend data is not cleansed, normalised and enriched, it becomes difficult to understand enterprise wide spend and identify savings opportunities further down the procurement cycle.

Step 4 – Categorise

This step is focused on the creation of an organisation-wide classification schemas for products and services, via commodity or product types. 

A good classification schema is central to spend analysis. Using standard commodity taxonomies like UNSPSC, SIC or even a customised taxonomy system helps with classifying third party spend into discrete groups, e.g. pest control or packaging materials. 

From an analysis perspective, uncategorised spend inhibits the ability to aggregate and leverage. It also makes eliminating purchase price variance for items bought by various business units extremely difficult.

Step 5 – Analyse

Previous steps focused on extracting all enterprise wide spend data and then aggregating, normalising, and categorising them so a purposeful analysis can be undertaken. 

In this step, the key is to analyse and interrogate historic and current spend data to understand trends and gain insights.

Step 6 – Identify

The overarching goal of spend analysis is to enhance spend visibility, facilitate spend optimisation and improve procurement performance. 

The insights gleaned from step 5 should provide granular details that helps to identify and define a roadmap for cost reduction opportunities and intelligent procurement decisions.

Cost Management from Gateway Procurement

Looking to improve cost management in your organisation? At Gateway Procurement, we help businesses and organisations across the UK to obtain best value through procurement. 

If you need specialist support with spend analysis, cost optimisation or any other aspect of procurement, our team of experts is here to help.

Get in touch with Gateway Procurement today on 01482645844, or by emailing daniel@gatewayprocurement.co.uk.