Six steps to performing effective spend analysis
Managing spends effectively is essential for businesses of all sizes. Understanding how your organisation spends money is the first step to identifying areas of inefficiency and implementing cost-saving measures. However, analysing spends can be a daunting task, especially for large organisations with a lot of data to comb through. Let’s look at the challenges, benefits, and steps to performing effective spend analysis.
One common challenge in spend management is a lack of visibility into spending. Organisations may have fragmented systems for tracking spending or may rely on manual processes, making it difficult to get a complete picture of where money is being spent. Another issue is maverick spending, where employees make purchases outside of established procurement processes, leading to higher costs and potential compliance issues. Additionally, organisations may struggle to effectively manage supplier relationships, leading to missed opportunities for cost savings or increased risk. Moreover, limited resources and competing priorities can make it difficult for organisations to prioritise spend management initiatives and invest in the necessary tools and processes for effective spend analysis.
Effective spend management requires collaboration across teams and departments. Organisations should establish clear processes for procurement, budgeting, and expense management to ensure that spending is aligned with strategic goals and that budgets are managed effectively. Clear communication and collaboration across teams can help to ensure that spending is optimised and resources are used effectively.
Spend analysis offers several benefits to organisations, including:
Identifying Cost Savings Opportunities: By analysing spend data, organisations can identify areas where they are overspending and find opportunities to reduce costs.
Improving Supplier Performance: Spend analysis can help organisations evaluate supplier performance and identify areas where suppliers may be falling short.
Mitigating Risks: By analysing spend data, organisations can identify potential risks and take action to mitigate them.
Supporting Strategic Decision-Making: Spend analysis provides insights that can inform strategic decision-making, such as identifying areas for investment or expansion.
According to a recent report by Gartner, "Spend analysis is a foundational tool for identifying savings opportunities, understanding supplier performance and risks, and providing insights that can drive operational and strategic decisions."
To perform effective spend analysis, organisations should follow the following steps:
Step 1: Define Your Goals and Objectives
Before you begin analysing your spend data, it’s important to establish your goals and objectives. Are you looking to reduce costs in certain areas of your business, or do you want to identify opportunities for strategic sourcing? Defining your goals and objectives will help you focus your analysis on specifics and make it more meaningful.
Step 2: Collect and Organise Your Data
Once you have defined your goals and objectives, the next step is to collect and organise your data. This can be a time-consuming task, especially if you have data stored in multiple locations or formats. It’s important to ensure that the data is accurate, complete, and up-to-date. There may be a need to work with other departments or vendors to gather all the necessary information.
Step 3: Categorise Your Spend
After collecting the data, the next step is to categorise the spends. This involves grouping expenses into logical categories, such as travel, office supplies, and IT services. Categorising spends will help identify trends and areas of inefficiency.
Step 4: Identify Your Key Metrics
Once the spends have been categorised, key metrics need to be identified. These are the specific data points that will help measure your progress toward your goals and objectives. For example, if your goal is to reduce travel expenses, your key metric may be the average cost per trip.
Step 5: Analyse Your Data
Next, it’s time to analyse the data. There are several different ways to analyse your spend data, including:
Pareto Analysis: It is well known that typically 20% of expenses account for 80% of the total spends. By identifying and focusing on these high-value expenses, you can identify areas where you can make the biggest impact.
Benchmarking: This involves comparing your expenses to industry averages or best practices. This can help you identify areas where you are overpaying for goods or services.
Time Series Analysis: This involves analysing your spend data over time to identify trends and patterns. This can help you predict future spend and identify areas where you may need to adjust your budget.
Another tool that can be used for spend analysis is the spend cube. A spend cube is a three-dimensional representation of spend data that allows organisations to drill down into their data and identify spending patterns. The cube is made up of three axes: supplier, category, and time. By analysing spending patterns across these three axes, organisations can identify areas where they are overspending and opportunities for cost savings.
Step 6: Take Action
Once the spends data has been analysed, it’s time to take action. This may involve renegotiating contracts with vendors, implementing new purchasing policies, or finding new suppliers. It’s important to track your progress toward your goals and adjust your strategies as needed.
Automation of spend analysis
Spend management software can help organisations automate spend analysis and streamline procurement processes. Some popular tools include spend analysis software, business intelligence tools, and data visualisation tools. Another important tool for automation is procure-to-pay (P2P) software, which streamlines the purchasing process and integrates with spend analysis tools to provide real-time spend data. These tools provide real-time visibility into spending, enabling organisations to identify areas for cost savings, optimise supplier relationships, and include features like spend analytics, procurement automation, invoice management, and contract management.
Performing effective spend analysis is a critical component of any spend management strategy. By following a few steps, it is possible to identify areas of inefficiency and implement cost-saving measures. By using the right tools and techniques, you can gain valuable insights into effective spend management.
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