A Beginner’s Guide to Spend Analysis
The Quagmire of Spend Data
By Shashi Jina, Research Director, SAPinsider and Kumar Singh Research Director, SAPinsider
This article is the first in a series of five articles that will explore the fundamental and strategic aspects of spend analysis.
While the imperatives today are more focused on providing enhanced products and services to customers, there is no denying that controlling cost is still a strategic and critical task that most organizations need to manage. The fact is that the primary criteria to evaluate the efficacy of a CFO’s tenure is the ability to manage and drive down annual spend. While on one hand, the customer is at the center, the pressure to squeeze savings, while maintaining or enhancing customer experience. Strategic sourcing hence becomes one of the most critical functions, tasked to help organizations achieve this intricate balancing act of reducing cost while enhancing customer experience.
Strategic sourcing professionals have many tools they can leverage to find cost efficiencies. However, at the core of it all is visibility into spend. Professionals need visibility into their current spend data, in granular details, in order to identify savings opportunities. However, the visibility that many organizations have is highly fragmented. Data may reside in spreadsheets or siloed systems, subject to different standards, different organizations, and data quality. This significantly hinders the ability of an organization to get a clear, organization-wide view of an organization’s spend. The need for organizations in this quagmire is for a tool that provides them an integrated, granular view of spend and the recent pandemic has accentuated this need. We have seen a shift from a focus on strategic sourcing analysis to an organization-wide spend management initiative. In the post-Covid world, there is an increased focus on understanding the total spend and having the granular visibility to drill down by department, by SKU, by category
This is where spend analysis tools come into the picture.
What is Spend Analysis?
In simple terms, spend analysis is a single, integrated application that allows organizations to establish a process to methodically analyze their historical spending. The application organizes spend data in many different structures, like supplier hierarchies, commodity alignment, and spend amount. To illustrate this through an example, from a procurement manager perspective, it can help answer key questions like:
- Which parts are the top spend categories?
- Which parts are top spend categories?
- What has been the trend like for the last few years?
- How many suppliers for these parts? What was the volume for each of these suppliers?
- How many of them are preferred suppliers?
- What percentage of this spend was managed through contracts with suppliers?
- Which area presents the largest risk in terms of costs and supply?
Now that we have introduced the concept of spend analysis in a simple way, let us formalize the definition of spend analysis. As Chartered Institute of Procurement & Supply (CIPS) defines it:
” A spend analysis is a process for analyzing the historical spend (purchasing) data of an organization to provide answers to questions concerning spend visibility, compliance and control (Pandit and Marmanis, 2008).
The spend analysis aims to inform strategies that realize savings on total spending and better purchasing and supply management outcomes (Pandit and Marmanis, 2008). It is often the first step in aligning a firm’s sourcing strategy with its competitive strategy. In order to analyze all goods and services purchased and to forecast purchases for the future, firms need to aggregate total purchases across all organizational divisions (Rendon, 2005). The objective (output) of the spend analysis is to produce a fully documented understanding of the company’s prior and future spend for supplies and services, segregated by users and suppliers (Rendon, 2005).”
A key point to understand is the difference between spend analysis itself and a spend analysis tool. A spend analysis tool essentially helps organizations build that structure around their spend data that many of them lack, and provides an interface to the end-user. The backend enrichment, harmonization, and integration of data, coupled with a front-end application that allows users to slice and dice the data the way they want, is what provides organizations the real capability of spend analysis.
Components of a Spend Analysis Solution
At a high level, a spend analysis solution will have the following key components:
- Spend data cube
- Analytics application
- Business rules library
We will overview these in brief here to get an understanding of the overall architecture of a spend analysis solution. In subsequent articles, we will review these components in detail.
Spend data cube: This is the underlying database that is the foundation of the spend analysis solution. There are two key steps involved in building this data cube, in order to address the challenges that were discussed earlier. The two steps involved are:
- Data definition and loading
- Data cleansing, structure, and enrichment
We will cover the process in detail in a subsequent article.
Business rules library: The automated ability to clean, curate, structure, and enrich data in a spend analysis tool relies primarily on the solution’s ability to “learn” the spend data characteristics. This is both manually defines as well as “learned” by the system based on feedback from user interactions with the data, leveraging the analytics application. This is where there are opportunities to leverage advanced AI and ML algorithms. We will explore those opportunities in a separate article.
Analytics Application: This is the front end that users interact with. Key features of this component are:
- Dashboarding, reporting, and visualization
- Ability to provide feedback to the logic repository
- Update data, if and when required
- Cloud or web-based with defined (and restricted) access privileges
Value of a Spend Analysis Solution
A robust spend analysis solution generates tremendous value for any organization. While we will review many of them in detail in our subsequent articles, some of the key benefits of a spend analysis solution are:
- Integrated visibility into organizational spend
- Ability to define measures and KPIs around spend and track them effectively
- Tool for supplier management and strategic sourcing
- Automate and simplify aspects of contract management and contract renewal
- Control maverick buying
What does this mean for SAPinsider?
Understand the current state of your spend data. A critical first step is to understand where your spend data resides. The data may be fragmented across many systems and it is imperative that you develop a comprehensive view of this fragmented landscape. This early documentation will be an important input in developing the spend cube component of your spend analysis solution and will also help you plan your project timelines in a realistic way.
Determine key data points required. The next step is to understand what are the data points that you need. This will consist of data points fundamental to spend analysis like transaction date, transaction description, vendor name, spend amount etc. as well as additional data points that enrich the information and are critical for extracting true value from a spend analysis solution.
Define roles for end-users prudently. Not all data should be or needs to be accessed by all users of the solution. Hence defining roles and associated views is another important consideration. A careful mapping of roles, responsibilities of all prospective users is essential to determine the level and type of access they will have to the solution.
Leverage the business rules library to its full potential. While the spend data cube forms the foundation of your spend analysis solution, the business rules library is the brain behind a differentiated spend analysis solution. It is imperative that you capture all unique nuances of your business, whenever you can, in the form of business rules in this component. Leveraging expert knowledge of your people is important in this initiative.
In the subsequent article in the series, we will focus on the methodology and best practices around developing spend analysis data cube.