Spend Analysis Do’s & Don’ts: A Beginner’s Guide
True insight into an organization’s spend is an essential factor in the ability for procurement professionals to see where opportunities exist to support developing a roadmap alongside the data. But building a robust spend analysis involves following certain steps and avoiding others. Corcentric’s how-to guide, A Beginner’s Guide to Spend Analysis, provides insights and best practices when undertaking this invaluable task, helping you apply the knowledge gained to optimize sourcing, purchasing, supplier management and more. But first, you need to know some of the most important Do’s and Don’ts when it comes to spend analysis.
Spend Analysis Do’s
Do cleanse, consolidate, and classify – Before you even begin your spend analysis, you need to assess what data is required and determine what type of insights you are looking to achieve. If you have multiple data sources, you need to consolidate all of that data into one source, normalize the data, and cleanse supplier names to remove duplications. Once the data is all in one place, you need to apply classifications that address products, services, and your objectives.
Do scope out needs and assess opportunities – Every project is unique; sometimes that project may cover multiple locations. Yet each location has different needs and different challenges so a one-size-fits-all approach may not work. Whether it is contract obligations, lack of competitive resources, or complex supplier relationships that work for one location but not another, it is absolutely essential to know what you are dealing with and what you want to accomplish.
Do bring in stakeholders – Once you’ve consolidated and cleansed the data and established the scope, you can then build in another layer to the spend analysis. You need to bring in stakeholders before acting on the analysis. Talk to people within your organization who have worked with the suppliers to understand the history and relationships for each one. You need to get as much relevant information as possible on each supplier. In addition, get copies of any active contracts with these suppliers so you can fully assess next steps.
Do assign an ROI (but only when necessary) – Why the clarification? The fact is that procurement professionals understand the value of spend analysis; having the data necessary to enact strategic sourcing initiatives which will lead to greater savings for the organization. However, upper management does not have visibility into the entire sourcing process and so they often look for an ROI to convince them that the undertaking was worthwhile. The difficulty is that spend analysis is only one component of the strategic sourcing initiative, making it difficult to determine the true dollar ROI. Yet without the analysis, it would be nearly impossible to optimize your sourcing initiatives.
Do use data as a tool, not the end result – Analysts can have a tendency to obsess on the data without looking at the purpose of the analysis. Data is raw fact…what you do with that data is what makes it actionable. Once data is extracted, you need to organize it into a single picture that makes sense. Once that is done, apply the knowledge you accumulated from stakeholders and subject matter experts to target spend that is truly relevant to your procurement goals.
Spend Analysis Don’ts
Don’t ignore time parameters – It is essential to set up a timeframe for collecting data but you need to calculate how far back to go and that will depend on the type of products and services being purchased. Items like office supplies that are ordered multiple time during the year may require a minimum of 12 to 18 months of data for review in order to really know what to look for in both pricing and terms. On the other hand, capex purchases normally take place only once over a period of years. If you need to look at such long-term expenditures for your analysis, make sure to collect the data for the appropriate time period. Failing to do so leads to the risk of under- or over-estimating needs on your RFP or RFQ, among other things.
Don’t ignore low-spend suppliers – If you look at small expenditures (indirect or tail spend purchases) as inconsequential, you are making a big mistake. While only a few suppliers are looked to for major expenditures, companies, especially those with a more decentralized procurement function, can have literally hundreds of suppliers for smaller, indirect spend items. One of the most effective ways to achieve greater control over spend management is to consolidate those hundreds of suppliers into a controllable, easily trackable number. But first, you have to see all of the data to ascertain which suppliers to consider and which to let go.
Don’t skimp on cleansing your own data – Some suppliers, especially major corporations, may be listed under a variety of names. Our guide uses the example of AT&T, which could be listed as AT&T; AT&T, Inc.: AT and T, etc. This is especially true when the procurement function is not automated; when multiple people key in POs under different naming conventions or when departments are siloed. Remember, the system will identify each of these listings as separate suppliers, preventing procurement from having a clear view of spend. It is essential that you consolidate these listings under a single name.
Don’t bury yourself in details – Spend analysis should be looking at the bigger picture which is still comprised of details. However, the level of granularity needs to make sense. Focus on your overall spend with specific suppliers in order to effectively judge current suppliers vs. their competitors. Getting too granular, like looking at individual products vs. looking at overall spend, can end up slowing down your analysis and making it too complex and overburdened with details. You can always take deeper dives into product, but that should come after the spend analysis is completed.
Don’t STOP – One of the biggest mistakes a company can make is to get the analysis completed and then simply fail to act on it. Every data point should contribute towards your strategic sourcing initiatives. If you did your due diligence and took the proper steps on the front end, the analysis should lead to meaningful action. It is also essential to make sure to act on the results in a timely manner. Inaction can result in outdated data (consider things like missed contract renewals) and a loss of buy-in by management.