Spend analytics: A comprehensive guide to optimize financial practices

Spend analytics ensures a company is run efficiently by optimizing expenses regarding goods and services, like software. Spend analytics is a key part of the puzzle regarding sound financial management.

What is spend analytics?

Spend analytics is the practice of gathering, organizing, processing, and analyzing procurement data.

Procurement teams use spend analysis to make smarter data-driven decisions and:

• Manage supplier relationships
• Decrease the cost of purchasing goods and services, including SaaS solutions
• Negotiate beneficial vendor deals
• Improve supply chain management practices
• Execute strategic sourcing
• Increase spend visibility

In a data-driven business landscape, most companies integrate powerful software into their workflows so they can spend analyses as needed. With built-in spend analytics features, procurement software enables organizations to centralize procurement data, keep accurate records of expenditures, and streamline data processing.

Why is spend analytics necessary?

An organization needs to spend analytics to prevent missing out on the valuable insights data offers. Spend analytics ensures procurement teams stay on top of current and future business needs by analyzing historical data and financial forecasting.

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Spend analytics can help your company’s financial health. Here’s how.

Risk mitigation

Businesses sometimes have to pivot quickly, tightening budgets and finding alternative supply chain options. This was certainly the case in response to COVID-19. According to McKinsey, the last few years presented businesses with newfound challenges, including:

• Sharp declines in demand due to rapidly changing consumer behavior
• Accelerated supply chain disruptions
• Suppliers and manufacturers facing financial uncertainty
• Changes in commodity pricing due to new consumer spending behavior

Risk mitigation is one way for businesses to navigate economic uncertainty, fluctuations in consumer behavior, and potentially costly changes in supply chain logistics.

Lower costs

Cost savings is a significant reason that procurement teams are vital to a company’s bottom line. A sound procurement system that includes spend analytics enables businesses to use their resources best.

Cost savings are also possible through risk mitigation, streamlining P2P processes, and reducing vendor costs—all enabled by practical spend analysis.

Uncovering savings opportunities

Data alone can’t offer actionable insights. But once paired with spend analysis, it can save businesses money and uncover savings opportunities that weren’t otherwise obvious.

Spend analysis uncovers buying patterns, spend leakage, and maverick spending. It can even facilitate consolidating vendor deals for a greater return on investment. The more savings opportunities a business uncovers, the more it can leverage them to optimize its financial strategy.

Data-driven decision-making

Yet another critical benefit of spend analytics is the ability to make decisions based on historical data. With the right software solution, procurement teams get a real-time overview of the procurement metrics and KPIs that matter.

Which vendor relationships are paying off? Is there an ROI on their category management efforts? Is automation being applied where possible to cut costs further? Questions like these become easier to answer with spend analytics in place.

Examples of spend analytics

There are features and reports that spend analytics platforms offer to help finance and procurement team leaders improve spend management.

Three of the most important are spend breakdowns, overlapping spend identification, and contract coverage fee alerts.

Spend breakdowns

An essential yet powerful feature offered by most spend analytics tools is the ability to analyze spending by category, department, or supplier.

For instance, you could identify the top five vendors you spend the most money with and implement a separate and more detailed vendor management program for that group.

Or, perhaps your finance team wants to access spend by department and category data to inform next year’s budgets.

Overlapping spend identification

All too often, companies have multiple software platforms that offer overlapping functionality.

Sometimes, they even pay for two of the same kind of platform, such as when multiple departments independently source project management tools.

One practical example of spend analytics is the ability to spot overlapping licenses and consolidate agreements to control costs and minimize vendor risk.

Contract overage fee alerts

A lot of SaaS contracts have built-in limitations regarding usage volumes. When you pass the threshold stipulated in your contract, you can be charged an overage fee, which will multiply and wreck the budget if not caught quickly.

But with a good spend analytics tool, you can spot overage charges early and possibly even set up automated alerts so you know the minute you’re charged extra.

Challenges in spend analysis

While implementing a spend analytics software platform is a surefire way to cut down on procurement spend and maximize profitability, it's not without challenges.

Data silos

Procurement professionals are at the mercy of the available data when using a spend analysis solution for data visualization and management.

In some organizations, business units control data separately and house it in completely separate software platforms.

If these platforms can’t be connected to your procurement analytics tool, you’ll struggle to build reporting dashboards that tell the whole story.

Insufficient analytics capabilities

Spend analytics tools can present the data, but you need sufficient analysis capabilities within your procurement function to drive compelling insights for change.

Luckily, many platforms offer free online learning resources such as webinars to help get you up to speed.

Resistance to change

Some stakeholders may be resistant to the changes required to achieve full optimization of a spend analytics solution.

For instance, you might need buyers to upload their purchase order numbers into the analytics platform, adding another step to an already complex process.

The 5 stages of spend analysis

Here’s a general five-step approach to spend analysis. Remember that every business operates differently and benefits from solutions optimized for their needs.

1. Identify your spend analysis goal

A sound approach to spend analysis works best when your finance team starts with a clear goal. Once that goal is identified, it informs the finding of relevant data patterns.

Here are some examples of goals you can reach with spend analytics:

• Uncovering additional savings opportunities within sourcing categories
• Comparing the ROI of similar vendors
• Reducing supplier risk
• Using classification taxonomy to identify costs within more complex expenditures
• Using benchmarking to reduce current material and supply costs

2. Identify and centralize your data sources

Sourcing data can take two forms:

1. Internally sourcing data from each company department to get real-time insight into current spending data
2. Sourcing third-party data for benchmarking initiatives to help you cut better deals and improve supplier management

Sourcing and centralizing data is made significantly more accessible using a centralized platform that stores, processes, categorizes, and draws actionable insights from data. Through integrations and API features, procurement teams can maintain a constant feed of internal procurement and third-party data to validate the accuracy of their data analysis efforts.

3. Clean, standardize, and organize your data

Ensuring you work with accurate data is the first step toward drawing meaningful insights. The data management may require standardization, normalization, cleansing, and ongoing management. Smaller businesses may not need to include data cleansing initiatives, but larger ones might do this during the preliminary process of gathering and analyzing data.

Depending on how simple or complex your resource management initiatives are, onboarding software that enables data management is critical.

4. Use software to analyze the data

You’re ready to extract insights from all your data at this stage. As mentioned earlier, the analysis process is easier when you start with a goal.

Here, you’ll leverage the reporting features of your spend management software (learn more about those here) to access essential insights.

There are plenty of different spend analyses you can run, like:

Tail spend analysis: Tail spending happens when employees spend company resources on smaller purchases of goods and services without adequately tracking them. These purchases often comprise a more significant portion of a company’s expenses than expected.

Contract spend analysis: With contract spend analysis, you get a granular look at the individual costs of items. By identifying who purchased the item and which supplier it came from, you gain insight into spend patterns you can then use to negotiate better deals.

Category spend analysis: Category spend analysis gives procurement teams visibility into how much is spent in what categories. This type of analysis can help get a high-level overview of the budget. Category spend analysis can also uncover expenditure costs by department.

Supplier profile analysis: A supplier profile analysis focuses on improving everything relevant to managing supplier relationships. By creating and maintaining key supplier data in their corresponding profiles, procurement teams get insight into how effective their negotiation efforts are, if agreements and policies are being followed, and if they can improve relationships with each supplier.

5. Repeat and track critical spend data at regular intervals

Spend data is regularly changing, so you should do regular spend analyses. By repeating these processes monthly or quarterly, you can focus on every saving opportunity and improve your procurement process.

Future of spend analytics

While spend analytics may not be a brand-new invention, it's certainly an area constantly under development.

Our SaaS Trends Report explores how software companies increasingly implement artificial intelligence features to make managing work easier.

We predict that AI will play a vital role in the future of spend analytics, with platforms providing AI-powered insights and recommendations for spend management.

At the more advanced end, this may involve goal-based directives, such as choosing between common finance goals (like cost cutting) to provide the AI engine with more context for its recommendations.

Moreover, we expect spend analytics to become increasingly integrated with more holistic, end-to-end purchasing solutions, with SaaS tools moving from a “best-in-class” to a suite-based model.