No matter the line of business, raw materials, services, and human resources must be acquired to maintain internal operations and create products and services. While you can’t stop money from flowing out of an organization, you can certainly track and control how it flows to ensure that you are not spending more than you need to through the practice of spend analysis.
Spend analysis examines procurement spend to reduce costs and increase efficiency. The idea behind spend analysis as a business concept is to increase spending efficiency through proper data analysis and informed decision-making.
Spend analysis is essential for managing business expenditure, but it’s not always easy to implement, especially in modern business.
Spend Analysis in 2021
There are some fundamental challenges and inadequacies that prevent organizations from capitalizing on spend analysis.
For example, lack of data accuracy is one of the biggest challenges procurement teams face when trying to analyze and optimize spending. Poor analytics is another common roadblock. All these issues add inefficacies to spend analysis, preventing organizations from unlocking optimum returns.
Spend analysis is a strategic tool for CFOs and CPOs to gain insights into spending and make data-informed procurement decisions. Over the years, spend analysis has evolved into a more comprehensive process that includes any activity that contributes to a company’s expenses.
Read on to discover how your organization can identify, collect, and analyze your procurement data to manage your money more efficiently and avoid spending more than you need to in 2021.
How to Use Spend Analysis Effectively in 2021
As the Covid-19 pandemic draws on, businesses are realizing the importance of every single expense. If your organization is struggling to pull in revenue due to the pandemic, your procurement and finance teams can offset some of those losses by cutting unnecessary spending. While spend analysis can help your organization reduce costs and improve efficiency, it offers much more than short-term cost savings.
If implemented correctly, spend analysis can lead to lasting growth and prosperity. Below, we look at how organizations can use spend analysis effectively to reduce costs and increase efficiency in 2021.
A spend classification or category is the logical grouping of similar expenses into categories and sub-categories based on organizational definitions of similar purchases. Spend taxonomy refers to the same categories and sub-categories of spend organized in hierarchies. Essentially, procurement taxonomy shows you what parts of the company are spending certain funds by providing a more detailed category analysis.
Taxonomy is the core of many procurement initiatives. Having the proper taxonomy enables spend analytics and sets your organization up for success. It facilitates accurate and consistent spend reporting across the organization, which not only enables an intuitive buying experience but also supports compliance.
Procurement taxonomy also increases transparency within categories, enabling larger savings opportunities.
For organizations to use spend analysis effectively, spend data has to be entered and grouped correctly. Spend classification, also known as spend categorization, is the process of classifying or categorizing information into a taxonomy. It’s the next step to optimizing your spending. Spend classification will help you combine or aggregate all your spend data into an organized system that makes sense.
For instance, IT may be viewed as a spend category covering both software licenses and hardware. Standard classifications such as the UNSPSC (United Nations Standard Products and Services Code) and SIC (Standard Industrial Classification) are commonly used to classify procurement spend. However, these taxonomy standards are not often preferred for procurement or sourcing purposes.
When used for spend analysis, the standard UNSPSC and SIC taxonomies are either too broad or don’t offer any useful information. As a result, these generic spend taxonomies are primarily used as a jumping-off point for creating a company-specific category tree.
Customized spend classification, on the other hand, helps manage your money more efficiently and improves your organizational capability to spend it.
Indirect Spend Reduction
The visibility gained from proper spend classification allows you to see the specifics of what you are actually spending your cash on and enable cost-cutting measures. You might find that you are spending a lot more than you thought you were on certain products or services or that a vendor has been overcharging you. None of that is possible without proper categorization.
Keep in mind that organizations also need to support internal operations through indirect spending. The next step is to review your internal processes to identify and eliminate unnecessary areas of indirect spend. Look at utilities, human resources, marketing agencies, etc. The culprits, in most cases, are outdated/unaligned IT, unsuccessful marketing partnerships, and inefficient HR-related services.
The next step of the spend analysis is Opportunity Assessment (OA), which introduces a range of procurement process improvement activities aimed at reducing sourcing costs. Based on data accumulated in the previous stages of the spend analysis process, you will now be able to carve out high-level opportunities for smarter spend, more efficient processes, improved risk management, and more for total cost improvements.
Opportunity Assessment takes a robust look at your organization’s spend to map out where, how, and why money is spent in forensic, data-driven detail. This process looks for synergies and value-for-money opportunities. At the end of the Opportunity Assessment process, you’ll be left with a category-by-category analysis of where things stand and estimates of available savings.
Is Your Spend Analysis Optimized?
Cost-cutting is a prudent strategy for surviving the Covid-19 economic impact. Spend analysis is one of the critical strategies for procurement teams to reduce costs. As a CFO, spend analysis can help you identify where your money is going and take actionable steps to cut back on unnecessary expenses.
At Acquis Consulting, we have a seasoned team of experts that can help your organization identify new savings opportunities through strategic sourcing.
Are you looking for an effective way to cut unnecessary business spending and help your organization weather the Covid-19 storm? Contact us for an in-depth look at the inner workings of spend within your organization.