Why is spend analytics software so important?
Well, because every company knows what they sell. Sales departments know; finance knows; even the CEO knows the top level numbers.
Compare that with how many companies truly know and understand what they’re buying.
It’s shockingly few. And yet, especially in many manufacturing industries, goods and services purchased from external suppliers can account for 60% of a company’s revenue.
Saving just 2.5% through strategic sourcing and targeted cost savings is a lot easier to accomplish than a sales force increasing their revenue by 10%.
This is the approximate amount to drive the same improvement to a company’s bottom line.
Drop us a quick message to get the calculation!
Anyhow, in this article, we’re going to take a look at:
- How to get a reliable spend analysis without the help of specialised spend analytics software
- Some of the advantages that procurement analytics software can provide
- The difference between various spend analytics software out there on the market
- The key watch-outs with both approaches
Why a solid spend analysis is essential
If you don’t know:
- exactly what you’re buying;
- from whom;
- and at what quantities and unit prices;
then your business is at risk and you’re leaving cash on the table.
The dangers present in such a data-starved procurement organisation are:
- Inefficient use of employees’ time, resulting in them managing too many low value, non-critical tail spend suppliers;
- No overview of single-sourced vendors, and consequently no supplier risk management strategy in place to mitigate supply chain risk;
- Not knowing where the potential low hanging fruit is to get some quick win cost savings
- No clear understanding of the extent of maverick spend – i.e. the % of total spend which is not being managed by a procurement professional.
Performing a spend analysis using Excel and raw ERP data
It’s not easy for a procurement manager to do a spend analysis from scratch.
Poor data is usually the culprit. The data often makes it difficult to get meaningful, actionable numbers. But fear not, we have to start somewhere.
The first steps to analysing your spend
The best starting point for putting together a simple spend analysis is usually a mixture between:
- POs issued to external suppliers
- Data from your Finance department based on actual invoice values paid to vendors
What you pay the supplier doesn’t necessarily match the price that you’re ordering goods or services at. There will be discrepancies, depending on your invoice tolerance policy. If you don’t know what that is, ask your Accounts Payable or Controlling team.
But the problem with exclusively using invoicing data is that it doesn’t always contain the same line item detail that you’d see on the PO. So, combining detail from both is necessary:
You need the price paid from invoice-based data and item descriptions from PO-based data.
ERP systems will often require a custom report to be written to provide this level of data, but it’s well worth the investment to program this. SAP for example doesn’t give you this out of the box as a standard transaction.
If you don’t have this, you can still start with invoice data. Ask your Financial Controller to provide you with a report for all invoices paid to external vendors over the past 12 months.
This will allow you to filter the list of vendors and the total amount paid to each of them in descending order. It’s unlikely to tell you the details you’ll need to make a meaningful evaluation of your vendor base. But this is a good start.
Spend Analysis with the help of technology in procurement
As I’m sure you’re aware, there are a dizzying number of procurement software companies out there who claim to offer spend analytics in some form.
On the one hand, suites which cover spend analysis alongside other procure-to-pay or source-to-contract functionality are packaged as part of an all-in-one offering.
In most cases, these suites are aimed at enterprise level customers and have a high degree of complexity. They’re difficult to implement and integrate into your existing systems without the help of external consultants.
In addition, the spend analytics modules are rarely as comprehensive as the specialist solutions which provide this. They’re only really a useful tool if your organisation has already committed to or implemented one of these suites already. Even then, you may find that the investment into a best-of-breed solution will pay back, due to the more advanced insights and dashboards it can provide.
The pure play best-of-breed solutions which focus purely on providing spend analytics are typically much more advanced in the level of analytical dashboards which can be provided.
The main watch-out here is that you could fall prey to the garbage in, garbage out phenomenon. If the data you’re feeding the system isn’t clean, then you’re going to be putting lipstick on a pig by presenting dirty data in nice looking dashboards.
Who is the key user?
Who will be the main users of the software?
Procurement Excellence or Consultants will typically look for a solution that can very quickly provide a holistic view of what is being spent with whom. They need to easily dissect both supply risk threats and cost saving opportunities.
Spendkey is a great example which is built for Consultants or Procurement Excellence professionals.
Spendency can provide value-for-money analytics solutions at an affordable price for all sizes of businesses, which also drills down to whatever level of spend detail you wish. This is a great tool to get started with if getting the budget for the necessary investment is proving to be a challenge.
A team of Category Managers will likely require more granular features at line item level.
More comprehensive solutions that provide more granular data can be found through Scalue (which also has a process mining function), aimed at mid-market businesses. Sievo is a more comprehensive solution aimed at enterprise level customers.
Ask yourself: do you need it to be powered by AI?
Some of the higher end solutions will offer AI-driven data analysis and cleaning. This can definitely save a lot of manual work. However, I would always recommend exercising caution with the claims that spend analytics software providers make.
There are a couple of issues you need to consider:
- Most software will not give you more than around a 50-60% accuracy in data classification powered by AI. You will need a human to do the rest…
- That human needs to know what they’re doing. The person classifying the data needs input from someone with a deep understanding of the goods and services being purchased. A data analyst on their own won’t be able to perform this.
Nonetheless, the time savings offered even just by classifying half of the line items is a huge amount of work saved. The Category Manager or Data Analyst can eliminate a huge chunk of work thanks to automation.
I’d strongly recommend seeing some demos and having a list of questions as part of your due diligence process. Also, you need alignment internally within your organisation. Are you going to clean the data in-house or seek a more advanced spend analytics solution to do the heavy lifting?
Predictive analytics: the next frontier
Where is this market going? Well, the trend is likely to head in two directions:
- Predictive spend
- It’s a logical next step that if procurement analytics companies are sitting on a huge data lake from all of their customers that this can also be used in conjunction with AI to predict future spend.
- Supplier ESG analytics
- Likewise, with the architecture already in place to measure and analyse supplier spend, building the capability to track key ESG performance data will likely be an addition we will see widespread adoption of in the near future.
Some basic spend analytics use cases to get started
While procurement analytics software can do WAY more than this, there are some basics that everyone should be able to extract in order to facilitate meaningful discussions with stakeholders and drive value.
I could write a whole other article on different ways that a Procurement Excellence Manager can drive value from having reliable spend data, displayed in useful, easy-to-analyse dashboards.
For now though, a quick whistle stop tour of some basics:
Presenting the 4 most basic categories of spend
Being able to present a simple analysis to senior stakeholders of:
- Direct materials (typically repeatable spend)
- Indirect materials (typically one-time or infrequent spend, such as office supplies, furniture)
- Services (often under contract and not immediately addressable)
- Capital expenditure (usually large sums of money on machinery, construction, real estate etc. Executed once; hard savings usually can’t be achieved)
Going beyond this point in the process is usually where you’ll get scuppered by poor data. Beware if you don’t commit to cleaning up your data before investing in purchasing software to perform spend analytics.
Tagging your vendors
The final step of a basic spend analysis is to tag the vendors: this breaks down the elephant into bite-sized pieces.
Speak to your stakeholders, look at the PO descriptions and then put all of your suppliers into these three categories:
- Critical – The vendor cannot be replaced because there is no other possible source (usually due to IP, monopolistic position or geographical / supply constraints)
- Preferred – The vendor could be replaced but it will be costly or risky to do so. Extracting yourself from the existing vendor relationship will require a detailed exit strategy.
- Transactional – The vendor can be relatively easily replaced without major issues, beyond the usual teething problems associated with on-boarding a new vendor and internal resistance to change.
This basic analysis enables you to understand:
- How many vendors are untouchable?
- How many could theoretically be put out to competitive tender, for example using an e-sourcing software application?
How much of the spend does Procurement actually control?
Next comes the critical initial yardstick. How much of this spend are you currently managing at present? Take a look at your spend report and categorise purchases based on these three criteria:
- Actively managed by Procurement
- Managed by other stakeholders
- Maverick spend (i.e. non-compliant)
Using indirect procurement software to offer guided buying or tail spend management can often drive number 3 into number 2. This still ensures that strategic procurement teams have the time and resource to drive SRM and partnering initiatives with key vendors.
So, is spend analytics software essential?
Let’s wrap this up then.
Do you need to use software to get basic spend analysis?
No, you don’t….
But you’re leaving a significant amount of cash on the table for the sake of a fairly modest $ 5-figure investment if you decide not to.
This investment gives almost instant payback, thanks to visibility of cost savings opportunities and supply chain risks.
Likewise, if you’re willing to pay a bit more, the AI embedded into the higher end solutions out there will perform a LOT of spade work. Without this, your Category Managers or Data Analysts would otherwise have to grind their way through manual processes.
Consider the opportunity cost of this resource and decide wisely.
I’ve done a few podcast interviews with CEOs of spend analytics platforms, which I’ve linked to below:
S2 E24 with Arvid Fredin, former CEO of Spendency (before they were acquired by Onventis)