Spend Analysis That Finds Money: A Practical How-To Guide

Spend analysis is the process of collecting, cleansing, classifying, and analysing purchasing data to understand how an organisation is spending its money, who it is spending it with, and what it is buying. It is the starting point for any strategic procurement initiative: category management, supplier consolidation, contract compliance management, and savings identification all depend on having an accurate, complete picture of current spend.

In 2022, with inflation increasing the urgency of understanding where money is going and identifying categories where cost can be reduced or fixed through forward contracting, spend analysis is more valuable than in stable years. Here is a practical guide.

Step 1: Collect the Data

Spend data typically lives in finance systems (accounts payable ledgers, general ledger), procurement systems (purchase orders, contracts), and sometimes in department-level spreadsheets. The completeness of the picture depends on collecting from all sources. Common data quality issues include: multiple supplier names for the same supplier (spelling variations, abbreviations, subsidiary names), miscoded commodity codes (items classified in the wrong category), and transactions in systems that are not connected to the main finance system.

Step 2: Cleanse and Classify

Raw spend data cannot be analysed until it has been cleansed and classified. Cleansing involves standardising supplier names (merging "ACME Corp", "Acme Corporation", and "Acme" into a single supplier record) and correcting miscoded transactions. Classification involves assigning each transaction to a commodity category using a consistent taxonomy -- typically a standard framework such as UNSPSC (United Nations Standard Products and Services Code) or a customised version of it.

Step 3: Analyse and Act

1. Pareto analysis: where is the concentration? In most organisations, 80 percent of spending is concentrated in 20 percent of suppliers. Spend analysis makes this visible. The top 20 percent of suppliers by spend volume deserve active relationship management; the long tail of minor suppliers often represents a consolidation opportunity.

2. Category analysis: where is the leverage? Group spending by category and ask: how many suppliers are we using in each category? What contracts exist? When do they expire? Are we compliant with existing contracts? This analysis identifies the categories where strategic sourcing can generate savings.

3. Maverick spend: where is the leakage? Maverick spend is spend that occurs outside of approved contracts or procurement processes. It is almost universally higher-cost than contracted spend and it obscures the true cost of categories. Spend analysis quantifies maverick spend and provides the evidence base for enforcement.

4. Inflation exposure: where are we most vulnerable? In 2022, identifying which categories have the highest price volatility and which purchases are covered by fixed-price contracts versus spot pricing is a strategic priority. Spend analysis by category, combined with contract data, produces this picture.

XNM supports public-sector and capital-project organisations in building spend intelligence and strategic procurement capability. Reach out to XNM's procurement, sourcing & contract management team to discuss spend analysis and procurement strategy for your organisation.