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Key takeaways
- Spend analysis collects, cleans and categorizes purchasing data to show where money goes.
- The usual finding: more suppliers than expected, duplicates, price differences for identical items and spend with no contract.
- The work has five steps: collect, clean, classify, analyze and act.
- Data quality is the hard part. Expect most of the effort to go into cleaning supplier names and categories.
- Start with your top 80 percent of spend. Do not try to classify every small payment first.
Ask a finance team how much the company spent last year on software, and you will get an answer in a day. Ask how many separate software suppliers there are, and how many overlap, and the answer takes weeks and arrives with caveats.
Spend analysis exists to close the gap between those two questions.
What spend analysis is
Spend analysis is the process of gathering spend data from across the business, cleaning it, grouping it into categories and examining it to understand patterns. It answers questions such as: who are our biggest suppliers, how much do we spend per category, how many suppliers do we have in each category and how much of the spend follows our policy.
Spend analysis is the systematic collection, classification and examination of purchasing data to find savings, control risk and guide sourcing decisions.
Why it comes first
Almost every other procurement activity depends on it. Strategic sourcing needs to know what to source. Contract work needs to know which suppliers matter. Maverick spend and tail spend cannot be tackled until they are measured.
The five steps
1. Collect
Pull spend data from every source: the accounting system, ERP, purchase orders, corporate cards, expense systems and sometimes bank records. Aim for at least 12 months. You need supplier, date, amount, currency, description and cost center for each line.
2. Clean
This is the tedious part. The same supplier appears under several names: "Acme Ltd", "ACME Limited" and "Acme, Inc". Duplicates hide the real total. Standardize names, merge duplicates, fix currencies and remove records that are not spend, such as internal transfers.
3. Classify
Assign every line to a category. Many teams use a standard taxonomy, such as the UN standard product and services code, or build a simple list of their own. A short custom list that people understand beats a perfect taxonomy nobody uses.
4. Analyze
Look at the data from several angles.
| Analysis | Question it answers | What you might find |
|---|---|---|
| Spend by category | Where does the money go? | Two categories account for most spend |
| Spend by supplier | Who are the biggest suppliers? | A long tail of small suppliers |
| Suppliers per category | How fragmented are we? | Fourteen suppliers for one product type |
| Price variance | Do we pay different prices for the same item? | An 18 percent gap between sites |
| Spend by department | Who buys what? | Three teams buy the same service separately |
| Contract coverage | How much spend has agreed terms? | Large spend with no contract |
| Spend trends | What is rising or falling? | A supplier whose rates crept up each year |
5. Act
Analysis that does not change anything is a report. Turn each finding into an action: consolidate suppliers, renegotiate, add competition, stop a service or enforce a policy. Assign an owner and a date.
A worked example
A company extracts 12 months of payments. After cleaning, it finds 1,450 active suppliers and total spend of 18 million dollars. The top 60 suppliers hold 78 percent of spend. Another 900 suppliers together account for under 4 percent. Within IT, seven separate suppliers sell cloud storage, and four departments pay different rates. Actions: consolidate cloud storage under one contract, review the 900 small suppliers for a catalog or card program, and put the top 60 on a quarterly review.
Data you need
- Supplier name, ID and address.
- Invoice or payment date and amount, in a consistent currency.
- Line item description, quantity and unit price where available.
- Purchase order number, or a flag where there is none.
- Cost center and general ledger account.
- Contract reference, where one exists.
Do not wait for perfect data. Start with accounts payable data and add other sources over time.
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Questions spend analysis can answer in your first week
- Who are our ten biggest suppliers, and what share of spend do they take?
- How many suppliers do we pay in a year, and how many did we pay only once?
- Which categories have the most suppliers?
- Which suppliers appear under more than one name?
- How much spend has a contract behind it?
- Which department spends the most on software, and which tools overlap?
- Which suppliers have had price increases in the last year?
Seven answers from one export. That is usually enough to decide which category to tackle first.
Common problems
- Dirty supplier data. Duplicates and variant spellings distort the totals. Budget time for cleaning.
- Missing line detail. Invoices often show only a total, so you cannot see unit prices. Capture detail where you can, starting with your largest categories.
- Over-classifying. Teams spend months building taxonomies. Begin with 15 to 30 categories and refine.
- One-off analysis. A single project becomes outdated in months. Plan to refresh at least quarterly.
- No follow-through. A deck of findings and no owners changes nothing.
Spreadsheets or software
You can do a first spend analysis in a spreadsheet, and our spend analysis template gives you a layout. When data comes from many systems, or when you want it refreshed automatically, dedicated tools help. See spend analysis software and spend management software.
How it connects to KPIs
Spend analysis provides the raw numbers for measures such as spend under management, contract coverage and supplier concentration. See procurement KPIs for formulas.
- Export 12 months of accounts payable data.
- Merge duplicate supplier names for the top 100 suppliers.
- Group spend into 15 to 30 categories.
- List the top 20 suppliers and top 10 categories.
- Count suppliers per category and mark any with more than five.
- Check which large suppliers have no contract.
- Write down three actions with owners and dates.
Jargon, decoded
- Taxonomy. The category structure used to classify spend.
- Spend cube. A multidimensional view of spend by supplier, category and unit.
- Pareto analysis. Looking at how a small share of suppliers accounts for most of the spend.
- Normalization. Cleaning data so the same supplier or item is recorded one way.
- Price variance. The gap between prices paid for the same item.
- Contract leakage. Spending outside a contract that exists.
Where to go from here
Analysis feeds decisions. For the savings method, read what is strategic sourcing. For the off-process spend you find, read maverick spend. To track results over time, see procurement KPIs.
Frequently asked questions
What is spend analysis?
It is the process of collecting, cleaning, classifying and examining purchasing data to understand where money goes, find savings opportunities and control risk.
What are the steps in spend analysis?
Collect data, clean it, classify it into categories, analyze it from several angles and act on the findings.
What data do I need for spend analysis?
Supplier, date, amount, currency, description, cost center and, where possible, purchase order and contract references, for at least 12 months.
How often should spend analysis be done?
A full review yearly, with lighter refreshes quarterly or monthly so that findings stay current.
Do I need software for spend analysis?
Not at the start. A spreadsheet works for a first pass. Software becomes useful when data comes from many systems or you need regular, automatic updates.