8 Challenges of Spend Analysis (And How To Overcome Them)
Spend analysis allows you to reduce costs and identify potential savings, but is your business prepared for challenges that may pop up as you analyze your supply chain data?
Over the years, spend management has evolved into a comprehensive process. Without a proven mechanism in place, analyzing spend data becomes difficult and time-consuming. You may also face issues when optimizing your procurement budget and processes periodically.
I'm Rana Bano, and I've made it my latest mission to help RevOps teams take strategic steps and achieve their desired goals by providing them with actionable advice. In this guide, we’ll delve into the most common spend analysis challenges, as well as discuss solutions to help you overcome them.
What Is Spend Analysis?
Spend analysis or spend analytics is a systematic approach that involves gathering, cleansing, categorizing, and scrutinizing expenditure data. This meticulous process serves a dual purpose: (1) to reduce procurement expenses and enhance operational efficiency, and (2) to ensure strict adherence to applicable controls and compliance standards.
Spend Analysis vs Spend Management
Spend analysis is primarily concerned with understanding spending details and patterns. On the other hand, spend data management takes a holistic approach to procurement and strategic sourcing, aiming to enhance efficiency, align with best practices, and establish a culture of continuous improvement and control.
So, you can consider spend analysis as a subset of the broader spend management framework, with both playing roles in optimizing a company's procurement processes.
What Are The Main Benefits Of Spend Analysis?
There are several great benefits of spend analysis (it exists for a reason, after all). Here I'll touch on what the five main ones, though you may be aware of even more.
Savings and Profitability
Your company's performance hinges on the decisions you make, especially in indirect procurement that affects daily operations and employee support. Avoid making blind cuts to spending without a clear understanding. Instead, consider using spend analytics software to gain spend visibility to strategically reduce non-essential expenses. This will help you identify and prioritize savings opportunities, enhancing proactive decision-making and forecasting.
Improved Compliance
Implementing spend management practices simplifies expense tracking and documentation, aiding compliance with regulatory requirements. Detailed spend data reports also make audits and compliance with multiple regulatory bodies more manageable.
Reduced Cycle Times
Spend management streamlines decisions like supplier selection and contract negotiation, reducing process-cycle times. It establishes metrics and rules for recurring activities, enabling faster and more consistent decisions.
Better Sourcing Opportunities
Visibility into supplier spending allows effective supplier consolidation and price comparison. It identifies top-performing suppliers and highlights redundancies or unreliable partners. It also tracks supplier diversity programs, aiding strategic supplier decisions.
Automation and Improved Systems
Spend management facilitates efficient expense decisions, improving internal systems. Organizations can automate procurement processes and enhance spending visibility to realize the benefits of spend management fully.
8 Challenges Of Spend Analysis (With Proposed Solutions)
Now, let's delve into the eight most prevalent challenges encountered in spend analysis, while also exploring potential solutions to effectively tackle these hurdles.
1. Lack of Awareness About Spending Data Sources
Identifying all expenditure sources is another hurdle in effective procurement spend analysis. Some cost centers are readily visible, but shadow cost centers, often existing only on paper, can easily be overlooked. These shadow cost centers might handle finances and allocate budgets, but they complicate spend management.
Solution: To address this challenge, involve all department and business unit heads responsible for procurement costs when identifying cost centers. If you're a part of larger organizations, digitalization can streamline the collection of spend data into a central repository for analysis, reducing the chances of missing shadow cost centers.
2. Bad Spend Classification
When experts in spend analytics make mistakes in categorizing expenses, it can lead to serious problems. Imagine if someone thought a big purchase was just a regular cost and not an important investment. This mix-up could mess up how money is divided and how budgets are set, causing inefficient spending.
Solution: To tackle this challenge, test your experts to see how good they are at categorizing spending. These tests show how skilled the team is and where they need more training. This will make your spending analysis more reliable, leading to informed decision-making and improved cost management.
3. Data Quality Issues
Another critical spend analysis challenge is the incomplete, inconsistent, and inaccurate data provided by clients. When data is riddled with gaps, disparities, and inaccuracies, drawing actionable insights from the analysis becomes more challenging. And let's not forget that cleaning and structuring this data is also time- and effort-consuming, which can slow down decision-making.
Solution: In response to this challenge, consider investing in tools and methods to clean and organize datasets. You can also leverage automation through machine learning and AI to accelerate the process and make it more accurate. This, in turn, enhances data quality, which ultimately leads to more effective cost reduction and efficiency improvement initiatives.
4. Lack of Standardization
The absence of a standardized classification system for spend categories is a prevalent issue in the world of spend analysis. Different companies and industries often have their unique ways of categorizing expenditures, making it challenging to compare and benchmark data across entities. It also makes it hard to see how a company is doing compared to others in the same industry.
Solution: To solve this issue, establish a standardized classification system that aligns with industry best practices. Collaborating with industry groups or organizations can help make these common categories. This way, organizations can compare data easily and make better decisions based on what's happening in their industry. Standardizing spend categories can also help you find useful insights and improve practices to match industry standards.
5. Insufficient Resources
Spend management demands dedicated efforts to identify, collect, analyze, and execute spend data savings opportunities regularly. However, procurement teams often find themselves overwhelmed with their daily tasks, leaving little time and resources for effective spend management.
Solution: To overcome this resource constraint, your procurement professionals can seek IT support to establish efficient processes to realize savings opportunities. Also, invest in automation tools for analyzing spending patterns, thereby saving time and resources.
6. Poor Analytics Capabilities
Effective spend analysis requires the ability to identify and extract the right reports from collected spend data, which demands analytical skills that are often scarce and costly. Additionally, the cost of acquiring advanced spend analysis tools can be substantial, making it challenging to secure stakeholder buy-in for such investments, especially without immediate, visible results.
Solution: To secure buy-in, conduct a cost-benefit analysis to justify investments in analytical capabilities. You can also use resources like the Hackett Group report for cost benchmarking guidelines. Additionally, implement AI-powered automated analytics tools to get valuable insights from data, aiding critical decision-making.
Remember, even minor cost savings can translate into substantial sums, especially if you're dealing with high data volumes or high-cost orders.
7. Silos in Work Culture
In many organizations, spending occurs across departments in procurement, but communication gaps can lead to a lack of awareness among category managers who may purchase the same items for different purposes. Additionally, data storage practices vary across departments, resulting in inconsistent data formats.
Solution: To break down silos, implement integrated spend analysis solutions that communicate with other important tools in your tech stack. Think: ERP (Enterprise Resource Planning) software, accounting or purchase order software, and mail servers used by procurement departments. Using these tools, each department can generate reports as needed while maintaining a centralized repository, bridging the silo gap.
8. Resistance to Change
Spend management can be misunderstood as a threat by some stakeholders within the organization, such as supplier managers and contract officers. Changes in supplier selection processes or contract modifications made to control spending may be seen as challenges to their authority and decisions, leading to resistance.
Solution: To mitigate resistance to change, it's crucial to communicate the benefits of decisions to all affected stakeholders. Involving top management members, such as the CEO, in the decision-making process can help reduce uncertainty and resistance, as decisions vetted at this level tend to face less opposition.
Analyze Your Spending Data To Improve Your Bottom Line
A spend analysis assessment offers ongoing benefits to your company, impacting your profitability, vendor relationships, and employee efficiency positively. It's a dynamic process that adapts alongside your business growth.
By comprehending the key stages of spend analysis and implementing the discussed approach, you can cut down costs, elevate supplier performance, and make data-driven decisions. These strategies will not only safeguard your business's prosperity in today's competitive landscape but also position it for continued success.
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