Spend analysis in procurement starts with a simple question: where does the money go? Most organisations know their total spend. Far fewer can say with confidence what is being bought, from which suppliers and at what price.

Even companies that are showing positive growth will often find significant room for improvement in their purchasing. This guide explains what spend analysis involves, the benefits it brings and how to carry one out.

Spend analysis in procurement is the practice of collecting, cleansing and classifying an organisation's historical purchasing data to show what is bought, from whom, by whom and at what price. It is used to find savings, manage supplier risk and plan future sourcing. The terms spend analysis and spend analytics are generally used interchangeably.

What Is Spend Analysis in Procurement?

Spend analytics refers to the practice of collecting and analysing the historical purchasing data of an organisation. The process is used to shed light on the business's buying patterns and to review the relative value of spend across different suppliers or services. Spend analytics can help businesses with cost reductions, risk management and future planning.

The starting point is procurement spend: the money an organisation pays to external suppliers for goods and services. This usually excludes payroll and tax, and it is often split into direct spend, which goes into the product or service you sell, and indirect spend, which keeps the business running.

A procurement spend analysis can be a one-off exercise ahead of a cost review or a continuous process supported by software. Either way, the aim is the same. Once you know what you spend, you can investigate ways to do it cheaper or better, which is where spend analytics services usually begin.

The Benefits of Spend Analytics

What are the benefits of spend analytics in practice? The seven main spend analysis benefits are set out below.

1. Achieve Full Visibility of Procurement Spend

One clear benefit is full visibility of your business's spend behaviour. With every payment categorised, you can see which areas have the most spend activity, with a full expenditure breakdown. Attaining this visibility may seem time-consuming, but the opportunities for cost savings alone make it worth the investment.

2. Identify Procurement Savings and Realise Them

Once the analysis is complete, it will show spending patterns and potential cost reductions across the categories. This allows managers to cut costs by using different products or services, or by consolidating existing suppliers. Procurement savings are often found in categories such as office supplies, temporary staffing and other external services.

For more on how tools support this, see the guide to spend analytics software savings.

3. Make Procurement Processes Consistent

Spend data shows where teams buy the same things in different ways. That makes it easier to apply one best practice process across the organisation. There is often a reduction in the time taken to create reports and ad hoc analysis, which frees up time for more productive tasks.

4. Manage Risk and Minimise Maverick Spending

Maverick spend is the purchasing of goods or services outside contract or from non-preferred suppliers. It presents several risks, including missing out on preferred supplier discounts and damaging supplier relationships. Good spend data allows you to identify all suppliers, including those with non-contracted spend, and act to bring that spend under contract.

5. Evaluate Supplier Performance

The most important part of a good supplier relationship is information and communication. Spend analysis gives you the data you need to understand the true value of your suppliers. Once the suppliers that provide the best value have been identified, you can work with them to build better relationships.

6. Benchmark Performance

Spend analytics gives you visibility of trends and changes in prices over a set period of time. This is helpful when setting benchmarks, both internally and against peers. For example, understanding the average number of suppliers used for an activity, or the average cost rise by category, allows your organisation to set realistic targets.

7. Support Data-Driven Future Sourcing

Effective spend analytics gives you the information you need for future business planning, purchasing and forecasting. It means that any future procurement decision is made with the data taken into consideration. This reduces the risks that come from decisions based on assumptions or limited data sets.

Want to see where your money goes? Talk to our spend analytics team.

How to Do a Procurement Spend Analysis

A procurement spend analysis follows five steps. The detail varies with the size of the organisation and the state of its data, but the order does not.

1. Extract

Gather spend data from every source that holds it. This usually means accounts payable, purchase orders, purchasing cards, expenses and any contract register. It is advisable to agree the scope at the start, for example the last 12 to 24 months of spend across all business units.

2. Cleanse

Raw data is rarely consistent. The same supplier may appear under several names, and descriptions may be missing or vague. Cleansing removes duplicates, corrects errors and groups supplier records that belong to the same parent company.

3. Classify

Assign each line of spend to a category, such as IT, facilities, professional services or travel. A consistent category structure, often called a taxonomy, is what makes the data comparable. Many organisations then arrange the classified data in a spend cube, which shows category, supplier and business unit together.

4. Analyse

With clean, classified data you can start asking questions. To analyse procurement spend and find savings opportunities, look for the following:

• Fragmented categories – Many suppliers providing the same goods or services.
• Price variance – Different prices paid for the same item across teams or sites.
• Off-contract spend – Purchases made outside agreed contracts or preferred suppliers.
• Contract coverage – Large areas of spend with no contract in place, or contracts that are close to renewal.

5. Act

Analysis only has value when it leads to action. Rank the opportunities by size and ease, assign an owner to each and track the results. A simple worked formula helps to keep the savings honest:

Annual saving = Reduction in unit price x Annual volume

For example, a unit price that falls from £10 to £9, a reduction of £1, on 5,000 units a year gives an annual saving of £5,000. Refreshing the analysis on a regular cycle then shows whether the saving is being realised.

Supplier Spend Analysis

Supplier spend analysis looks at the same data from the supplier's side: how much you spend with each supplier, across which categories and under which contracts. Whether you are on the customer or supplier side of a contract, this view shapes the commercial conversation. It supports three things in particular.

• Consolidation – Where several suppliers provide the same thing, moving volume to fewer suppliers can improve pricing and reduce administration. Used well, this lets you contract fewer suppliers whilst attaining greater value.
• Risk – The analysis shows where you depend heavily on one supplier, and where critical spend sits with suppliers that have no contract in place.
• Negotiating position – Knowing your total spend with a supplier, across every site and team, puts you in a stronger position at renewal.

Contracts remain fundamental here. Having them in place reduces risk, supports cost reductions and helps to avoid supply chain disruption. For a wider view of this approach, see the post on using data to make savings decisions.

Spend Analytics Tools vs Consultants

There are two broad routes to procurement spend analytics, and many organisations use both.

Software suits organisations that want a continuous view. Spend analytics software automates the extract, cleanse and classify steps and presents the results in dashboards. It works best when the data sources are stable and someone in the business owns the output.

Spend analysis consulting suits organisations that need an answer quickly, or that do not have the time or skills in-house. A consultant will typically run the analysis as a project and turn the findings into a savings plan. Spend analytics consulting is also useful where the data is poor, because judgement is needed to classify it sensibly.

In reality, the choice is rarely either/or. A common pattern is a consultant-led first analysis to prove the value, followed by software to keep the picture up to date.

Key Takeaway

Spend analysis turns purchasing data into a clear picture of what you buy, from whom and at what price. The benefits follow from that visibility: savings, lower risk, better supplier relationships and better sourcing decisions. The analysis itself is only the start, and the value comes from acting on it.

How Athena Can Help

We assess your current spend data, carry out the cleansing and classification, and present clear findings with a prioritised list of savings opportunities. Our experienced procurement team can guide you through the whole process, and our approach is designed to minimise the load on your team.

Our Block spend analytics case study shows the approach in practice, with £250k of savings and a supplier database delivered for Block Solutions. Where a continuous view is needed, we can also help you put the right software in place.

Want to see where your money goes? Talk to our spend analytics team.

Frequently Asked Questions

What are the benefits of spend analytics?

The main benefits are full visibility of spend, identified savings, more consistent processes, less maverick spending, better supplier management, benchmarking and data-driven sourcing. Together they give procurement and finance a shared, factual basis for decisions.

What is procurement spend?

Procurement spend is the money an organisation pays to external suppliers for goods and services. It is usually split into direct spend, which goes into what you sell, and indirect spend, which supports the running of the business.

Why is spend analysis important?

Without it, decisions about suppliers and budgets rest on assumptions. Spend analysis shows where money is going, where contracts are missing and where prices vary. That makes it the foundation for any savings programme or sourcing strategy.

How can analytics improve procurement?

Analytics replaces manual reporting with a consistent view of categories, suppliers and prices. Procurement and spend analytics together allow teams to spot problems earlier, prepare better for negotiations and measure whether savings have been delivered.

How do you analyse procurement spend to find savings opportunities?

Extract the data, cleanse it and classify it into categories. Then look for fragmented categories, price variance, off-contract spend and areas with no contract in place. Rank the opportunities by value and ease, and assign an owner to each.

How can you reduce procurement costs?

Start by understanding what you spend and with whom. Cost reduction in purchasing & procurement then usually comes from consolidating suppliers, renegotiating contracts, reducing maverick spend and challenging what is bought. Procurement cost savings last longer when they are tracked after the contract is signed.