Guide to Spend Analytics: Best Practices, Implementation, and KPIs

If your team routinely feels lost in a fog of invoices and purchase orders, you’re not alone. Verifying invoice integrity, matching them to contracts, and locating approvers can devour their time, leaving them with little bandwidth to drive strategic value.

The issue? A lack of transparency. According to a survey from Harvard Business Review, “many organizations lack transparency” into their internal and external spend, with “the majority of those surveyed (60%) warning that poor visibility…is a significant source of risk.”

The solution? Investing in spend analytics. These tools give a clear view of spending, uncover cost-saving opportunities, and improve efficiency. In fact, better transparency could save 11-20 percent in costs.

Along with helping you keep spending under control, spend analytics delivers actionable insights that facilitate smarter negotiations and stronger supplier relationships. Finance executives are increasingly recognizing their importance, with a recent KPMG survey finding that “implementing data analytics is the single most important activity over the next 12–18 months.” 

What is spend analytics?

Spend analytics is a strategic approach to understanding and optimizing your organization’s spending. It gives your finance and procurement teams a high-level view of organizational expenditures, along with detailed breakdowns by department, category, and vendor.

But reporting is just the start. The real power of spend analytics lies in uncovering patterns that humans easily miss, revealing opportunities for cost savings and spend optimization. This can include highlighting areas where you could streamline workflows, consolidate your purchases to leverage your buying power, or negotiate better terms with high-volume suppliers.

Ultimately, these tools take guesswork out of the equation. They equip leaders with data-driven insights that can help them make better decisions across the board.

How spend analytics can give you greater visibility, control, and leverage over your expenditures

Cost control and expense reductions

Think of spend analytics like X-ray vision for your organization’s expenditures. They automatically analyze procurement patterns to uncover areas of overspend and hidden cost saving opportunities. These can come in many forms, including suboptimal vendor selection, overlooked subscriptions, underutilized software licenses, and maverick spending (unauthorized purchases made outside of established procurement protocols).

As McKinsey notes, “The most immediate task for spend analytics is to provide transparency and insight into where cash is spent. After all, a procurement organization’s primary objective is usually to optimize external spend with suppliers—commonly 40 to 80 percent of a company’s total cost—and realize a source of competitive advantage in terms of cost.”

Proactive risk management

From traditional threats like economic downturns to emerging ones like cyberattacks and geopolitical instability, businesses have their fair share of risks to manage these days. But rather than anticipating issues before they become real problems, traditional risk management strategies can feel like whack-a-mole. Instead of being proactive, you react to problems as they pop up.

Spend analytics offers a better approach. It can unveil potential vulnerabilities in your supply chain long before they affect your operations, including:

• Concentration risk: Are you overly reliant on a single supplier for critical goods or services? Spend analytics platforms can recognize excess concentration and suggest diversifying your supplier base to mitigate the impact of a single disruption.

• Financial instability: Is a key supplier facing an overwhelming debt burden or other financial difficulties? Identifying risks like these before they affect procurement operations allows you to create contingency plans that ensure continuity.

• Data security vulnerabilities: Do any of your suppliers have weak cybersecurity protocols or operate in regions with a high risk of cyberattacks? Spend analytics can help you identify these vulnerabilities and take action as necessary, including implementing stricter data security measures and sourcing from alternative vendors.

• Geopolitical instability: After a decade or so of relative calm, geopolitical instability is once again a prominent enterprise risk factor. A survey from Oxford Economics found that over “60% of those polled see [geopolitical tensions] as a ‘very significant risk’ to the world economy.” If you have suppliers located in a region undergoing significant conflict or a natural disaster, spend analytics tools can flag the need to explore alternative sourcing options.

Supplier relationship management

Spend analytics can also help you build stronger, strategic partnerships with your vendors. With detailed supplier performance data at your fingertips, you can identify areas for improvement and collaborate with them to better optimize processes. We’ve seen this play out in all sorts of ways—streamlined contract renewals, opportunities for joint cost-saving initiatives, and more. After all, the best supplier relationships are a win-win for both sides.

ESG, sustainability, and supplier diversity

Sustainable procurement is the practice of acquiring goods and services that minimize a company’s environmental footprint while maximizing social impacts. It’s no longer optional—consumers, investors, regulators, and other stakeholders are now demanding that companies source goods ethically and responsibly. Recent regulations such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) require companies to report on and hit certain standards around their environmental and social impacts throughout their supply chain.

With spend analytics tools, ingraining sustainability into your procurement organization doesn’t have to be a hassle. These tools can automatically surface hidden eco-efficiencies within your supply chain and identify potential partners with a strong track record of social responsibility.

Implement a robust spend analysis process in 5 simple steps

Ready to take back control of your spending? Here’s how to get started:

1. Identify and centralize data sources

Before you can start analyzing your spend data, you need to get it all in one place. This typically involves pulling data from your enterprise resource planning (ERP) system, customer relationship management (CRM) platform, and vendor databases.‍

2. Clean your data

As procurement professionals can attest to, financial data often comes in a less-than-pristine state. To gain as clear a picture as possible, inconsistencies and inaccuracies need to be dealt with via a process known as data cleansing. Similar to an auditor meticulously verifying financial statements, data cleansing involves reviewing and standardizing data sources to ensure they’re functional and reliable.

3. Data classification

Once your data is cleaned up, it’s time to sort it into useful categories. These groupings will vary from business to business, but the goal is to categorize your data into meaningful buckets that, once analyzed, will provide relevant business insights.

4. Leverage spend analysis software

Deloitte anticipates that global data volumes will reach 175 zettabytes by 2025. That’s an astronomical amount that makes manual analysis basically impossible. Fortunately, spend analysis software can automate a significant portion of the data cleansing and classification process, freeing your team to focus on more value-adding tasks like strategic analysis.

5. Regularly monitor and review your data

There’s no finish line in spend analysis. It requires ongoing monitoring to identify new opportunities for cost savings and efficiency improvements.

Keep track of your progress with these 7 spend analysis KPIs

So, you’ve implemented an end-to-end spend analysis process. Congratulations! To keep it operating at peak performance, keep a close eye on these key performance indicators (KPIs):

1. Spend under management

Most procurement teams oversee the vast majority of organizational spend, but some expenses may not fall under their purview. Spend under management measures the percentage of total organizational expenditures actively managed by procurement. The higher the percentage, the greater control and visibility of your spending patterns you have.

2. Procurement cycle time

This metric tracks the average time elapsed between when a requisition is submitted and the due date for payment or delivery. In most cases, it’s ideal for this to be as short as possible—quick procurement cycles tend to be highly correlated with cost minimization and operational efficiency.

3. Spend visibility

Spend data should be accessible and understandable to all relevant stakeholders. This KPI assesses the extent to which this is true in your organization, which is a good indicator of how much your spend insights are contributing to informed decision-making and the identification of cost saving opportunities.

4. Cost savings

This may seem like a straightforward metric, but it’s vital to precisely measure savings that are directly attributable to your spend analysis efforts. Track the bottom-line impacts that initiatives like negotiated price reductions, elimination of under-utilized systems, or vendor consolidations have had. It will show executives the value the procurement function is delivering.

5. Supplier performance

Supplier performance is a multifaceted KPI that encompasses on-time delivery rates, order accuracy, and average quality. Comparing these metrics against internal benchmarks can help you identify laggards that may need to be swapped out, as well as high-performers that should be prioritized when it’s time to renew the contract.

6. Spend without contracts

Too much organizational spending outside of official contracts is a red flag. High levels indicate a lack of control and increased risk. In general, keeping this metric as low as possible will save you money via standardization and mitigate potential legal issues.

7. Proactive engagement

A mature procurement function is able to anticipate organizational needs and proactively engage with stakeholders. This metric measures the average number of days between when a need is identified and a requisition is submitted.

Gain a comprehensive view of your spend with Tropic

The power of spend analytics to help you control and prioritize spend is undeniable, but not all platforms are created equal. Tropic offers a robust spend analytics solution that gives you deeper insights into all aspects of your spending.

Here’s what sets Tropic apart:

Effortless data integration

Tropic seamlessly integrates with your existing ERP, CRM, vendor databases, and other systems, giving you a single source of truth for all your procurement data. Your analysts can leave manual data entry behind for good.

Impactful, actionable insights

Gain instant visibility into areas for cost savings, potential risks, and supplier performance optimization. With data-driven insights in your back pocket, you’ll always have the upper hand during negotiations.

Intuitive user experience

Our user-friendly interface makes it easy for anyone in your procurement team to leverage the power of spend analytics, regardless of their technical abilities.

Don’t settle for a generic spend analytics solution. Book a free demo today and see what life is like in Buyer’s Paradise.