Spend Analysis Explained:
An Introduction for People Outside Procurement
Note: This piece is envisioned as something that could be helpful for getting all the members of a sustainable purchasing cross-functional team on the same page when talking about spend analysis.
Over the last few decades, the procurement department within many organizations has been transitioning from a primarily logistical function that executes purchases budget-holders request, to a more strategic function that guides senior leaders and budget holders in maximizing value for the organization’s dollar. This involves establishing within the procurement department a proactive process in parallel with the still-necessary reactive process of responding to budget-holder requests. Spend Analysis is one of the key tools that procurement organizations use in this parallel process to proactively identify opportunities to optimize their organization’s buying power.
In short, the spend analysis process involves pulling together purchase history data to answer key questions, such as:
- What are we buying?
- Who is buying it?
- Who are we buying it from?
In many big organizations, purchasing has historically been decentralized, making it very difficult to answer those seemingly simple questions. Organizations doing this data collection and analysis process for the first time often discover that they are buying the same things from a number of suppliers and that they could get better pricing if they consolidated the business with one supplier. Or, they find that budget holders are buying many things from a supplier that is not on contract, meaning that they are getting no volume discount despite the high volume of business they are doing with that supplier. Those are just two examples of the many cost saving opportunities that make up the business case for doing spend analysis.
However, despite the strong business case for doing spend analysis, many procurement organizations find they don’t have the time, resources or data necessary to do it. Spend analysis often requires an upfront investment of institutional capacity into data collection, software upgrades, dedicated staff time, and/or consulting dollars.
If that investment has already been made in your organization, consider yourself lucky and congratulate your purchasing team heartily for their proactivity and leadership. Because of their work, it won’t be much trouble to get the data necessary for analyzing the sustainability performance of your organization’s spending.
If that investment has not yet been made in your organization, know that you are in excellent company with your peers at many other organizations. Do not despair. There are many ways your cross-functional team can get a strategic sustainable purchasing initiative going in the absence of that. Here are just a few examples of how your team can do that:
- Your team can ask key suppliers to supply the data about what you purchase from them. In fact, some suppliers can not only supply the data, they can also supply the analysis of the data!
- In non-competitive environments, your team can find a peer organization that has done a sustainability analysis of their spending and let their findings guide your planning, given that your top 5 impact areas will likely be similar to theirs. This is a reasonable assumption because we often see that 4-8 areas of purchasing contribute the overwhelming majority of an organization’s supply chain impacts, and that those are fairly consistent across organizations of similar type. In competitive environments where peers don’t share that type of information openly, you may need to work through a trade association to develop an anonymized, average analysis for organizations of your type.
- Your team can narrow the scope1 of your initial efforts to a specific subdivision of the organization where the data can be manageably collected. For example, one department might have better data tracking than the rest, or, there might be a satellite campus for which rounding up the data manually would not be an overwhelming task.
The Big Win-Win
If your organization has not yet made an investment in spend data collection and analysis for the purpose of finding cost savings, your purchasing staff may feel like a request for them to do sustainability spend analysis is putting the cart before the horse. Or worse, they may feel that you are putting your priorities as a sustainability advocate ahead of their priorities, given that their job performance is most likely evaluated on how much money they can save. (Your team could try to remedy that problem by asking your Chief Procurement Officer or Chief Financial Officer to change how purchasing staff are evaluated, but that’s a challenging ask to make at the outset of your program. You are more likely to win that type of change once your sustainable purchasing program has gotten off the ground and has demonstrated to senior leaders and purchasing staff how sustainable purchasing saves money.)
Alternatively, your team can join your purchasing staff in making the case to senior leaders that resources should be allocated to augment the organization’s spend data collection and analysis capabilities. Your team may want to do this not only because it will enable sustainability spend analysis. As sustainability advocates, budget holders, operations staff and purchasers, everyone on your cross-functional team will likely believe strongly in efficiency and avoiding wasting the organization’s resources, so the potential cost-savings associated with uncovering off-contract purchasing and streamlining purchasing is something they can get fired up about together. When your purchasing staff see that the cross-functional team values the same things that concern them, and is willing to go to bat for resources that will help them, the establishment of that win-win relationship can radically advance collaboration around sustainable purchasing.
Why would purchasers need the cross-functional team’s help making the case for investing in spend data collection and analysis when there’s a strong business case for doing it already? For one, implementing systems that capture spend data often requires significant cooperation from stakeholders outside of the procurement department, not just financial resources. Many of those stakeholders will be on the sustainable purchasing cross-functional team, making team meetings one more place where the dialogue about the importance of spend analysis can take place with key stakeholders. Additionally, the cost-cutting pressure on procurement departments can sometimes be so great that they cannot budget a major upgrade to their tools and must continue to squeeze productivity out of old systems. Having stakeholders from around the organization become aware of those delays and the cost-saving benefits being missed, can open up budgetary possibilities that the procurement department might not have been able to access otherwise.
1 Whenever you narrow the scope of your analysis to a subdivision of the organization, it’s important to recognize that the spending associated with that subdivision may not be representative of the organization as a whole, and therefore the priority action items you identify for improving social, environmental and economic performance of that subdivision’s spending may not be the most strategic actions for improving the performance of the entire organization’s spending.