If you have ever used a personal finance package such as Intuit’s Quicken then you already have a good understanding of the concept of spend analysis. With Quicken you can download all of your purchases made with checks, credit or debit cards from the banks which provide you the accounts. You can also key in expenses directly for purchases made with cash.
Quicken recommends categorizing expenses into different groups such as rent, insurance, groceries, gasoline, clothing, entertainment and car repairs. Once categorized, Quicken can show you a pie chart that explains how your money is being spent. You could create a monthly budget that measures variances against projected spending amounts. Empowered with analytics, you can identify opportunities to reduce spend in different categories. For example, Quicken might identify that you are spending $500 on dining out each month. You could choose to make a lifestyle change such as bringing your lunch to work or preparing more home cooked meals. Other information might be less actionable. For example, Quicken might identify that your wife is spending $200 per month on shoes.
Corporations have a similar need to perform spend analysis on their various purchases. If you work in a large corporation, chances are you are already familiar with this process. Corporate travel agencies offer the best examples. Companies are always trying to reduce the corporation’s spend on travel. As a result, CFOs and purchasing departments will contract with a third-party travel agency, such as American Express or Carlson Wagonlit Travel. The agency will analyze the travel patterns of your employees then negotiate favorable discounts with key travel providers on your behalf. For example, if your company has headquarters in Chicago and satellite offices in Los Angeles and Dallas, then you should choose an airline partner that has hubs in these cities such as American Airlines. The travel agency may negotiate with several hotel chains and rental car agencies to find the best deal. Employees are required to perform all travel requisitions through the agency which ensures the preferred, negotiated rates are enforced. The agency may perform a quarterly or annual analysis of travel patterns to ensure that the vendors selected are offering the best mix of services for your employees’ actual needs.
The same process can be used for other types of goods and services being purchased. However, in most cases the procurement organization rather than a specialized third-party agent performs the analysis, negotiation and requisition functions. The process begins with spend analysis to determine what the company is buying and from whom. To obtain the information, companies will aggregate all their purchasing data from procurement and accounts payable systems for the past year. Spend analysis software will group the purchases into categories, and then show spend by item, category, supplier and business unit.
The outcome of spend analysis is usually an opportunity to identify cost savings. Consolidating spend with a single vendor is usually an area that can provide short-term savings opportunities. For example, a company may be using DHL for 50% of its international shipping needs, FedEx for 30% and UPS for the remaining 20%. By consolidating all of its international shipping with one of these three companies, the company may be able to obtain an additional volume discount of 10-15%.
Included in most e-procurement software suites today are spend management applications which can provide detailed reports on purchases by category. Spend management can help procurement managers to segment purchasing by the category, by supplier, by business unit or by employee. Armed with such information corporations can identify opportunities to reduce costs. Spend management is a concept that is always popular with executives regardless of the economic cycle. In recessionary periods cost reduction is driven by a desire to match lower revenues with a lower cost structure. In growth periods cost reduction is still important to free up cash for strategic investments.
Verticalogy by Steve Keifer 