Whether you're contemplating doing a spend assessment yourself, investing in specialized tools, or exploring outsourcing options, this article highlights the complexities and crucial considerations to assist in your spend assessment journey.

What is a Spend Assessment?

A spend assessment is a strategic approach that goes beyond standard supplier or commodity reports — It involves a systematic review of historical procurement data to uncover valuable insights into your company’s spending habits.

This process serves as a tool to pinpoint challenges and opportunities within your sourcing value chain.

A comprehensive spend assessment should answer essential questions about your spending, as highlighted in this article on 5 Questions to Ask Your Procurement Team.

Benefits of a Spend Assessment

1. Enhanced Spend Visibility

Many organizations are geographically dispersed or are dealing with diverse lines of business, add in multiple ERP, procurement, and financial systems, and achieving a comprehensive view of spending becomes quite a challenge.

Often data within these systems remains unrefined, dispersed, and lacks central organization. This lack of data cohesion and consolidation hinders the ability to accurately discern spending patterns.

A spend assessment serves as the bridge that consolidates all this disparate source data into a single, unified report, providing the much-needed visibility you need to make data-driven procurement decisions.

2. Maximize Savings

By examining the aggregated data (by commodity, supplier, cost center, etc.) strategic sourcing opportunities are often uncovered where savings can be generated or realized through:

RFx Process
Contract Renegotiation
Supplier Rationalization
Demand Aggregation
Supplier Performance Monitoring

3. Improved Compliance and Process Efficiencies

A detailed analysis of transactions may help to uncover opportunities around compliance and processes, including:

Contract compliance
Adherence to Procurement Policies & Procedures
Diversity spend compliance
Maverick spend
Regulatory requirements
Procurement and related process efficiencies (e.g. invoice processing opportunities, PO limits)

Tips to Develop a Successful Spend Assessment

1. Set Clear Goals & Objectives

Define a clear set of goals and objectives you want to achieve from your spend assessment.

Set Measurable Goals: Examples of goals include establishing a savings target, enhancing compliance, and/or optimizing procurement processes.
Determine Cross-Functional Benefits: It’s important to determine the benefits each business function within your company can derive from the data.
Promote Collaboration: Explore opportunities for enhancement through collaboration with different business functions.

2. Gather Data

Identify Source Systems: You need to identify the source systems from which you’ll gather data. Common systems for a spend analysis include:
- ERP (Enterprise Resource Planning) or Financial System
- Purchase Requisitioning System (or PO system)
- Corporate Card (P-Card or T&E Card)
- Consider other systems such as production, inventory, supplier systems or even sales systems if a more comprehensive analysis is required.

Historical Data: Request a minimum of 1 year worth of historical data, but ideally aim for 2 to 3 years. This will provide valuable trend data and enable year-over-year comparisons.
Strive for 100% Spend Visibility: Achieving 100% spend visibility involves extracting transaction data for the entire company from all systems and lines of business. However, it’s essential to note that targeting 100% spend visibility should be the end goal, as this may not be a realistic goal to start your journey. A successful approach often follows the 80/20 rule, prioritizing areas of the company or systems that would have a greater impact in achieving this target.

3. Define Essential Data Fields

As you gather data from the source systems, keep in mind the essential data fields needed for your spend assessment, ensuring they align with your company's requirements and operational processes.

Identify common or unique identifiers, such as Order Numbers or PO Numbers, to facilitate record matching across various source systems, like ERP or purchasing requisitioning systems, for a more detailed analysis.

4. Know your Data

The accuracy of your spend assessment relies heavily on the quality of your data. It's crucial to invest time in assessing the data quality before you begin to optimize the data.

Consider IT's Role: Keep in mind that IT's primary role is data extraction, and they may not be aware or concerned about issues like incomplete transaction descriptions or missing dates and vendor names.
Collaborate with Sourcing and AP Teams: It falls upon the sourcing team, often working closely with the AP group, to proactively review and address data gaps before utilizing it for analysis.
Internal Data Quality Control: The more internal data quality control and cleansing you perform, the higher the accuracy of your final results.

5. Optimize your Data

After gathering data extracts from various source systems, data preparation is crucial before analysis. Since data often originates from multiple channels, it’s necessary to consolidate, clean, augment, and enrich the data in order to get accurate insights.

While striving for a complete review of all data, it's important to acknowledge that this can be daunting, especially with large datasets. In such situations, keep in mind the 80/20 rule to serve as a helpful guide.

Here are some key considerations for optimizing your dataset to maximize the potential of your spend assessment:

Clean and Augment the Data at the Transaction Level

Data Cleansing: Eliminate errors stemming from misspellings, missing information, or inconsistent attribute values.
Supplier Name Normalization: Standardize supplier names to create a unified representation. For instance, variations like "CompanyABC Canada," "CompanyABC Inc.," and "CompanyABC Licensing" should be consolidated into a single, comprehensive name to improve accuracy.
Add Categories and Sub-Categories: Classify transactions based on supplier names or item descriptions, tailoring categories to your business context. Multiple sub-categories (up to 3 levels or more) can enhance granularity and specificity, providing deeper insights.
Utilize SIC or UNSPSC Codes: Assign transactions to their respective SIC (Standard Industrial Classification) or UNSPSC (United Nations Standard Products and Services Code) codes to aid in categorization.
Distinguish Between Direct and Indirect Spend: Separating these spend types reflects the distinct management approaches typically employed within an organization.

Layer in Unstructured Data Points at the Supplier Level

Under Contract: Identify suppliers that are under contract and those that are not to indicate the extent of spend under management, assisting in contract oversight.
Supplier Performance: Add supplier performance metrics alongside other spend metrics in order to determine spend with high or poorly performing suppliers.
Addressable versus Non-Addressable: Helps in identifying suppliers or categories that may not be amenable to procurement efforts, allowing focused allocation of resources.
Supplier Status: Enables a quick assessment of where each supplier falls within the Pareto curve, aiding in strategic decision-making.

Essential Data Points to Enhance your Raw Data Set

6. Visualize the Data for Strategic Decision Making

At this point in the process, we now have a wealth of data. But viewing this data in its raw, tabular form may leave you and your stakeholders feeling overwhelmed.

It’s important to take this complex financial data and present it into clear, comprehensible visuals that will drive actionable insights and strategic decision making.

7. Continual Measurement and Frequent Reporting

High-level executives and stakeholders, driven by the potential for opportunity, eagerly seek insights that can drive their organizations forward.

As you embark on the journey of developing a spend assessment, the significance of ongoing measurement and reporting cannot be overstated.

Once these decision-makers appreciate the promise of a well-executed analysis, they are more inclined to actively engage and commit to achieving defined objectives.

To guide this endeavor, the following are set of essential principles to keep in mind:

Establish Key Performance Indicators (KPIs): Define a set of performance metrics to ensure the program progresses towards its objectives.
Compare with Industry Standards: Benchmark your performance against industry standards.
Streamline Reporting: Create a consistent set of reports, update them regularly, and make them accessible to key individuals within the organization.
Schedule Review Meetings: Organize meetings for report presentations at a frequency that suits your organization; quarterly reviews are recommended as a minimum.

Sustaining Success

By performing a spend assessment, you equip your company with a powerful tool for uncovering hidden opportunities, streamlining processes, and enhancing your bottom line.

As you progress through the various stages of a spend assessment, from setting clear goals to optimizing your data and presenting it visually, remember that this is not a one-time endeavor. Continuous measurement and reporting are key to sustaining the benefits of your efforts.

With the right approach, supported by the principles we've outlined, you can transform your raw data into actionable insights that drive strategic decision-making!

Demystifying Spend Assessments: A Strategic Imperative