Types Of Spend Analysis Every Organisation Should Focus On

Types Of Spend Analysis Every Organisation Should Focus On
6 min read

Spend analysis is not as straightforward as it seems. While it can be simply defined as the process of analysing your company’s procurement spend over time, it is an elaborate process with multiple facets attached to it. From spend data sourcing to categorisation and visual representation, a lot goes into analysing a company’s procurement spend.

However, once conducted, spend analysis allows you to have complete visibility of your spend data, focusing on the smallest expense incurred by your organisation. From the vendors you work with to the contracts you handle, spend analysis considers multiple aspects. This is why it is difficult to put all spend analysis processes into a single category.

Depending on what you focus on, you can divide spend analysis into different types. Each of these types brings you a step closer to your organisational goals and helps your finance and procurement leaders make informed decisions.

Here are the most common types of spend analysis you should know before getting started with any relevant assessment:

Direct Spend Analysis

As the name suggests, this spend analysis type focuses on the assessment of your company’s direct spend. Direct spend refers to the expenses that are directly related to the production or assembling of the products sold by your organisation. Whether you are spending money on procuring raw materials or finished products for assembling them, it all goes under the umbrella of direct spend.

Direct spend analysis gives you comprehensive visibility into your company’s direct expenses. It helps you track the expenses you incur for procuring raw materials, supplies, equipment, hardware, and everything directly connected to the finished product sold by your organisation.

Indirect Spend Analysis

As opposed to direct spend analysis, indirect spend analysis deals with expenses that are not directly associated with building or assembling the products you sell. Here, we take into consideration money your company spends on business operations that function “behind the scenes” to keep your core processes running.

With indirect spend analysis, you gain visibility into expenses associated with marketing, human resource management, finance, sales, operations, etc. It is important to note that most of these expenses incur irrespective of the profit your company makes and the revenue it generates. This makes it critical for finance and procurement leaders to do their best to control such spend to improve your company’s financial position.

Maverick Spend Analysis

Just like humans, companies tend to get impulsive at times and go a little off-road when it comes to spending money! Maverick spend refers to such expenses incurred beyond the scope of a contract or procurement guidelines. If you procure goods from non-preferred vendors or indulge with vendors falling outside your company’s recognised procurement policy, the money you spend will be categorised as maverick spend.

Maverick spend analysis provides you with valuable insights into your organisation’s unintentional spend and mistakes made while going beyond the contractual limits. It also helps you see if your organisation is making real profits while dealing with non-preferred suppliers. A deep dive into your maverick spend will let your finance and procurement leaders come up with suitable remedies to stay within limits and check the contracts at hand.

Tail Spend Analysis

Tail spend is a major issue and you cannot ignore it when it comes to spend analysis. It refers to the money your organisation spends on purchases making up around 80% of your procurement transactions while making up only 20% of your company’s total spend volume. In other words, it refers to transactions where a large amount of money was spent on purchasing multiple smaller items.

If you wish to increase bottom-line savings and prevent unnecessary revenue leaks, you should never ignore extensive tail spend analysis. It gives you details regarding all areas where you could have controlled tail spend and saved a little more. Ultimately, it allows your organisation to reduce low-value purchases from your vendors and utilise its resources wisely.

If your organisation makes a lot of purchases every year, it is common for such tail spend to be overlooked. While the value of these transactions is low, smaller bits often add up to make bigger dents in your company’s treasury. Effective tail spend management helps you get more spend under management, leverage cost savings, and be more mindful of the areas where your company spends money.

Contract Spend Analysis

As the name suggests, contract spend analysis deals with analysing the contracts between your company and the vendors it works with. It is a deep dive into your relationship with multiple suppliers (while categorising different subsidiaries operating under the same parent companies) and the contracts associated with them.

Effective contract spend analysis gives you details regarding active, expired, and soon-to-expire contracts. It also allows you to analyse the terms of contracts and see if you can renegotiate to get better deals with the same or different vendors. Moreover, contract spend analysis often serves as the basis for vendor rationalisation, allowing companies to derive maximum benefits by shrinking their supplier base.

Analyse All Spend Types Under A Single Digital Umbrella With Spendkey

From analysing direct/indirect spend and maverick spend to tracking tail spend and contract spend, Spendkey gives you a single spend analysis tool to manage all your company’s expenses with a few clicks. Equipped with modern technologies like artificial intelligence and machine learning, the software solution is designed to automate otherwise cumbersome processes like spend categorisation, data cleansing, standardisation, and many more. With Spendkey, you can empower your finance and procurement leaders to obtain better insights into your company’s spend habits and make informed decisions to boost bottom-line savings.

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