Spend analysis is the process of aggregating, cleansing, categorizing, enriching, and analyzing the disparate pieces of spend, sourcing, and supplier data that reside inside and outside of the enterprise in order to gain greater visibility into enterprise buying behaviors and make informed decisions. It is the first “pillar” in the strategic sourcing foundation, as it informs sourcing decisions, assists in contract compliance audits, and aids in the assessment of supplier performance and other important business functions (like forecasting savings goals).
For some time, Ardent Partners has taken the view that chief procurement officers (CPOs) who do not conduct spend analysis are guilty of professional malpractice. They are flying their teams blind into future sourcing decisions and cannot possibly optimize their spend or sourcing behaviors. In a perfect world, 100% of enterprises would conduct a vigorous spend analysis using innovative analytics technologies and would leverage the resulting intelligence to inform their decisions. Admittedly, 100% adoption may not be realistic, but procurement teams have been pretty far from this utopian future, flying under 50% adoption for quite some time.
Predictably, best-in-class CPOs and their teams are ahead of the adoption curve, continuing a years-long trend. In 2016, 59% of them indicated that they deploy an automated spend-analysis solution, compared to 25% of all other teams. Put another way, the best-in-class are 1.4 times more likely to adopt an automated spend-analysis solution than procurement teams of lower maturity classes. Although not causal, greater adoption of these solutions correlates with superior enterprise and procurement performance:
- Spend under management: Best-in-class procurement teams reportedly pull 91% of spend under management, compared to 57% of all other teams. In other words, more mature procurement teams manage 37% greater spend than less mature organizations.
- Savings 2015 (actual): Because teams cannot save what they cannot identify, best-in-class teams realized 7.7% actual savings in 2015, compared to 6.9% – a 13% difference.
- Savings 2016 (planned): Although there are going to be differences between identified and realized savings, the best-in-class procurement teams still outperformed the competition, having identified 8.4% savings targets compared to 7.2% for all other teams – a 17% difference.
- Addressable spend that is sourced: They also reported 67% of addressable spend that is sourced (spend that is within their influence and converted into a sourcing event), compared to 47% of all other teams.
- Spend that is contract compliant: Best-in-class teams also report 69% of spend that is contract compliant, compared to 54% from all others – a 27% difference. Having visibility into historical spend enables CPOs to drive greater on-contract spending and compliance, and to optimize existing supplier relationships.
Spend analysis rightfully sits at the front of the source-to-settle process, as visibility, intelligence, and optimization naturally cascade from one process to the next and enrich each part with the value imparted from the other. Best-in-class CPOs and the procurement teams that they lead understand and embrace this. A majority of them have adopted automated spend-analysis tools to assist in the process. As a result, they learn more about their enterprise spend and thus make smarter business decisions, which, as the data shows, correlates with superior enterprise and procurement performance.
Free download: For more lessons learned from best-in-class procurement organizations, please see Ardent Partners’ CPO Rising 2016: The Art and Science of Procurement.
This article originally appeared on CPO Rising. Matthew York is a research analyst at Ardent Partners and editor of CPO Rising. Andrew Bartolini is the chief research officer at Ardent Partners. Follow Ardent Partners on Twitter.