Why spend analysis?
Why not just analyse procurement spend per account
Sometimes you hear people question why a spend analysis is even required to get a holistic view of an organisation’s expenditures. The spend is already classified either in material groups or into different accounts, why not just analyse the spend using them and cut out all the extra work required to cleanse and classify the spend?
The answer is twofold: if there are material codes in use for direct material, then they are more often than not enough to use to classify spend. Indirect material however very seldom has the equivalent material code and while the indirect material expenditures are already classified into different accounts, it does not mean that the account classification is relevant from a procurement perspective. The chart of accounts is designed to create transparency from an accounting perspective. It is set up so that groups of expenditures can be treated in a similar way and creating a holistic view of the whole organisation. From an accounting perspective.
From a procurement perspective, the information that comes with from the chart of accounts is of value. But it is not granular enough and not formatted the right way to provide detailed insight into the organisation’s buying behaviour. What is needed is to have the expenditures structured according to the supplier market structure so that similar goods and services are classified into the same category. Knowing that we spent € 1 million on “Consultants” may be sufficient from an accounting perspective. But it is too high a level to be actionable for a purchasing department.
Using the account structure instead of a market oriented spend analysis as a foundation to build a strategic procurement organisation is equivalent to taking up running using your black leather shoes you wear around the office. They both have soles to protect your feet from stepping on glass or stones. They both have an outer layer to keep your feet warm. And they both have laces to keep the shoes on your feet. The office and running shoes are similar, but they have crucial differences.
The same goes for a purchasing category structure and an account structure. Similar but worth crucial differences.
Doing a simple cost benefit analysis will reveal that the extra costs associated with investing in a proper category based spend analysis, or a pair of proper running shoes, is not only be a good idea. It is essential to your success.