Overview

All businesses engage in some form of spend management activities that are intended to improve purchasing costs and lower supply base risk through the efficient use of a limited set of resources.

The effectiveness of these activities is directly linked to the quality of the spend analytics available to the organization. Unless a business has a clear picture of what it’s buying and from whom these goods and services are sourced, it will only be able to make marginal improvements to its spend performance.

Even for organizations with a high degree of control over the buying activity carried out across their business, effective analysis of spending patterns can often be challenging due to poor or inconsistent classification of its various transactions. Without accurate categorization of data for past spending activity, no amount of analysis can yield the information necessary to fully optimize sourcing decisions, assess the supply base, and conduct effective negotiations. For organizations with lower levels of spending control, these issues are only exacerbated.

In general, spend activity for an organization gets unevenly tracked across spend categories through a variety of requisitions, purchase orders, receipts, invoices, and expenses. Even where all of these transactions are utilized aggressively and processed through the same system, ensuring that category coding is consistently applied is a constant challenge due to patchwork catalogs, compliance hiccups, and user fatigue. And for regular and repeatable purchasing activity that's automated by contract agreement, there may still be circumstances that require occasional one-off ordering that ends up being wrongly categorized or might only be handled through additional unmatched invoices.

With ad hoc spending needs, significant transactions could end up being processed in general categories if requesters don’t know how to categorize their purchases. If a requester or buyer does try to code an item of spending, they may still face multiple similar choices and pick the incorrect category. For example, installing EV charging points, is it (Facilities) Maintenance, (Facilities) Hardware, or (Energy) Electricity?

Continually evolving organizational spend patterns regularly see categories becoming less significant or obsolete and new categories appearing to replace them. Often, these changes only become apparent well after the business shift in spending has occurred, requiring historic spend details to be reclassified against an updated category taxonomy. With senior management personnel changes leading to changes in analysis requirements and reporting structures, these challenges can also exist with spend analysis activities.

Unless these categorization problems are resolved, spend analysis will continue to be flawed. Spending patterns will be misrepresented with spend data being spread inaccurately across different categories, making it difficult for managers to monitor trends, identify sourcing opportunities and negotiate more effectively with their supply base.