Spend analysis marries two crucial departments within an organization: finance and operations. The two disciplines are inexorably linked in the pursuit of profitability; deep insight into how a business allocates/invests its resources is an essential key to unlocking its margin widening potential.
Spend analysis is critical to the success of operational management. The patterns and correlations uncovered via spend analysis can alert us to stagnant internal processes that prevent efficiency. Analytical insight can help us identify roadblocks that hinder day-to-day operations, or reallocate resources according to the highest need. In short, spend analysis can free us from wasted time and the ineffective use of capital.
Below are four spend analysis use cases highlighting some of the salient benefits it provides in terms of cost savings, risk management, and increased organizational efficiency.
It is critical that we optimize internal process and performance efficiencies across the organization – every minute saved helps to increase the bottom line. Smoother operations can also produce intangible benefits, like the ability to maintain strong supplier and customer relationships.
On a more granular level, spend analysis can point us towards operational areas in need of improvement. By blending finance and procurement data, we can measure the success of our internal processes.
Let’s take the example of invoice holds. Upon receipt of an invoice from a supplier, it is standard practice for a company’s finance department to wait to pay a specific supplier until they receive a formal “approval” from the employee who created the purchase order for goods received.
If I order 10 laptops for your team but I don’t confirm my receipt, the invoice to the laptop supplier does not get paid on time. Late invoice approvals lead to late supplier payments. And unplanned late payments to strategic suppliers can trigger late fees and damage long-term relationships.
“Late payments, no matter the internal or external cause, is a primary cause for poor supplier performance, deteriorating relationships, creating higher prices by a built-in penalty. Late payments are the under-identified scourge of the supply chain, causing more disruptions than any other identified risk.” Supply Chain Dive.
Sometimes, there’s good reason for an employee not to approve an invoice -- perhaps it includes a mistake, such as the incorrect quantity or price. Other times, inefficient processes or human error create operational bottlenecks. For example, employees may not have been properly trained on correct invoice approval practices, or may not have the time to do so given their day-to-day duties.
Even so, invoice holds can impact an organization’s days payable outstanding (DPO) financial metric, and can tarnish its reputation among suppliers, leading to increased rates in the future.
Reputational damage can negatively impact future cash flows when vendors require advance payments for goods and services, or larger up-front deposits. In some cases, the supplier may refuse to ship additional products until outstanding invoices are paid.
Insight gleaned from spend analysis can provide an organization with valuable action items needed to facilitate smoother operations. For example, if I look at invoice hold volume by geography, I may discover that the majority of our invoice holds emanate from the facilities business units in Georgia and Massachusetts.
This knowledge allows me to trace back to the root cause of these holds. Employees working within the facilities department may be on campus grounds or the factory floor for the majority of the day. They may not have much dedicated time to sit at a laptop to approve invoices. Can I create a process that allows this team to approve invoices from their mobile devices while they’re on-the-go? Improved processes will have a positive impact on partnerships and the bottom line.
The visibility gained via spend analysis enables cost-cutting measures on a granular level.
Imagine that you manage technology procurement for a public, global company. You oversee a team of category managers around the world who handle your organization’s relationships with mobile device suppliers. The savviest way for them to renegotiate service plans is to look at the amount of call time and mobile data your enterprise is actually using.
Analytics allow you to track mobile device usage patterns across the organization to determine whether current usage patterns align with what you’re paying regional providers.
For example, how does call volume change by geography? How much data is consumed on average, and where do the greatest outliers exist? Which teams use the most international calling minutes or accumulate the highest data roaming charges? Answers to these questions allow your team to renegotiate service plans that best fit the needs of your workforce without overspending on minutes or data plans that go unused.
When we combine employee mobile device plan information with data and call usage by employee, a roadmap for cost-cutting emerges. We can look at the pool of employees who have an upgraded data plan, and swiftly pinpoint those who are not using this extra data on a regular basis. We can subsequently contact these employees for a further evaluation of need—if they aren’t using the data, do they need it?
Similarly, we can leverage analytics to compare employee travel data against mobile phone usage data. If an employee has an international calling plan, yet we don’t see international travel for three consecutive months, we can contact those users to determine if it’s time to downgrade to a less costly plan. Switching these users to domestic plans can save us $15-20 per user per month, which adds up to significant cost savings at enterprise scale.
The Association of Certified Fraud Examiners estimates that organizations lose roughly 5% of revenue to fraud each year. Their 2020 study concludes that one-third of fraud was due to a lack of internal controls.
Spend analysis can be leveraged as a tool to pinpoint areas of negligence or fraud. When looking at employee expense transactions by category and merchant, we may uncover a disproportionate amount of “miscellaneous” expenses which are not readily explained.
Alternatively, we may encounter payments to certain merchants, such as nightclubs, that are not authorized under our company’s expense policy. This information becomes a starting point for further investigation, alerting us to areas that require a closer look at the details. Doing so will allow us to minimize our company’s exposure to fraudulent schemes or accidental non-compliance with regulations.
We may also discover that certain business units within our organization are consistently exceeding per diem, or are violating expense policy rules. In light of this information, we can provide the business unit in question with additional training on correct procedures, or adjust our future budget projections with increased accuracy.
Whether adhering to fiduciary compliance, or to internal policies that help to curb rogue spend, every disruption prevented allows for greater peace of mind. Spend analysis is a vehicle by which companies can minimize risk and ensure compliance.
Data integration from multiple internal and external sources is often required for spend analysis and can be particularly useful when examining employee expenses.
For example, many large enterprises rely on an external travel vendor to book airfare and lodging for the entire organization. Weaving this third-party travel data into employee expense analyses creates a mechanism to ensure the minimization of extraneous costs.
Perhaps our company has a policy that prohibits first class or business class travel on international flights. Looking at expenses by fare class will allow me to determine how often this policy is violated.
Similarly, I can monitor whether employees have been averaging nightly hotel rates that are within prescribed travel guidelines. In 2020, the average hotel room price dropped by 32% (NerdWallet, 2020). Do accommodation expenditures over time reflect this change?
Lastly, if I look at employee air travel broken down by vendor, I can also determine which travel providers we are using most frequently. In the graph below, it is clear that our company is spending the most with American Airlines.
This analysis opens the door for corporate rate negotiations with our preferred airline. We can make sure that we’re getting the most out of our relationships with travel partners by discussing possible employee frequent flyer travel perks and benefits.
Oracle makes it easy to incorporate additional data sources into your analysis, providing a robust look at the inner workings of spend within your organization.
Company spend encompasses myriad internal processes which have external outcomes. These external outcomes have large-scale impacts for not only the business itself but its many stakeholders—from employees to vendors, to shareholders.
According to Gartner’s Glossary, “Spend management is about maximizing value from company spend while decreasing costs, mitigating financial risk, and improving supplier relationships.”
The use cases presented above demonstrate how Oracle Analytics can hasten the attainment of these objectives. But even beyond that, Oracle has combined machine learning (ML) with deep financial and procurement knowledge to provide a spend analysis solution that takes the onus off of the user.
Picasso famously said “Computers are useless. They only give you answers.” Oracle’s Fusion Analytics products help you ask the right questions from the outset; these carefully crafted tools ensure that the answers you receive from your data provide maximum utility.