How to Use Your Procurement Spend Cube to Deliver Results
Although Procurement does more than manage spending, spend data is foundational to the function’s strategic impact. So you need some way to consolidate and organize your data in a way that makes both financial and non-financial opportunities easy to find. That solution is known as a spend cube. Here’s how you can assemble one that produces results.
What is a spend cube?
A spend cube is a three-dimensional representation of spend across the business. It illustrates what teams are spending on (goods and services/categories and subcategories) who they’re spending with (suppliers) and who is spending (business units/purchasing managers).
Why is a spend cube important?
A spend cube also allows teams to see the intersections between different factors. These intersections allow teams to conduct spend analytics, supplier analysis, and other activities that inform strategic sourcing decisions.
Spend cubes also grant teams comprehensive visibility, which is important because today’s organizations have so much complex spend. There’s no way to manage or analyze it effectively without the ability to see 100% of an organization’s spend at a glance.
The visibility that comes from a spend cube also enables teams to
- Improve internal compliance by revealing maverick spend, which is traditionally difficult to find
- Spot areas of the business with increased risk exposure–supply chain shortages, supplier gaps, data security risks, etc.
- Drive improvements to the efficiency of the procurement process
- Look for strategic and non-financial improvement needs and opportunities–scope 3 emission reductions, supplier diversity spend increases, ethical vendor relationships, etc.
The core benefit of having a well-defined spend cube is the perspective into organizational purchasing that it offers. When you can see spend as a whole instead of the siloed fragments that live in various ERPs and procurement suites, you can make informed, effective decisions that improve EBITDA and benefit the entire business.
That means better relationships with key stakeholders like Finance, tangible impact, and a seat at the strategic table for Procurement.
So how can you unlock this visibility into your spend? Building a spend cube is easier than you may think.
The ingredients of an effective spend cube
To build an effective spend cube, you first need to gather all of your organization’s purchasing data. Without all of this data, the insights you pull from your spend cube will be inconclusive at best and misleading at worst.
Unfortunately, the M&As and technology investments of today’s business landscape mean that purchasing data is fragmented and siloed among various P2P/S2P suites, ERPs, P-cards, BI platforms, and other tools. As a result, most teams only have visibility into 40-60% of their spend data.
To solve this problem and create a usable spend cube, teams must first de-silo and normalize all of their data. Then they have to organize it into a tiered category system. Finally, they have to refresh it at regular intervals to avoid falling into the spent analysis trap.
A single round of this process can take 30+ hours and still leave concerning gaps in a team’s ability to understand their spend. Repeating the process each month or quarter can distract from a team’s other responsibilities to the point that it may not feel worth the time and effort, especially for smaller, less mature procurement organizations.
Solving Procurement’s data roadblock
This level of involvement in spend cube formation has traditionally deprioritized execution, giving the function’s impact a glass ceiling. In response, SpendHQ has developed a rapid data processing methodology that uses each teams’ expertise without requiring them to conduct manual data labor.
This approach leverages the automation of Machine Learning alongside the combination of client and SpendHQ procurement expertise to normalize, categorize, maintain, and fine-tune spend cube creation in a matter of weeks. Here’s how it works.
Normalization
Procurement’s data is messy for two reasons. First, data lives in multiple systems which all format data exports differently. Secondly, vendor naming conventions on purchase orders (POs) are rarely normalized across organizations, especially in global businesses.
SpendHQ’s artificial intelligence model automates this process by using natural language processing (NLP) and its data lake of $8+ trillion of previously analyzed spend to consolidate records into clean, accurate supplier profile suggestions.
Categorization
Without tiered categories (also known as a taxonomy), a spend cube is just a massive collection of supplier data, which has limited uses. So once the organization agrees with the normalization output, our algorithm uses Machine Learning to suggest categories, sub-categories, and so on by comparing data points to the same data lake from the normalization process.
As a result, teams typically have 97% of their entire organization’s spend categorized in a matter of weeks, with the additional 3% consisting of individual and one-off purchases.
This process is fundamentally different than other approaches that rely on collaborative classification. Unlike automation, a collaborative classification is a lengthy process that relies on your team to identify the right categories for each piece of spend data.
These processes also rely on heuristics, or rules, instead of machine learning to classify spend. Rules are manually created sets of “if X, then Y” logic, but they can grow outdated over time and they are highly granular. Large organizations may have to build hundreds of thousands of rules just to classify their spend.
Do you have the right categories?
Another consideration is whether your spend cube is built on the right taxonomy. A spend cube is only as valuable as the quality of its categorization, so your taxonomy needs to be organized in a way that makes it relevant to Procurement specifically.
This single factor limits the effectiveness of many spend cubes. Most taxonomies categorize spend using GL codes, UNSPSC codes, and other taxonomy structures that were developed for Finance and Accounting. These taxonomies focus on who purchased or whom it was purchased from.
By contrast, SpendHQ’s model divides spend into unique sourcing level taxonomies that focus on what the organization purchased. This view allows teams to see purchasing activity across the business instead of analyzing spend one department or supplier at a time and missing key insights as result.
Chief Product Officer Pierre Laprée summed up the value in a recent interview when he explained, “We’ve had so many clients have this aha moment where they say ‘“Oh now I know who I spend with across my organization and I actually realize that those five companies belong to the same group.’”
Without visibility into spend, these insights could go unnoticed for years, draining the organization’s resources and Procurement’s strategic reputation.
Refreshes
The value of a spend cube rests in its relevance, and with the pace of business, old data is irrelevant. So once SpendHQ works to make sure a client has accurate normalization and categorization, our algorithm is ready to refresh data each month or quarter in a mostly hands-off manner. And because it’s based in Machine Learning, the algorithm gets faster and more accurate over time.
Taking procurement data to a new level
Finally, the most effective spend cubes enrich their data with additional insights into their vendors, such as:
- Supplier diversity
- Carbon emissions
- Corporate social responsibility (CSR)
- Anti-slavery commitments
- Fair trade
- Sustainability ratings
- Cyber risk
- Financial risk
Enriching data with these insights turns a spend cube from a basic cost center analysis into a powerful tool for strategic impact. Instead of simply conducting an item spend analysis or individual category spend analysis, you can help transform how the entire organization does business.
For example, you might find that your organization unknowingly has a concerning percentage of spend dedicated to a vendor with an ethically questionable supply base. Or you may find that one of your vendors has a carbon-neutral pledge, opening the door to a strategic contract. By enriching and centralizing your data, you can address these issues that would have been difficult, if not impossible, to see in their full scope otherwise.
Know your goals
When you understand what you can accomplish with a spend cube, it can be tempting to start looking for and working on every opportunity your cube reveals. But there are more opportunities hiding in your data than you may think. Trying to act on all of them as soon as you have spend visibility can be overwhelming, especially if your organization is on the earlier side of the procurement maturity curve.
The best way to solve this problem is to align with your key stakeholders and understand what they would like to see Procurement accomplish, what they are trying to accomplish, and what blockers are limiting their impact.
While Procurement stakeholders usually look to your team for cost savings, your organization’s spend data holds answers to their other problems as well. You may identify a way to improve fulfillment times or payment terms, for example. You may also find impending supply shortages or public relations nightmares simply because you have a unique perspective on the entire organization’s supply chain.
Working with stakeholders will also make the procurement process easier. Especially in companies with billions in spend, the opportunities for impact are endless. The scope of your spend cube can become overwhelming, which is why working with other business units to identify the organization’s needs is a critical, though underrated, procurement practice.
If you combine your stakeholders’ goals with your evergreen initiatives, knowing where to look for the right projects will be easy.
Analyzing spend data with your cube
Once you have a general understanding of what you want to accomplish, you’ll know where to prioritize your spend analysis. To find them, you’ll usually start by looking at spend from a category and sub-category level, which will reveal a handful of opportunities:
- Spend trends (increases and decreases over time)
- Compliance (maverick buying)
- Tail spend
- Scope 3 emissions
- Sustainability
- Diversity spend
- Single-sourced spend
- Supplier fragmentation
You can also look at supplier spending to find:
- Spend trends (increases and decreases over time)
- Compliance (maverick buying)
- Contract opportunities
- Spaces for new contracts, such as vendor spend increases
- Upcoming renewals
- Approaching renewals
- Approaching expirations
- Single-sourced-spend
- ESG-related issues
- Scope-3 emissions
- Water usage
- Diversity spend
- Corporate social responsibility concerns
Slicing and dicing
You can also analyze spend by drilling down into at the places where various parts of your spend cube intersect, otherwise known as slicing and dicing. These areas may reveal impactful trends or opportunities that aren’t obvious or easy to see, and offer strategic value as a result.
For example, you might want to compare sub-category spend at your Nashville and London offices. You might also be curious about why and where spend in a category spiked after a specific purchasing manager joined the business. Slicing and dicing can give you answers to complicated questions within a few seconds without demanding the intensive data science spend analytics once required. In some cases, slicing and dicing may even raise new questions you hadn’t thought to consider beforehand.
Learning how to analyze spend data is a never-ending process simply because it holds so many dimensions. But the rule of thumb we shared earlier has always remained true: you will always succeed if you work to deliver the results the business needs. As SpendHQ’s Chief Product Officer Pierre Laprée explained on a recent Art of Procurement Live session,
“If you deliver something that is not good for the business or if something is good for the business, but not for you, there are two things. Either you’re not tracking the right things and you should change, or you’ve been tracking the right thing, but the situation has changed… Procurement needs to have this agility and have the ability, through data and tools, to adjust what they are tracking, because the business reality might require different KPIs, and that might change 2 to 3 times in a year.”
Zooming out: What is a cube of cubes?
Most procurement teams deal with billion dollar plus amounts of spend across a single organization. But teams in the world of private equity are responsible for leveraging Procurement for EBITDA improvements across a portfolio of companies.
To succeed in this complex operation, teams need something that combines multiple spend cubes into one data visualization model instead of multiple, separate ones. That model is known as a cube of cubes.
A cube of cubes accomplishes the same purpose as a single spend cube, just with more data. It shows the intersections of multiple companies’ purchasing activity, giving operating partners the visibility they need to pursue initiatives that lower costs and set the stage for a profitable exit, such as:
- Cross portfolio supplier contracts
- Non-compliance reduction
- ESG compliance
- Large-scale cost reductions
- Portfolio EBITDA improvements
As the leader in private equity spend analytics, SpendHQ has assembled comprehensive cubes of cubes for some of the world’s leading private equity firms. Using our previously detailed approach to gathering, normalizing, categorizing, and refreshing spend data, we are especially experienced in providing PE firms the data analytics capabilities needed to accelerate bottom line impact, operationalize ESG compliance, and maximize investment values.
Contact us to learn more about our private equity experience and capabilities.
Procurement Performance Management: How to really use your spend cube
So you’ve worked with stakeholders to find out what the business needs and used that feedback to find more opportunities and projects than you know what to do with. Now what?
To solve this issue, we created Procurement Performance Management (PPM), a digital procurement solution that, like a CRM for sales, facilitates an organized, transparent approach to executing and tracking strategic procurement initiatives. Here’s how it works.
Ideas and opportunities
When you have promising ideas, you need a way to share and keep track of them. If you’re like most Procurement pros, you’ve used a Microsoft Excel spreadsheet to store ideas at least once in your career. And at least once, you’ve lost them to the handful of situations that make spreadsheets difficult (impossible even?) to keep up with.
So the first step to PPM is creating a place where procurement practitioners and stakeholders can share, log, and catch up on these opportunities. Once an idea has been approved, users can then upgrade it to a project for streamlined tracking and execution.
Project pipeline and unbroken communication
PPM’s Project Pipeline places communication, organization, and transparency at the heart of project execution. Instead of sending buyers and category managers out to tackle their tasks in silos, PPM creates a single-source-of-truth for all procurement activity and attaches it to the relevant project.
All in-flight projects are represented in the pipeline, complete with
- Status information
- Comments and updates
- Projected timeline
- Expected results (financial and non-financial)
- Areas of impact
The pipeline makes cross-organizational collaboration easier and allows CPOs and other executives to obtain general or specific updates on Procurement activity at a non-intrusive glance. With this visibility, teams can move past the performance questions that have plagued Procurement for decades.
Reporting results and progress on goals
Because PPM houses everything Procurement does, it also becomes the single location for reporting Procurement’s financial and non-financial impact.
Remember how your spend cube required information from all the different systems that hold your organization’s spend data? PPM eliminates the need to piece together reports from all of them because it integrates with many of those systems, including Coupa, SAP Ariba, Workday, Archlet, Corcentric, MarketDojo, and many others. That means your realized impact feeds directly into your reporting structure.
PPM then makes reporting even easier by giving stakeholders acces to self-serve reporting on-demand. A report from independent research firm Hobson & Company revealed that PPM users spend 80% less time on ad-hoc reporting requests. As Yannick Caharel, the Global CPO of Christian Dior Couture recently explained,
“…PPM [Procurement Performance Management] allows me, to have an online platform where we report all the projects, all the budget, all the saving, with all the documentation and so on….So I’m not doing 60 pages of PowerPoint presentations. The moment I go to New York, Shanghai, or Dubai, I just log into PPM, so that we have a full business review based on true projects, true realization, whether it’s identified, ongoing, completed, and so on.”
Creating a continuous improvement loop
A final core benefit of enabling your spend cube with PPM is that there are never really final results. When you can see the full picture of Spend→Execution→Results→Spend, you will find never-ending opportunities to optimize your processes.
When you combine the spend analytics of your spend cube, the process excellence of PPM, and a culture of continuous improvement, Procurement can become the heart of organization-wide excellence. And because your function touches every part of the business either directly or indirectly, you will have a natural positive impact far beyond simple spend management.
Reimagine what a spend cube can do
Procurement is much more than an organizational cost-cutter, but the function’s influence still starts with its power over spend.
The good news is that assembling and using am actionable spend cube is easier than it may at first seem. Our unified Spend Intelligence and Procurement Performance Management platform is built to help you execute on your spend cube immediately.
If you’re ready to unlock a new level of Procurement impact, click below and schedule a demo today.
