Do you know how much, and how often, you spend with a specific vendor? The answer to that question might just be the key to negotiating a fair and realistic contract with your suppliers. Over recent decades, the power balance in the supplier/buyer relationship has shifted dramatically to the former. For supply managers looking to optimize their organization’s spend, data is key to success in re-balancing that equation.
Chances are that by the time you enter into a contract negotiation with a supplier, they already have a good understanding of previous spending levels on your end. Unless you have conducted a spend analysis, the same may not be true in reverse. That’s why this type of data crunching can be vital in helping supply managers improve their negotiation of vendor contracts as well as their relationships with vendors.
Understanding the Core of Spend Analysis
The basic meaning of this concept is in its name. More specifically, spend analysis is
the process of collecting, cleansing, classifying and analyzing spend data with the purpose of reducing procurement costs, improving efficiency and monitoring supplier compliance.
In other words, it is a comprehensive analysis of all available spending data that results in a better understanding of how money is spent. As a result, it’s often the first step in a strategic sourcing process that looks to develop better supplier relationships and contracts.
Why Supply Managers are Turning to Spend Analysis
Successful, long-term negotiations and relationships with suppliers have to be strategic. Too often, we hear horror stories of supply managers entering less-than-favorable vendor contracts because they don’t realize they’re overspending, or start their analysis with a personal connection or ‘hunch’ rather than data-backed reasoning.
The good news is that managers are beginning to realize this problem. A study by the research firm Aberdeen Group noted that a need to improve negotiation leverage for supplier contracts was among the top three reasons for enterprises to focus on spend analysis.
The Need for a Strategic Analysis Process
Underlying the increasingly common recognition of the need for spend analysis is the idea that, due to shifting power balances, buyers are looking to re-establish their own leverage. As a supply manager, you should have at least as much, if not more information about your spending habits as your negotiating partner. If you don’t, you risk entering into contracts that don’t actually benefit your company.
Spend analysis can help to accomplish that information gathering process. Through purposeful, automated data gathering and aggregation, managers can gain a quick yet powerful overview of past spending on similar products with the same vendor, and more. This data, in turn, helps to even the playing field and allows both buyer and supplier to come to the table with the same amount of background information.
Standardized data gathering also helps in negotiations with various suppliers. Once you have established a set list of spending criteria based on historical and current data, you can more easily determine whether a vendor proposal is actually beneficial to and realistic for your company.
Another important aspect of this type of analysis is its ability to provide on-demand data. A new contract, for instance, needs to be evaluated not just in terms of total spend, but the impact on other, related spend levels. With a spend analysis framework in place, these types of reports can be generated quickly, leading to more informed negotiations and decision making.
Expanding Your Analysis to Vendor Competitors
Crucially, spend analysis is about more than just analyzing your past spend as it relates to a current or prospective vendor. Especially in existing relationships, this only serves to level the playing field. On the other hand, you can get ahead by expanding your analysis to competitive vendors, as well.
This is information that the other side probably doesn’t have. Understanding your alternatives, and strategically placing them into the negotiation process, shifts the leverage toward the buyer side of the demand equation. These types of hardball tactics are not always effective but can help when a negotiation seems stuck with no side unwilling to move.
Managing Ongoing Relationships After Initial Negotiations
Most supply managers have to think beyond the initial purchase. Instead, managing relationships over time is just as important. thinkLeaders at IBM further outlines how a data-driven process can improve your relationship with existing vendors. The spend analysis process is not just competitive, but collaborative:
Injecting relevant data into negotiations across the company brings insight to (negotiation) conversations. This is not to put the other party on the defensive, but to add perspective and context. Sharing data with your negotiating partner can often lead to better deals for both. (thinkLeaders)
Ultimately, everyone appreciates a level playing field. The data you gain from your analysis, both in terms of historical spend and inefficiencies that could be improved, is valuable to both sides. Sharing data where appropriate helps to establish credibility and trust, which often leads to a mutually beneficial buyer/supplier relationship.
Related Article: The Importance of Integration in Your New Spend Management Solution
Overcoming the Challenges to Effective Spend Analysis Implementation
In short, spend analysis can play a vital role in helping supply managers not just improve initial negotiation of vendor contracts, but also maintain positive and mutually beneficial relationships with these suppliers over time. However, organizations tend to struggle with it because of poor data quality, incompatible data sources, and insufficient systems in place to automate the process. All three of these reasons can be solved with the right software solution in place. Could ProcurePort be that solution for you? Register for a live demo of our cloud-hosted spend analysis software to find out.