Spend categorization does not have to be painful. Granted, it can be time-consuming and demanding, but the time spent on developing a robust category structure will pay off handsomely.  Extracting usable information from historical company spend data sounds easy in principle but the problem is in the interpretation.  Without a firm foundation, the information you generate from the raw data may be incomplete, error-ridden and unreliable.

A spend categorization structure that is customized to your business is the foundation.

Spend is classified based on a hierarchy of categories, from general to specific, and may extend down to 5 levels of granular detail.  This hierarchy is also called a category tree or a taxonomy – which is the science or technique of classification.

Why is spend categorization so important? 

The main objective is to provide a base for identifying strategic sourcing initiatives.    Attention to taxonomy design is very important because it helps to classify your data accurately to the most granular level.  You can see what you are spending on, how much, to whom and what the scope for cost savings is.  Making informed decisions based on your spend is only possible the data is complete, cleansed and allocated into meaningful buckets.   These buckets must be relevant and meaningful in your industry sector and your organization. The categories selected must be accepted and commonly understood by every level of management across all business units.  If the categorization is too complicated it will create confusion, if too simple – opportunities will be missed.  Everyone needs to be talking the same language.

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This article was first published on sievo.com