Below is a practical guide to building your own spend taxonomy, but if you’d rather just use ours, you can download it by clicking the button below.
Why bother?
What is the point of a creating a spend taxonomy? Ultimately it’s about analysis, utility and speed. Category management is an extremely effective approach to procurement and without a good taxonomy and accurate classifications identifying the spend, suppliers and contracts in each category, extracting insights can be like pulling teeth.
The challenge
Building a taxonomy of any kind is difficult. Both conceptually and practically. On the conceptual side you have to strike a balance between creating categories that are detailed enough that they communicate insight, but broad enough that they comfortably cover all the bases.
On the practical side you have to compete with the fact that the task itself is painfully, excruciatingly, mind-numbingly dull. It is the perfect blend of a tedious task, that requires real effort. Rest assured though that the effort realty is worth as it will serve as the cornerstone of your spend analysis and category management.
Before you begin
- Decide what you’re categorizing. Before you build your taxonomy you need to decide whether you’re categorizing suppliers or attempting the much more ambitious task of categorizing spend at a line level, which is only practical if you’re using specialized machine learning tools. Supplier categorization on the other hand, while a big upfront task, is nevertheless achievable using ordinary tools.
- Don’t start from scratch. This is a purely practical point that it’s much easier to edit something than to create it from nothing. Start with an existing taxonomy (like ours) or use your chart of accounts and expand from there.
When you’re building
- Involve category experts. The knowledge of people who handle your spend is essential in creating a taxonomy without gaps. The people who manage your spend will also be some of the primary users of the taxonomy going forward, so it’s very important that they understand it and will agree to use it.
- Have a taxonomy czar. As essential as it is to have SMEs contribute, what you can’t have is each person creating their own taxonomy for their specific area, each with different structures and levels of granularity. This means having a single person responsible for consistency and usability who negotiates the tradeoffs of breadth and depth; the ultimate acid test of the taxonomy is that it is usable by novices and experts alike.
- Test it as you go. Don’t wait till you’ve sunk a lots of time and resource on your taxonomy only to discover it’s inadequate on the day you need to start using it. Test it early on a sample of data to highlight which categories need to be split, merged, added or deleted.
- Add definitions. Full disclosure: this is by far one of the most tedious bits, but by adding definitions you draw a clear line between different categories, which is an essential guide for anyone doing spend classification or for anyone using the taxonomy for the first time.
After you’re done
- Evolve the taxonomy iteratively. You’re unlikely to create something perfect on the first attempt, and even if you’ve created something perfect for the current moment there will always be new categories that emerge or fall away as technology and business practices evolve. Expect this, plan for it and set aside some time every year to review and update it.
- Use the taxonomy to enrich your data. Data visualization tools like Power BI, Tableau, QlikView or Looker will allow you to combine the taxonomy with your spend data to create interactive dashboards and reports for your teams to use. This power of this cannot be overstated!
If enjoyed this article, please feel free to share it with others. If you’d like more information on how tickl can help you, please feel free to reach to info@tickl.org