What is a taxonomy?
According to Collins Dictionary (2021), the definition of a taxonomy is ‘the process of naming and classifying things such as animals and plants into groups within a larger system, according to their similarities and differences’.
That's a very broad and vague description and I’d say a taxonomy is more than that. In my spend classification world, a taxonomy is a list of categories and sub-categories used to classify data into groups or ‘buckets’ of items or services, providing a unified view for the purpose of reporting and analytics. It can be used by the whole business or just one department, such as procurement. In procurement, a taxonomy can also be known as a ‘category’ or ‘spend tree’.
You might not realise it, but taxonomies are used in many everyday activities, for example online shopping. Every time you do your online food shop, you are inadvertently using a taxonomy. If you need to search for apples, you might go to Fresh Food, followed by Fruit, followed by Apples. That's your level 1, 2 and 3. Try looking on another supermarket's website and you’ll find the apples in a different category structure.
This is reflective of spend taxonomies in business too. You’ll find many different variations, all being used with differing perspectives. If you move from company A to company B, you might find that everything you knew is now different in your new company.
A taxonomy usually has several levels and the number can range from 1–6 (although I have heard of more, can you believe?!). I would recommend 3–4 levels as the optimal option, the reason being that most organisations do not interrogate their data to any further level of detail. Also, the more detailed the taxonomy, the longer the classification process takes and the more open it is to mistakes.
Think of peripherals: if you can classify mouse, keyboard, monitor and docking station all as peripherals, you can classify that pretty quickly. However, if you have to search for each item individually, and classify it individually, it adds time to the process.