What is spend under management? Procurement Explained
Spend under management is the amount of spend managed by procurement out of total company spend. Spend under management will never be 100% but can come close to 80% with the right approach. Small creeks form largers streams and rivers. Consistency in spend initiatives will carry fruit eventually.
So why should CPO and CFO try to improve spend under management?
Large enterprises with multiple locations have started to prefer centralized procurement. Centralized procurement implies that purchasing decisions and procurement is handled by the procurement function. Decentralized procurement means that purchasing activities are assigned across the organization and business units. Benefits of centralized procurement include more efficient use of resources, benefits of scale, better use of contracts, and improved spend management. When organization is looking to improve their spend under management, the emphasis often is on strategic initiatives. These include execution of category strategies, negotiating better agreements, and nurturing preferred supplier relationships. Organization may want to improve its compliance, by implementing a sourcing policy and creating purchase-to-pay-process with certain approval limits. Measuring spend under management can also help identify sourcing potential and opportunities for savings.
Leading enterprises want to follow their spend under management to harness these benefits and to avoid the so-called maverick spending. Maverick spend is spend which does not follow company purchasing policies. Minimizing maverick spending is not only about getting those better prices and terms that you have negotiated, but more importantly ensuring legal and CSR compliance through using approved suppliers. The percentage of spend impacted is a key performance indicator (KPI)
Spend under management can be referred to as addressable spend or impactable spend. Not all addressable spend is impactable however. What is the difference between addressable spend and impactable spend?
What is addressable spend?
Addressable spend means the spend that is within the domain of control of the procurement function. Why can’t all spend be under procurement’s influence and control? It’s because there are some categories of spend that are non-negotiable or may not be suitable to be subjected to a strategic sourcing process. These include employee salaries, expense reimbursements, office leases, charitable donations, accreditation costs and taxes for instance. After deducting the non-addressable spend from total spend, you can identify the potential impactable spend.
What is impactable spend?
Impactable spend means the spend that is within the domain of influence of the procurement function. This could mean that spend is managed in line with organization’s sourcing policy or otherwise influenced by procurement. Procurement aims to leverage their influence over a high percentage of the identified impactable spend. The Hackett Group benchmarks indicate that world-class companies average 97.3 percent of total direct spend under management, with other organizations at 70 percent. For indirect spend, the figures are 95 percent and 66.5 percent, respectively. Indirect often has widespread group of stakeholders who have impact on spend decisions. If sourcing policies have not been properly implemented, compliance will remain low and proportion of maverick spending will be higher.
What is unmanaged spend?
Unmanaged spend, by deduction, is that portion of impactable spend that is not currently under the control, or direct influence, of procurement. It is spending that occurs outside of the defined procurement cycle and policies. It can include:
- Low value/high volume tail spend. Tail spend is generally defined as the amount an organization spends on purchases that make up approximately 80% of transactions but cover only 20% of total spend. Tail spend usually occurs rarely, amounts are relatively low and there may exist a preferred supplier for the same product/service.
- Maverick spend. This is spend that is effected outside approved contracts or defined purchasing processes. It is volume leakage from preferred and contracted suppliers. Maverick spending often happens through frustration at the lack of speed of conventional P2P activities or assumed lack of fit of the existing supplier. Slow approval for Purchase Requisitions and Orders can be to blame.
- Spend through non-procurement channels e.g. treasury and forex payments. This method is often used for large, expensive one-off purchases and imports.
How to increase spend under management
Targeting areas of unmanaged spend is one way procurement leaders can deliver value and maximize savings. These categories of spend may have been untouched or avoided until now due to other priorities or perceived difficulties. Lack of visibility to these spend areas could be the reason. Tackling unmanaged spend not only delivers savings, but it also reduces the cost of managing suppliers, mitigates risk and leads to increased spend with preferred suppliers.
Small and medium size organizations may not achieve the level that global leaders will without extensive focus on stakeholder collaboration and assistance from technology solutions in identifying improvement opportunities. Depending on the business sector or industry you are in, some areas of spend may be disregarded as too challenging to grasp and impact on. Transformation from decentralized procurement to well-functioning, centralized procurement, where customers are understood and stakeholders heard, is a long journey. Leading organizations however include property and leases, utilities, security, insurances, legal services, payroll benefits, etc. into their impactable spend.
Build influence through better visibility
Before embarking on any project to bring more spend under management, there needs to be clear visibility into category and sub-category definitions, spend amounts and purchasing processes. First take stock of how you are currently engaging with those functional areas. If you have not implemented a sourcing policy, trained your organization, applied TCO principles or been involved in supplier relationship building, there is much to do. The next step involves deciding how to approach the relevant stakeholders to agree how to address the unmanaged spend in their areas. Working with stakeholders on how to develop suppliers, improve quality and promote innovation will deliver rewards. Finally, set realistic goals, understand where your stakeholders are coming from, and develop the initiatives to achieve your goals.
4 practical steps to increase spend under management
- Classify and communicate the scope of unmanaged spend
Using spend analysis techniques, establish where the unmanaged spend is going. This information can direct you towards renegotiating current supplier contracts to include some or all of the unmanaged spend in that category.
- Make it easier for users to buy off contract to avoid leakage
Contract leakage happens when purchases are made outside contract due to slow purchasing processes or contract terms and conditions not being clear or not made available to users. Supplier contracts can track committed amounts and quantities against budgets and enforce pricing and terms.
- Streamline the Purchase Requisition and Purchase Order approval processes
Tricky processes cause people to avoid them and find other ways to make their purchases. The purchasing process needs to be efficient and user-friendly to support end-users and approvals automated. P2P solutions should be made availble on mobile devices.
- Avoid the blame game and focus on the collaboration
Avoid being judgmental towards your stakeholders if maverick spending or leakage occurs, as they may not be aware of the policies they should follow. They might be new to company or have seemingly sound reasoning for working with alternative supplier. Hear out their opinion and agree on solution to go forward. Collaboration is the key in getting procurement initiatives heard. Making accusations can result in unwanted response and spend rebellion.
Unmanaged spend can only be addressed if it is visible. Sievo spend analysis solution can help you bring more spend under management to deliver increased efficiencies and reduced costs.
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Header picture by: Firduouss Ross