Although it can involve many complicated factors, the basic principle of spend management is very simple – it refers to the methods that a company uses to control and optimize the money that they spend. It encompasses several different processes, including spend analysis, commodity management, and strategic sourcing, which work together to paint a clear picture of business efficiency. Although it is often associated with large, multinational enterprises, spend management can also be an invaluable tool for medium-sized businesses.
This is not always easy, however. In some cases, a lack of suitable technology or expertise means that initiating an effective program of spend management may appear to be all but impossible. At the same time, few medium-sized businesses clearly understand how much they squander on suppliers and services, and this lack of visibility can have huge effects on their bottom line.
Many mid-sized businesses do use professional spend management techniques when it comes to handling direct expenditures. However, when it comes to indirect spending, data responsibility is often put in the hands of separate business divisions. The people making purchases are generally not experts in procurement and may fail to use strategic sourcing to discover savings when sourcing things like repair, maintenance, and operating supplies. Because of this, many departments are unable to track and report on this spending and, as it follows, many medium-sized companies have little control over indirect expenditure.
We may ask ourselves what is spend management, and are there any spend management solutions available that are quick to implement, require no special technology, and are easy to monitor? Are there any, in other words, that would suit the typical medium-sized company?
Cloud-based spend management services can open up this useful tool to medium-sized businesses. They require no complicated installation, no additional technology, and reduce the cost of managing expenditure by a significant factor. These systems may be able to extract, clean, and classify data without the need for expensive or complicated methods, and will generally reduce the time taken to complete these processes drastically. What’s more, if the spend management system is collaborative, it opens up a new approach to data ownership – each department is encouraged to use standardized data practice, reducing the risk of mistakes and misunderstanding.
In the eyes of senior management, the main measure of success for procurement teams is the value of savings that they produce and so a key activity for procurement each year is to put together a savings program. Spend management is the process by which procurement takes control of the external spend their organization makes, achieves a price or cost reduction, and then puts it under contract. The problem that many procurement teams face is that not all spending is under this spend management process and so is not part of the savings program. There are many possible reasons for this but the main one is that others in the organization spend money without involving the procurement team.
However, studies have shown that savings of between 3% and 20% are possible when spending is put through a spend management process led by the procurement team. So, one way to kick-start your annual savings program is to identify what is not being managed in this way. Here is how you can identify what does is not go through your spend management process:
- Identify all the sources of data on spending – this may be in many places including some outside your formal information systems.
- As a double-check get a report from your accounts payable systems that identify how much has been spent with suppliers in the period you are looking at. When you compare this to the data collected in the previous step it will tell you just how much spending data you are missing.
- Extract spending data from these data sources and classify it according to what it was spent on – you may have to ask the people who spent the money to get this information.
- Collect data on the contracts you have in place.
- Look at the spend data now that you have classified it and see if you can identify opportunities to combine amounts spent on similar items to increase the volume that you buy from suppliers and so get a volume discount.
- Compare your spend analysis with the contracts you have in place to see if there are things that are not bought under contract – by using the contract in the future you may make savings.
- Look at your contracts to see if you have multiple contracts for the same item but with different suppliers – putting all the spending under fewer contracts could increase your leverage to negotiate better prices.