PROACTIS Blog

Spend Control Tip #1: Understand How & Where Money is Spent

Charlotte Sutton
Charlotte Sutton,
PROACTIS
Procurement and finance executives are being forced to do even more with even less. However, the majority only need to take a back-to-basics approach to uncover potential savings.
Consider: most organisations have not developed spend analysis reporting capabilities and as such do not fully utilise historic spend data as part of their strategic sourcing effort or have sufficient visibility into overall spend. However, analysts suggest cost savings of up to 20% can be achieved for each pound sterling of spend brought under effective management.

In an increasingly data-driven world where fact-based decision making is essential, the intensity on organisations will only grow to improve visibility and bring more spend under management. Opportunities include being able to: prioritise the management of spend categories, improve negotiation leverage, and track off-contract spend. In addition, it opens up opportunities to identify and address non-compliance and mitigate risk in the supply base.

While, the longer-term goal of tackling spend data management – extracting, validating, cleansing and classifying disparate data sets due to amounts coded to miscellaneous, disparities in product and supplier naming conventions etc. – will ensure a fuller picture of spending patterns; simply pulling back the cover often presents significant opportunities. It does not need to be an overhaul of existing systems or use of excessive consultancy programs. Focus on gaining rapid oversight on key lines of information. This will help you to answer important questions while aiding internal control.

A basic spend profile will establish a baseline of what has been spent, where and by whom. This should include:
  • Understanding and quantifying the day one position for subsequent benefit assessment
  • Purchasing policy adherence to identify key areas of expenditure which are bypassing contract commitments and an opportunity to transfer spend to current contracts and negotiate further price reductions and discounts
  • Categorising suppliers to help understand each major supplier and major category of spend to differentiate your supply base. Efforts can be devoted to those suppliers that fall into ‘bottleneck’ and ‘strategic’ categories or where opportunities exist for leverage
  • Electronic trading capabilities to assess the opportunities to use electronic means in catalogues, ordering and invoicing. This allows you to identify and prioritise groups of suppliers and transition them to an appropriate form of electronic trading
  • Suspected or potential procedural abuse
  • Use of ‘other’ means of commissioning expenditure that should be subject to formal procedures e.g. petty cash, expenses, direct engagement with supplier websites
  • Understanding whose terms and conditions the expenditure is subject to (really important if users can sign up to supplier documentation e.g. photocopier rental agreements, or commit expenditure via the internet where the legal position is unclear)
Understanding this data is crucial to plug financial leakage: prioritise investment and identify a procurement engagement strategy that will deliver the maximum return in the shortest timescales. Note: a failure to track key metrics within the procurement organisation will result in poor performance and the destruction of the finance/procurement relationship.
 
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