An organisation-wide view of Spend Under Management requires; creating value from sourcing events, contract management, preferred suppliers with active supplier development programmes and spend visibility.
It also requires capturing value through purchasing controls and compliance, and ensuring efficiency with which things are paid for.
The 3 Key Elements of Organisation-Wide Spend Under Management
Value Creation and Capture –
- Integrated value creation and capture
- The efficiency with which things are purchased and paid for (cost of the process)
- Management visibility of spend activity
The Yin & Yang of Spend Under Management
The problem with all of the commonly used definitions of Spend Under Management is that they measure only what has been done by the procurement function (i.e. the spend they have ‘influenced’), not the results the organisation as a whole has achieved. They measure only the yin of the source-to-contract process, but ignore its important relationship to the yang of the purchase-to-pay process. The yin & yang must be tied together to work in harmony in order to achieve truly meaningful results – actual cost savings with maximum value and minimum risk to the organisation.
Even when half of the combined process is working well, results will be greatly diluted if the other half is not closely tied into it. For instance:
- A painstakingly sourced, well-negotiated supplier contract that is never used because of a lack of visibility or good purchase controls does the organisation no real good
- Even a well-oiled purchase authorisation system that ensures proper approval of the ‘amount’ of a purchase, but does not also lead employees to pre-qualified suppliers, or through procurement-involved spot purchase workflows when needed, leaves employees largely on their own to pick suppliers, accept standard supplier terms and purchase with little consideration of risk
In either case, not nearly enough of the potential value that is created by procurement is ever really captured by the organisation. In either case, we cannot say that the spend is fully under management.
The dimension of efficiency needs to be taken into consideration as well when we think of the true meaning of Spend Under Management. Procurement-centric definitions do take into consideration the idea of efficiency within the procurement function itself because, naturally, the more efficiently procurement does what it does – sourcing, supplier management, contract management, catalogue management, etc. – the greater range of categories they can address and therefore do their part to put Spend Under Management.
But those definitions do not address the efficiency with which daily purchases are made across the organisation. In addition to delivering the most value to the organisation, spend that is really under management should also be considered to be that which is executed within the most streamlined and cost-effective path the organisation can provide.
That means the least amount of effort required for operational departments to find, authorise and order what they need; the least amount of time taken to communicate the order to the supplier; the least amount of time and cost needed to validate and pay the invoice. And within procurement, it means the least amount of time required to maintain supplier profiles and catalogues, and to respond to supplier enquiries.
Spend made in a time-consuming, inefficient manner is never what an organisation has in mind with the idea of under management
Spend Under Management should also mean spend that is visible to appropriate people in the organisation from expression of need and authorisation to invoice payment, and through to historical reporting and analysis.
In order to effectively manage budgets, operational managers need visibility of their entire cost pipeline, including purchases that are currently in process. In order to effectively manage cash, financial managers need visibility of all invoice activity and an aggregate of purchases and contracts that will soon result in invoices. In order to effectively analyse an organisation’s spend for purposes of future sourcing, supplier consolidation or contract negotiation, procurement managers need a history of purchases that is fully and accurately categorised.
Spend that just ‘pops up’ as an invoice then takes days or weeks to validate and never does get properly categorised cannot be thought of as under management. Even spend that is necessarily invoice-based, such as utilities, needs to be properly allocated to appropriate accounts in order to be considered fully under management.
To learn more, download our white paper, ‘Spend Under Management: Take a Broader View of Enterprise Spend Control’