There's a growing interest in spend management among public and private organisations. And finding new ways to control expenditure on goods and services has become a quest for many. But what's driving this trend?
Today, organisations face intense macro-economic pressures. Almost every sector is impacted by financial turbulence, tight profit margins and growing competition. Disruptive business models and technologies are all part of the new economy - and are often lauded and encouraged.
"We advise companies to be disruptive," Deloitte Chief David Cruickshank told the Economic Times in 2017.(1)
Meanwhile, websites like CNBC even publish a 'Disruptor 50' - a kind of FTSE 100 for transformational companies.(2)
But how are more established companies able to respond to increased customer demands and nimbler, innovative competitors within industries that are transforming fast - and often beyond recognition? How can a well-established commercial organisation increase it's profitability and Public Sector organisations increase return from budget, say by 5% per annum, accompanied by a satisfying surge in shareholder and customer value?
At Proactis, we see high performing organisations process in excess of 40,000 invoices per FTE per annum and top performance in excess of 90,000 invoices.
However, there is a wide variation in AP invoice processing efficiency according to sector, size of business, invoice profile and technology utilisation e.g. the cost to process an invoice is significantly higher in sectors with a high percentage of non-stock trade vs. stock trade; and best-in-class operations are nearly 60% more likely to have standardised invoice receipt and workflow processes as part of their AP function.
Back in the day, life was simpler. Years ago, executive teams had the choice of three levers to pull when it came to creating a healthier bottom-line:
- Increase prices.
- Expand output to lower unit costs.
- Reduce operational costs.
However, these options are increasingly difficult to achieve.
Previously, the occasional price hike was tolerated, as long as the market was strong. But today, price increases can be the death knell for companies. Customers know the market inside out and competitors are waiting to induce them away with special offers.
Scaling up your business to reduce unit costs is great if demand is rocketing for your products or services. But many markets are now hyper-competitive, saturated and demand is stagnant. In a globalised economy, untapped markets are few and far between and it’s difficult to sustain low-cost leadership.
The third option, reducing operational and personnel costs, would be an obvious move in tougher times. But often this lever has been pulled so much, it's almost rattling off its hinges. Organisations can only cut so much before they put customers and the very business itself in jeopardy.
Now there's a fourth option
Spend management is proving massively popular with forward-looking organisations of all sizes - not least because the impact it can deliver works spectacularly well, no matter whether the economy is in recession or taking off.
Spend management gives you more control and accountability of costs - by increasing the efficiency of every transaction and the insight into it. Put simply, you can bring costs under control in a fast and easy way without damaging your core business operation or taking risks with eliminating staff and increasing end-user prices. It's a proven way for organisations to improve value through improved operating profitability or return from budget.
Let's think percentages
If a 5% jump in profitability sounds unrealistic in today's world, then spend management will surprise you. Take just two area’s of spend management - the upstream procurement control discipline of Sourcing and the downstream spend control activity of Accounts Payable Automation - and you'll encounter mouth-watering figures.
In the US retail sector: Price Chopper, a $3.4bn supermarket chain, averaged 59% sourcing savings across the entire supply chain, and Rite Aid, one of the largest drugstore chains in the US, achieved sourcing savings exceeding $25 million through the use of Managed eAuction Services. P&O Ferrymasters, one of the leading European providers of tailor-made transportation and logistics services, reduced its invoice processing costs by over 35% and Essex County Council in the UK has been gaining £200,000-plus savings per year through the use of invoice capture and AP automation best practices. In each case, the quiet contribution to bottom-line profitability was significant.
Does spend management always mean the same thing?
The short answer is No. Like any mega-trend, there are technology vendors keen to climb on board and make a lot of noise about the breadth and depth of their capabilities without any substantial proof of customer ROI. Niche players will jostle for attention, though they may have only have one strand of spend management capability. You'll also see traditional players in the ERP space trying to muscle in, thanks to bolt-on products.
But true spend management relies on much more than this. It must apply to all levels of an enterprise, include all buying departments, all process departments, cover all types of suppliers and extend across all spend categories. Spend management requires domain know-how, sophistication, automation and business process expertise to support the complex and unique needs of organisations. Today and tomorrow.
You can try to work it all out for yourself and respond with ad-hoc methodologies and initiatives — or find a partner that's ready equipped with all you need to succeed. And in today's fast-moving world, there's no time to waste.