Highly effective Spend Management: aligned with your ERP system

Spend Management is a set of structured business processes that dramatically increase the Management and visibility you have over what your organisation spends. But you may be wondering if it is possible to implement effective Spend Management WITHOUT first replacing your existing Enterprise Resource Planning (ERP) system - a process that can be long, expensive and risky.

The good news is that you can deploy highly effective Spend Management around just about any core financial management or ERP system. In fact, it makes good sense to use a Procurement system that is outside the bounds of ERP:
  1. Spend Management is about managing business processes that are outside the realm of ERP – e.g. it manages the processes before a PO or invoice hits ERP and before a supplier is added to ERP, along with a whole new range of information about suppliers, RFPs, contracts and catalogues that is not even in your ERP system.
  2. Spend Management involves many more people than those who use ERP. Parts of your Procurement system will be used by practically every employee. Other parts will be used by your external suppliers.
Fortunately, most Procurement systems have been designed to make the touch points with your core financial and operational systems limited and non-invasive, making it quite practical to add them to existing systems.

The following ten questions are the key considerations for deployment of new Spend Management systems to work hand-in-hand with your existing ERP system:

What is our fundamental objective?
The fundamental objective of Spend Management is to gain control and visibility of the way your organisation buys goods and services, and to minimise the total cost of those items as well as the cost of the process of buying them. Though easily stated, meeting this objective is a challenge when you consider the wide range of goods and services your organisation purchases, and when you consider the range of people in your organisation and supplier base who are involved. But it’s a challenge well worth attacking because the return is so great.

Exactly how will we create savings?
Every organisation in the world has opportunities to create savings, created through:

  • Prevention of unnecessary purchases.
  • Better matching of what is purchased to actual needs.
  • Lower prices for what is purchased.
  • Reduced administrative costs for buying and payment processes.
This combination of savings can only be obtained on a predictable basis if they are:
  • Made with proper purchase authorisation.
  • Made with suppliers that were properly sourced and managed.
  • Paid with correct pricing and terms.
  • Processed quickly and efficiently organisation-wide.

What business processes are involved?
There are two important business processes that must operate together to achieve truly effective Spend Management:

  • The Source-to-Contract process creates savings opportunities by finding good suppliers and establishing advantageous agreements against which the organisation can then buy.
  • The Purchase-to-Pay process captures actual savings by leading employees to place purchases for what they need using those advantageous supplier agreements.
What people are involved?
Spend Management involves a high percentage of people across your organisation, as well as a number of external people:
  • Procurement professionals and category teams.
  • Accounts Payable (AP) personnel.
  • Every manager that has responsibility for a budget.
  • Every employee that needs to buy goods or contract for services.
  • Your suppliers; both large and small.

What systems capabilities are needed?
The main building blocks of a Procurement system are:

  • Information management and access - most of which is probably not currently held in your ERP system, such as the details about supplier qualifications, supplier contracts, RFx documents and related supplier responses, and supplier catalogues.
  • Workflow and business rules - unlike most ERP functions, Procurement processes are much more about facilitating the flow of activity among employees, managers, procurement professionals, accounts payable personnel and suppliers.
  • Guided processes - solutions need to deliver a consumer-style experience that meet their needs today and in the future.

What are the keys to success?
Any underlying Procurement system should be people-oriented. And with such a system, the keys to success are:

  • Employee adoption: Employee adoption is critical to gaining a high level of ‘spend under management’.
  • Supplier adoption: Similarlyyour Procurement system needs to make it easy for suppliers to interact with your company in a self-service manner.
  • A proven, complete framework: It is important that the eProcurement framework you put in place covers that full scope – even if you move into it one phase at a time.
  • A partner with experience: Deployment of a Procurement system to enable Spend Management is quite different from deployment of an ERP system, and you will want a partner that is a specialist in Spend Management. 

How will Procurement impact our existing systems?
Spend Management business processes are largely outside the scope of most ERP systems, so the impact of implementing eProcurement is minimal from a systems perspective. For example:

  • For implementation of the Purchase-to-Pay portion of eProcurement:
    • If using purchase requisition within ERP, you will simply turn that off.
    • Chart of accounts will continue to be maintained in your G/L and simply passed to the Procurement system.
    • Supplier master files will continue to be maintained in ERP and passed to Procurement for use in raising POs.
    • Most POs will be raised in your Procurement system and passed to your ERP system as accruals or commitments.
    • Payment checks will continue to be written from your ERP system, but most invoices and credit notes will be registered and processed in eProcurement.
  • For implementation of the Source-to-Contract portion of eProcurement:
    • You will make the comprehensive Supplier Directory in your Procurement system, your new master repository of supplier information and pass only basic supplier information from there to your ERP system as needed.
    • If you have any form of supplier contract file in ERP, you will replace that with the more robust eProcurement contract repository.
It’s really pretty simple, and Spend Management solution providers such as Proactis are very experienced in setting up the nominal level of required integration:

Do we need to replace our existing ERP system before embarking on a Spend Management program? Unless you have other reasons for replacing it, the answer is almost certainly no. If you are getting the fundamental financial management and reporting capabilities you need today, most Procurement systems are not going to disrupt this.

Is the Procurement system that comes with our ERP system my best option?  Very few, if any, ERP systems have a Procurement system with the range of applications to fully support both the Source-to-Contract and Purchase-to-Pay business processes. Keep in mind that, because ERP and Procurement are relatively separate systems, the advantages of a solution from a provider that is fully focused on Spend Management and Procurement may well outweigh the advantages of a single solution provider.

Can we deploy eProcurement to support our Spend Management program now and then replace our ERP system later without replacing our Procurement system? Yes, the same straightforward integration points will apply in your future system as in your existing system.

Can we deploy a single Spend Management process across multiple ERP systems?  Yes, and many companies are doing this today. If you have several different ERP systems supporting different business units within your organisation, you can gain tremendous advantages by implementing a common Spend Management ‘umbrella’ across all of those business units while integrating as needed with each of the individual ERP systems.

How do we avoid getting tangled up in a long, expensive project?
Rolling out a Spend Management program need not be anything like the arduous and costly project you would expect from replacing ERP. Spend Management roll-outs are easily segmented into manageable mini-projects that have ROI associated with each step:

  • Spend categories to be addressed: e.g. start with a single category such as IT spend or a grouping of categories that are similar; move through all your categories and associated suppliers in sequence of expected savings.
  • Business processes to be implemented: e.g. start with the Purchase-to-Pay process to get a foundation of solid purchase authorisations, then move on to tackle each element of the Source-to-Contract process to incrementally expand the range of suppliers. 
  • Organisational entities to use the new capabilities: e.g. start with your headquarters operation or a particular business unit to gain experience and refine your processes.  
By making each phase a manageable combination of spend categories, business processes and organisational entities, you can closely control the scope of each mini project, measuring results and making refinements as you go.

How do we organise for both early and sustained results?
With a clear understanding of the inter-relationship between the Purchase-to-Pay and Source-to-Contract, it is easy for these two important processes to progress in parallel:

  • A Purchase-to-Pay Stream can establish the framework to capture savings from all the opportunities created in Source-to-Contract. The Purchase-to-Pay Stream also focuses on realisation of the significant efficiency gains to be had in AP. 
  • A Source-to-Contract Stream will continually create more and more savings opportunities for the organisation to utilise in the Purchase-to-Pay process.

Where do we start?
Most successful Spend Management initiatives are a joint effort between an organisation’s Senior Financial Executive and Senior Procurement Executive. The basic steps for getting started are much like those for any other important effort:

  1. Build a common understanding of what needs to be done within your executive team.
  2. Define the business case for taking action.
  3. Establish a practical way to manage, measure and improve each of the activities required in order to drive towards the objectives (i.e. the business case).
  4. Identify a sequence of steps that self-fund the effort.

We have created a special guide to outline, and answer, the top 10 questions about why and how to deploy highly effective Spend Management that’s aligned with your ERP system