Traditional IT systems have generally been found wanting when it comes to addressing an obvious gap in enterprise cost management: indirect spend management.
That's one of the reasons why so many ERP Procurement modules lie dormant.
But infinitely configurable and best-in-class systems are rapidly giving global enterprises the opportunity to establish common practices and spend visibility with short project lead times and minimal disruption. This gives CFOs a vehicle for turning spend management into instant profit.
Less than 20% of organizations around the globe are exploiting the benefits of spend management, according to investment bank Triple Tree. Given that between them they are spending more than $20 trillion every year on direct and indirect goods and services, that's a staggering degree of inertia.
Any single dollar saved would contribute instantly to the bottom-line, and yet at a turbulent economic time when complete visibility on costs should be a priority, staff continue to follow ad-hoc, 'maverick' purchasing practices around the globe.
CFOs must plug the gap
CFOs multi-national enterprises are effectively presiding over the leakage of their share of more than $500 billion annual profits that are lost through inefficiency and non-adherence to an effective spend management strategy - and missing a major opportunity to consolidate the financial and organizational benefits of a coherent, global spend management framework.
Mandate to cut costs
Urged on by the Board, CFOs are driven by the need to cut costs and drive down administrative overheads, improve financial control and compliance with policies, and increase organization-wide productivity.
It's clear that everyone will benefit. But by contemplating the sheer scale of the challenge, it's equally clear that significant change will be required to see it through:
- Accounts Receivable and Accounts Payable are immersed in manual processing, excessive trouble-shooting and mountains of sticky-notes that represent an underlying lack of control. They should positively support the working capital and cash position.
- Information Systems are largely locked down, fire-fighting existing IT issues. Instead, they should be effectively supporting common enterprise-wide Purchase-to-Pay processes: automating workflow, ranging from data capture to the review, approval, cost allocation, payment authorisation, delivery of goods, and more.
- Procurement teams are struggling to maintain accurate, complete and up-to-date information and is constrained by time-consuming and inconsistent supplier adoption and communication processes. Instead, they should be able to build improved relationships for best value procurement across the organization.
'Maverick' spending is endemic. Methods should be created to reinforce the vision for improved spend management across all quarters of the organization. This might sound like the platitude that a sharp-suited consultant would promote, but true compliance and control can only be achieved if 'maverick' spending is contained.
First step to spend management
With the evidence gathered, the first step is to establish a baseline in which an organization identify the existing spend management position and measure performance against internal targets and industry standards. The needs of the organization and set goals and strategy for achieving them must be defined, without embarking on a monolithic re-engineering project that is costly and time consuming.
This requires a clear idea of the organization's global structure, including local behaviours that it makes sense to preserve, and elements that are ripe for collaboration and cost saving throughout the organization. For example, it might be appropriate to decentralize Accounts Payable or Procurement spanning across multiple sites and/or divisions in the same geographic area and deliver them as shared services across the Group.
Whether the model is based on a set of common processes or the principles of shared service, it will require a supporting system that enables spend and procurement management across territories. Language independence means it will be equally accessible to every user, allowing the mixing and matching of local and global suppliers, thus enabling an appropriate level of local autonomy, integrating easily with the variety of underlying ERP and business systems and accommodating local tax and currency regulations.
Fragmented ERP systems
COOs might believe that this is already available within existing ERP infrastructures. But closer inspection will probably reveal that globally, this is highly fragmented with territories and countries all running their own systems and favouring different ERP and financial system brands. Further complications will almost certainly include various charts of accounts and different business processes - all the consequence of growth through acquisition.
The problem is that most eProcurement systems and ERP modules are developed to address the needs of the ideal - a single financial organization with one set of ledgers. And the reality could hardly be more different.
In addition, many of these systems cover a broad function scope and offer a degree of integration across their different applications. Yet this breadth often leads to a lack of focus on issues such as bringing 'maverick' spend under control, giving visibility of the cost pipeline and delivering economies of scale.
This is where infinitely configurable, best-in-class spend management and procurement solutions offer advantages and should be considered in an international initiative.
Resistance from territory managers
Once a system choice has been made, there may still be resistance from Territory Managers who see it as a threat to their autonomy. Just because the Board is convinced about a rapid global return on investment, it doesn't follow that everybody else will fall into line, particularly when they are concerned about protecting their own Profit and Loss (PNL).
They might see pressure to deploy the ERP procurement module as using a sledgehammer to crack a nut and, even whilst they are paying their share of the system's cost, they would rather pursue a different solution that is less likely to impact on their established methods of remuneration.
Driving change across the organization
Triple Tree's estimates have already shown that spend management is hardly a nut-sized problem. And this is where the Board - and principally the CFO, aided where possible by a high-visibility CPO - has an opportunity to drive change across the organization, cutting through political issues to demonstrate the benefits of the new system and encourage comprehensive end-user adoption.
Many employees will respond positively to evidence of how cost savings they make by using the system contribute directly to the business's profitability. But ironically CFOs may find themselves pushing non-financial benefits to managers in smaller divisions and territories.
For example, increased visibility will actually help them to manage their PNL and budgets more effectively and identify areas for cost cutting. The system may also offer them a way to iron out the discrepancies, inaccuracies and limited analytics hitherto generated by the variety of underlying platforms and applications that now come together under its integrate umbrella.
The double whammy of avoiding a massive process re-engineering program simply to establish a system-based model for spend management, and achieving an elevated view of spend should ultimately provide a winning argument against even the most stubborn resistance.
Learn how to tackle the issues that a multi-location, multi-business unit organization is likely to encounter with spend management.