Benefits and Challenges of Spend Management
Spend management is a process of collecting, collating, maintaining, categorizing, and evaluating spend data with the aim to reduce procurement costs, improve efficiency, monitor and control workflows, and regulate compliance.
Spend management affects and manages various activities across the procurement cycle such as requisition processing, budgeting, planning, supplier management, contract management, inventory management, sourcing, and product development.
Spend management, over the years has evolved into a more comprehensive process that includes all the activities that contribute to an organization’s expenses. A detailed look into the evolution of spend management can be found here.
8 Major Spend Management Challenges and How to Overcome Them
1. Lack of awareness of spend sources: The first step to spend management is to identify all the sources of expenditure in an organization. While some cost centres are blaringly obvious to look for spend data, shadow cost centres that exist only on paper are easy to miss. While Shadow cost centres may make life easier to categorize finances and allocate budgets, they will lead to complications when managing spend.
Solution: When identifying cost centres, it is best to involve all department heads and the finance department responsible for costing. Although for medium and large-scale organizations, all departments would mean a very high number of departments and would require digitalization to automatically collect spend data in a central repository for analysis.
2. Lack of data accuracy: Spend data entered manually is riddled with inconsistencies, typos, mistakes, etc. Data sets with different currencies across different time periods with dynamic exchange rates lead to complexities and ultimately irregular entries. Lack of data accuracy leads to misguided decision making which ultimately leads to higher costs.
Solution: When collecting data for spend analysis, it is best to follow templates consistent across departments. Once submitted, a thorough check for inconsistencies can help keep data accuracy in check. For a detailed explanation on how a single taxonomy structure can be maintained, here’s a link to the whitepaper “Spend Analysis: Making Sense of Data”.
3. Insufficient resources: Purchase teams in organizations have their hands full with their daily tasks of buying, supplier management, purchase order processing etc. Spend management on the other hand requires dedicated efforts to identify, collate, analyse, and execute spend data savings opportunities regularly.
Solution: Procurement teams, for due to lack of time and resources, require IT support. Automated collection and analysis of spend data significantly helps save both time and resources. IT also helps put efficient processes in place that help realize saving opportunities.
4. Poor analytics capabilities: The capability to identify and extract the right kind of reports from collected spend data needs analytical skills, which are rare and/or expensive. Any spend analysis tool—based on its features and capabilities—costs organizations a substantial amount. On the other hand, organizations that deal with lower volumes of data, talent pools of data analysts, statisticians, and mathematicians are restricted and require high monetary investments. Getting buy-ins for investment in analytical capabilities proves to be difficult as there are no immediate and visible results.
Solution: A cost-benefit analysis is required to invest in this analytical capability. Here’s a Hackett Group report that gives cost benchmarking guidelines to help determine the cost-benefit analysis for making the right decisions when investing in this capability. If an organization deals with high volume of orders or high cost orders, cost-savings in minute percentages would translate to millions. An AI powered automated analytics tool is therefore helpful in analysing and making sense of given data enough to make critical decisions.
5. Silos in work culture: While spending is a common occurrence across departments in procurement, category managers purchasing the same article for different purposes are likely to be ignorant of their own behaviour due to lack of communication amongst them. Similarly, data stored by each of these departments would be stored with different intents in mind and hence in different formats leading to inconsistencies.
Solution: A simple solution to a siloed culture would be an integrated spend analysis solution that talks to the critical tools of an organization such as the ERP, accounting software, mail servers, etc. used by all procurement departments. Tools such as these also help each department pull reports as per their necessity while maintaining a central repository.
6. Data categorization: Spend data can be categorized as according to project, department, product or services, etc. Each of these has its own pros and cons. Departmental categorization puts spend on the same product by different departments in different categories while categorization based on products leads to spend based on a particular purpose divided into different categories.
Solution: First, it is advisable to study one’s organization and identify the mission critical departments, services or products. Once identified, spend categorization can be done based on major spends within the departments or based on products and services. This ensures that spend allocated and used by mission critical jobs remains unchanged not affecting the quality of the output.
7. Multiple authorities: Spend across departments is under the management of different department heads. Collecting this data means encountering varying interests, attitudes, and degrees of cooperation from people having access to respective department data. On top of that, disparate accounts of spend in different formats may be incomplete, inaccurate or even erroneous thereof posing a challenge to the business.
Solution: A spend management solution with access to the right persons is the solution to overcome the need to communicate with so many people and while tackling any other anomalies.
8. Resistance to change: Spend management can be misunderstood as a threat to some stakeholders in the organization. For example, supplier managers, contract officers, etc. would consider changes in supplier selection processes or modifications to contracts done to keep spend under management a challenge to their authority and decisions. This leads to resistance in changes in contracting and buying policies, especially if the stakeholders don’t see any benefit in the change.
Solution: Making sure that all the affected stakeholders are communicated the benefits of the decisions taken will reduce uncertainty to a certain level. Decisions vetted by the CEO or equivalent top management members face least amount of resistance.
9 Benefits of Spend Management
More savings and more profitability: The primary objective of spend management is to identify and exploit savings opportunities and ultimately improve the firm’s productivity. For example, the process of spend management sheds light on expenditures across an organization helping identify duplicate purchases that could have been negotiated as bulk orders leading to direct savings.
Improved compliance: Once a spend management practice is implemented, it becomes easier to trace, collate, and document expenditures that improve spend visibility. This in turn helps in complying with major regulatory requirements. As spend management best practices require companies to maintain granular reports of spend data across verticals, it becomes easy to audit and hence comply with multiple regulatory bodies.
Reduced cycle times: Spend management helps lock optimal decisions such as designated suppliers, contract terms negotiation, etc. that further reduce process-cycle. Cycle-times vary for every transaction in most companies. Spend management helps regularize recurring activities such as supplier selection or contract authorization by laying down metrics and ground rules for the same. This in turn helps whittle down options to make quicker decisions.
Identify better sourcing opportunities: Spend management helps collate expenditure on products inclusive of all peripheral costs thereby securing cheaper, better quality sourcing opportunities. For example, sourcing raw materials from China at a lower rate might turn out to be more expensive due to shipping costs than sourcing from local suppliers.
Identify maverick spend: Spend analysis also helps map the outliers on the chart helping identify and correct maverick spends. With the ability to collect and organize data in favoured formats, spend analysis helps spot outliers and anomalies, if any, and stalls unauthorized spends..
Eliminate over-payments: A thorough audit through expenditures may reveal duplicate payments for a single invoice–a classic example of data falling through the cracks. Spend management helps keep such payments in check.
Avoid late payments/fees: Spend analysis helps map and identify data patterns for prevention of late payments penalties. Avoiding late fees helps maintain better relations with the supplier and ultimately helps gain credit benefits leading to savings and profitability.
Manage risk: Spend analysis monitors transactions to keep a track on vendor’s financial performance and credibility. Since most projects are majorly dependent on suppliers, this analysis helps identify risk beforehand which enables procurement to make alternate plans.
Automate and improve internal systems: Lastly, spend management helps take effective and efficient expense decisions thereby improving all internal systems. Recognizing the possible benefits of spend management, organizations could automate their procurement processes and bring about visibility in the spend environment.
To summarize, spend management is a process that every organization needs to inculcate and execute if they mean to achieve their cost saving objectives year-on-year. A simple four-step process (i) collecting, ii) cleansing, iii) classifying, and iv) analysing expenditure data should get one on track for improved internal systems and processes. An organization can now even benchmark their spend percentage as a cost of procurement, here’s a research report that explains how.
Although, spend management is now easily deployable with e-procurement systems that use Artificial Intelligence to categorize and manage spend data – eradicating the worry of spend management. For a detailed look into what an advanced spend analysis structure looks like, head on over to this whitepaper.
Food for Thought
Spend management’s benefits have been spoken about and discussed at length by most thought leaders, analysts, and procurement professionals over the years. Although spend management after all these years of propagation has only been effective to a minimal percentage of professionals who have adopted the practice. As per this Pulse of Procurement report, only 14% of the 70% of respondents who had adopted spend management practices were able to reap benefits.
Taking into consideration the above statistics, one can assume most of the blog’s readers to either have an inkling of the spend management processes or have at least adopted a part of it for their organizations. Does the process increase turnaround times for routine tasks? And for those who have implemented the process, has there been a substantial change in the performance of the procurement department?
Let us know in the comments section below!