Over the years, spend management 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.
The first step to spend management is to identify all the sources of expenditure in an organization. While some cost centers look for spend data, shadow cost centers that exist only on papers are easy to miss. Shadow cost centers may categorize finances and allocate budgets, but they lead to complications when managing spend.
Solution: When identifying cost centers, it is best to involve all the department heads responsible for costs. Although for medium and large-scale organizations, there will be too many departments, but digitalization can automatically collect spend data in a central repository for analysis.
Spend data entered manually is riddled with inconsistencies, typos, mistakes, etc. Data sets with different currencies across different 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 to maintain single taxonomy structure, follow link to the whitepaper “Spend Analysis: Making Sense of Data.”
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, analyze, and execute spend data savings opportunities regularly.
Solution: Procurement teams, 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.
The capability to identify and extract the right kind of reports from collected spend data needs analytical skills, which are rare and 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 a high volume of orders or high-cost orders, cost-savings in minute percentages will translate to millions. An AI-powered automated analytics tool is, therefore, helpful in analyzing and making sense of given data enough to make critical decisions.
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 behaviour due to lack of communication amongst them. Similarly, data stored by each of these departments are 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.
Spend data can be categorized according to the project, department, product or services, etc. Each of these has its 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.
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 spending 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.
Spend management is 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 the least amount of resistance.
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. It helps identify duplicate purchases, and negotiate on bulk orders leading to direct savings.
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.
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.
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.
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 favored formats, spend analysis helps spot outliers and anomalies, if any, and stalls unauthorized spends.
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.
Spend analysis helps map and identify data patterns for the 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.
Spend analysis monitors transactions to keep a track on a 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.
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 spending 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) analyzing 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.
We have discussed spend management’s benefits at length. Many thought leaders, analysts, and procurement professionals have shared their thoughts over the years. And yet, spend management has been effective to a minimal percentage only. As per this Pulse of Procurement report, only 14% of the 70% of the respondents who adopted spend management practices, have reaped benefits.
Taking into consideration the above statistics, one can assume that most readers of this blog will know about spend management. So if you are a procurement staff or a senior, how much time does your spend management cost? Share with us those substantial gains your organization has reaped from implementing spend management.
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