Increasing spend under management is a common procurement mandate designed to help the top level management make sure every dollar is spent according to a well-defined process. The idea is to control the entire procurement cycle, so no savings fall through cracks in the buying cycle.
However, you cannot increase what you have not defined. There are differing opinions regarding how exactly to define “managed” spend, but once you and your organization agree on a definition, you can take steps to bring more spend under management.
Defining spend under management
This is the most commonly used formula to determine spend under management (SUM):
This formula needs to be looked at more in depth, though, before it can become a valuable KPI. The whole concept hinges on management, the key term in this equation and one which also happens to be highly subjective.
The problem is that “management” means different things to different organizations. Here we’ve outlined the basic criteria to consider when creating a SUM definition for your organization:
1) “Management” indicates a clearly defined procurement process, approved by management, and stated in procurement policy.
2) All stakeholders are aware of the process and use it on daily basis when running procurement activities.
3) The process is reviewed at regular intervals to ensure compliance and find areas for improvement.
4) The entire buying process is visible. This includes (but is not limited to) planning, requisitioning, RFPs, negotiation, approval, contracting, PO, invoicing, delivery, and data management.
Before you can even begin to use spend under management as a Procurement KPI, you need to work with your team to establish a definition that can be adopted on an organization-wide level. Regardless of your preferred definition, it should be clear that managed spend is dealt with according to an established process. Then, when you begin reporting the percentage of spend under management, you can preface it with a clear definition.
Once you’ve decided on a definition, move on to what really matters: how to bring more spend under management.
How to bring more spend under management
Understand that you’re going to be changing the way people work. Therefore, you must have buy-in from all stakeholders, from upper management on down. If your buyers don’t see your changes as coming from a place of authority, you will struggle with achieving a high level of compliance. Make sure you communicate the value of changing these processes in way that reflects the interests of your stakeholders. Focus first on getting the mandate from upper management by explaining the benefits to the company as a whole (cost savings, transparency, etc.). Then, once the management is on board, communicate the benefits to your buyers (time savings, efficiency, etc.).
Once you have stakeholder buy-in, there are 5 steps you can follow to bring more spend under management. While it’s helpful to start with the first step and move on from there, you may find that your process requires you to spend more time on one of these steps than another. Also, keep in mind that bringing spend under management is not a one-time deal; you’ll have to continually re-evaluate your spend to make sure that what is managed stays managed.
1. Make spend more visible.
You can’t bring more spend under management if you can’t see clearly how much your organization spends, how it spends it, and in what categories it’s being spent. Spend visibility is key. Hopefully this is being done by Accounting or being tracked within your ERP. Make sure Procurement also has access to this information, if you don’t already. With this data, you can make a spend profile to see how much is currently being managed within different categories on item level.
Once your spend is visible, then you can analyze it. This is where spend analysis comes in. A good spend analysis tool, one that is integrated with the ERP, can give you a detailed overview of how much spend is not going through the ERP purchase process by tracking the invoices being sent directly to accounts payable.
2. Put your processes in place.
Bringing more spend under management is a change management exercise. You need to clearly define your goals and then establish a new process to help you meet them. Use the spend data to help you define your goals. Communicate your goals clearly to your stakeholders and explain why these changes are necessary for the organization as a whole. As mentioned before, these changes will go more smoothly if you have upper management buy-in and the authority to put them in place.
When you are working on developing your purchase processes, take time to research and implement an e-procurement solution. (This is addressed more in Step #3.) Then, with your new e-procurement tool and improved processes in place, you can use the spend analysis tool to follow your progress and see how the new purchase process plays out in real life.
3. Run spend through e-sourcing technology.
While it is possible to manage spend without e-sourcing, it’s impossible to bring more spend under management without implementing an e-sourcing solution. The research is there; e-sourcing is too crucial to be ignored. Furthermore, cloud-based solutions have lowered the barrier to implementation, so now even SMBs can capture these benefits without the high costs and extensive training required for the cumbersome incumbent solutions. If you’re not sure how to choose an e-sourcing solution, this article can help guide you through the process.
E-sourcing is simply a tool, though. While it’s essential to have it in place, you will have to make sure it’s being used properly and in a way that helps you meet your SUM goals. If you’ve already implemented a solution but haven’t yet reached your goals, make sure you carefully consider Step #5.
4. Enable as many suppliers for requisitions as possible.
If you have an e-sourcing tool in place, you may have focused on uploading only the top suppliers in the categories with the most impact. While this ensures that the most critical spend is managed, it means your tail spend is going unmanaged. Try giving buyers access to all suppliers in your e-sourcing system. By making it easier for buyers to find the suppliers they’re used to working with, they will be more likely to run their requests through your tool. Once you have the requests in the system, Procurement can then decide whether to run an RFP, find a new supplier, negotiate contract terms, or otherwise manage the spend in a way that adds value for the organization.
Besides entering more suppliers into your e-sourcing solution, it’s also important to make sure that you have adequately onboarded your preferred suppliers. After implementation, take the time to notify your suppliers of your change in procedure. Offer assistance and respond to any questions or concerns they might have. Remember, sourcing is a two-way street, and if your suppliers don’t understand your new system, they might be try to work with buyers outside the prescribed management system.
5. Improve buyer experience
Buyers inside and outside of the procurement department are one of the biggest obstacles to getting more spend under management. However, it’s not because they enjoy maverick status; it’s because it might take them more time and energy to run requests and requisitions through the incumbent solution than it does for them to handle requests via email or over the phone. In this situation, think of buyers as your customers - what can you do to provide better customer service? Additional training may not be enough; you many have to find an e-sourcing tool that’s easier to use.
The tool you choose should be easy to use and efficient for buyers both inside and outside the procurement department. If it’s easier to run spend through the system than outside it, you’ll cut down on maverick spend and gain more control over runaway tail spend.
Managing your spend is a continual process. You will have to return to these concepts again and again to ensure the spend you’ve brought under management stays under management.