All You Need to Know About Spend Management
Last updated Sep 30, 2022 - 7 min read
- Table of Content
When running a business, you need to think about thousands of factors that can contribute to or add value to it. Among these factors, one of the most important is how you monitor and control your spending. Irrespective of the industry you are in, spend management is a process that makes sure money leaving your company is appropriately tracked and accounted for regularly.
Spend management is an umbrella term used to encompass a set of procurement and sourcing practices to maximize value from a company’s spend while mitigating risks, enhancing supplier relationships, improving efficiency, and regulating compliance.
Spend management means giving your spending a framework to help you look into, manage, categorize, and analyze it. But spend management, in reality, is a lot more than that: it's to equip people with tremendous visibility of the right data they need to draw insights from and make decisions.
To make the concept of spend management simple and fun, look at it as a health device or those monitors we see in the hospitals that can track your pulse, blood pressure, temperature, and more. Your vitals are running irrespective of whether you are tracking them or not, but when you can see them, you know where things are going wrong and where exactly you need to take action.
Similarly, organizations run with or without managing their spending but, when they don't, the chances of wasting time, energy, and resources on lower-value activities increase and expose them to fraud and risks.
Why Spend Management is Important
From sourcing goods and services to managing relationships with suppliers and maintaining contracts, procurement is a complex web of strategic activities.
“Skilled procurement team can reduce a company’s purchasing cost base by eight to 12% – enough for big companies to save billions. Procurement is the biggest lever companies have for optimizing costs,” says Klaus Neuhas, partner Bain.
We agree procurement is the biggest lever for optimizing costs. To appreciate this concept better, take a look at these numbers:
According to the Chartered Institute of Procurement & Supply, companies can spend more than 70% of their revenue on procurement. So, any small or big reduction to this amount can add significant benefits to the bottom line.
Now, let us move beyond cost and look at the figures from Deloitte CPO survey report 2021 that states: for the first time in 10 years, “reducing costs” was not the highest priority. Instead, nearly 78 percent of respondents cited “driving operational efficiency” as the first priority, with cost reduction as a close second.
Clearly, this report indicates how CPOs are contending to become more efficient with their procurement processes.
When you look at all these priorities, you see how each of them is closely interlinked and necessary for achieving procurement’s value proposition of getting more from less.
That's where organizations establish the need for spend management, to do more with less, and be more profitable, efficient, and proactive.
With spend management, organizations can find answers to many crucial questions regarding their spending, including:
- What am I spending, and what should I really be spending?
- How to spend prudently to eliminate waste?
- Am I getting what was agreed for that spend?
- How to minimize risks and eliminate spending frauds?
- How to uncover the insights I need to transform my procurement?
Spend Management Benefits
With these answers at hand, spend management helps companies realize the following benefits:
- Spend data visibility: Siloed and inaccessible data is one of the biggest setbacks for organizations. By pulling data from various sources like Excels, emails, ERPs, invoices, files, etc., and presenting it in a single platform, spend management gives structure to your procurement data and helps you make sense out of it.
- Higher spend compliance: By putting more spend under the spend management lens, you ensure that more and more purchases are contracted and approved. This particularly helps in preventing off-contract or maverick spend and boosts compliance.
- Enhanced process efficiency: Spend management helps companies reduce the time and effort they put into performing low-value activities. An effective spend management solution helps you optimize your data management, procurement analytics, strategic sourcing, category management, contract management, supplier management, and allows your procurement teams to focus on strategic activities that can impact the bottom line.
- Better risk management: The best way to manage risks is to have an agile and proactive approach. With market insights, supplier assessments, and contract management, spend management makes it easier for organizations to highlight risks and prepare for them well in advance. Also, with regular alert notifications and updates around contracts and markets, spend management providers further help companies limit risks.
- Negotiate better rates with suppliers: With strategic sourcing, supplier assessment, and analyzing the spend data, companies can quickly determine how much they are spending on each supplier and how those suppliers are performing. This crucial information helps companies drive meaningful negotiations with their suppliers to get a better rate.
- Identify other levers for cost reduction: Spend management can help you uncover several levers to drive cost reductions.
Spend Management Process
Spend management involves and affects various activities across the procurement cycle. It includes sourcing, budgeting, data management, supplier management, contract management, category management, and initiatives and task management. These activities and their dynamics differ for each organization, depending on their industry, size, and requirements. Below, we have listed 8 steps in the spend management process:
- Identifying relevant sources and extracting data: Every procurement organization generates large amounts of data. Because data sources are different for different organizations, it's crucial to identify the relevant external and internal data sources for your organization.
- Creating a single source of truth: Providing a centralized system to make the data available to a large base of users. However, some data is sensitive and should not be visible to all users. Additionally, decentralized data is sometimes also necessary for making quick business decisions. Hence, a flexible solution is needed to fulfill these divergent needs and bring ease of use and collaboration across the organization.
- Cleaning, normalizing, and enriching the data: The crux to effective spend management lies in extracting, transforming, and managing the data accurately. Spend data must be processed to meet the quality standards of practical analysis.
- Categorizing the spend data: Spend data is diverse and must be categorized and classified according to an organization’s objectives and needs. Accurately classifying the spend data is also crucial to facilitate perfect transparency and comparison for spend analysis.
- Visualizing the data: To truly uncover opportunities, it's important to visualize both current and past spending data on various aspects like category, business unit, cost center, geography, supplier, etc. Many companies leverage cloud-based spend management technologies that give them a holistic view of their procurement data to revolutionize data visibility.
- Analyzing spend: Looking into the data to filter, segment, analyze any patterns, irregularities, or trends. Bringing artificial intelligence, machine learning, and other advanced capabilities can help illuminate even hidden insights that analysts can miss. Deloitte’s CPO Survey 2019 highlights how CPOs who harness machine learning, NLP, and cognitive analytics see benefits that would have been unimaginable only a few years ago.
- Strategizing, planning, and executing: The way you plan, explain, and implement your initiatives can be the difference between their success or failure. Hence, it's always beneficial to follow a holistic approach: standardizing procurement strategies alongside the enterprise strategy while involving all the relevant users in the process. Doing this increases the chances of users adopting these changes and working towards its success.
- Forecasting spend: By collecting, maintaining, and analyzing your data, spend management not just helps you look into your past and present but also foresee your future. Tracking and identifying trends equips you with the right insights you need to forecast spend scenarios and prepare for any adversary well in advance.
Spend Management Challenges
Despite the enormous benefits spend management can bring, getting complete visibility of their spending is a daunting task for many organizations today. At first, it might appear that finding answers to what, why, whom, and where of spending is easy. However, as procurement data crosses departments and silos, achieving cross-organization visibility is indeed a big challenge.
Following are some major roadblocks in the way to spend management:
Diverse data sources
The spend data is often disconnected and scattered across multiple systems and sources like invoice systems, accounting systems, PO systems, contract data, supplier data, etc. Effective spend management must support the consolidation of all spending information from disparate data sources and provide a 360-degree view of company spending.
Spending data is often chock full of errors, inconsistencies, duplicate information, and misspellings. As a result, a large proportion of spend gets classified as “other” spend. If such is the state of your data, even with spend management, you will be making decisions based on assumptions. Hence, to get true insights, you need to fortify your spend data with accurate and up-to-date information.
Lack of skill or resources
According to the 2019 Cognitive Sourcing Study from LevaData, more than 50% of procurement organizations use legacy tools like Excel spreadsheets to store and analyze their data. A spreadsheet is an inflexible tool and only captures and displays snapshot information and cannot pull data from various sources. Besides wasting your time, resource, and energy, using these legacy tools also limits the breadth and sophistication of analyses you can conduct.
Cloud-Based Spend Management Solution
Many roadblocks prevent organizations from having a complete understanding of their spending. As a result, insights on excess spending, opportunities, and risk avoidance remain hidden, and companies cannot capitalize on savings and scaling opportunities.
To overcome these roadblocks, companies are now looking towards cloud-based spend management solutions to better organize, analyze, and manage their spending information, including full visibility into their procurement data.
Ignite procurement best-of-breed spend management offers a one-stop solution to simplify spend management. Along with providing a single source of truth for all your procurement information, Ignite spend management is packed with features like:
- Advanced security protocols to store and handle your data securely.
- AI and machine learning-based algorithms to link, clean, and enrich spend data.
- AI-based, self-learning classification systems to harmonize spend categories.
- Easy-to-use, visually compelling, drag-and-drop dashboards to simplify complex information.
- Spend and procurement analytics to drive insights across data sources.
- Initiatives and task features to plan your activities and design workflows.
This way, Ignite Procurement brings in a comprehensive set of capabilities and resources you need to start or transform your spend management. Our team of experts fully understands a procurement professional’s woes and thus, can help you find the right set of skills and technology for your individual business needs.
Let's work towards making your procurement a source of larger cost savings, more efficient processes, greater competitive strength, and a stronger bottom line.