Today, organizations are under increasing pressure to control costs and improve efficiency due to economic instability, increased competition, rising costs, and regulatory pressures. To ensure long-term success and sustainability, it has become essential for companies to implement robust financial control measures. One such measure is spend under management (SUM), which enables businesses to gain greater visibility and control over their spending, vendor engagements, and adherence to defined purchasing policies.
In this article we’ll explore the concept of spend under management, which involves tracking and analyzing the sum of money spent on goods and services that are subject to defined procurement policies and procedures. While this metric is most often used by procurement teams, finance teams can be responsible for gaining spend under management or collaborating with procurement to achieve this key result.
In small to mid-size organizations where there is no dedicated procurement team, finance teams may assume more responsibilities in procurement activities such as negotiating contracts, vendor management, overseeing procurement processes, and establishing and ensuring compliance with policies.
Regardless of which team takes the lead, the key goal should be to achieve spend under management, which involves optimizing spending, reducing costs, eliminating waste, rogue and unauthorized spending, ensuring compliance, and overall, delivering value to the organization.
What is spend under management?
So, what is spend under management and how can it benefit your business? Spend under management is a term used to refer to the total amount of money that an organization has control over when it comes to purchasing goods and services; essentially the value of purchases that are made in accordance with defined policies and procedures with preferred vendors. Furthermore, it encompasses optimized spend that has been reviewed and improved to achieve maximum cost savings.
Spend under management includes all purchases made by an organization, irrespective of whether they are made by procurement professionals or general employees, and whether they are centralized or decentralized. SUM includes direct purchases, as well as indirect spending on items such as office supplies, subscriptions, marketing, travel expenses, and utilities.
This SUM metric helps organizations monitor and manage their spending more effectively by identifying areas where savings can be achieved, and costs can be reduced. By calculating spend under management, organizations can measure the proportion of their total spend that is being actively managed by the procurement of finance department.
How do you calculate spend under management?
To arrive at the percentage of spend under management, you’ll need to determine the procurement or finance department's oversight of both direct and indirect spending and divide it by the total organizational or addressable spend (excluding tax payments and employee salaries). The resulting percentage represents the total SUM for the given period.
Typically, spend under management is divided into two broad categories: discretionary and non-discretionary spend.
Discretionary spend refers to the expenses that a company can control or choose to spend, such as marketing and advertising expenses, travel and entertainment, and capital expenditures. Non-discretionary spend, on the other hand, refers to expenses that a company must incur to maintain its operations, such as salaries and wages, rent, utilities, and raw materials.
By categorizing spend under management into these two categories, companies can better understand where their money is going and identify opportunities for cost savings and optimization. Clear policies and procedures are important for effectively managing both types of spending and ensuring that purchasing decisions are made in a consistent and transparent manner and align with the organization's goals.
Why indirect spend under management matters
If unmanaged, indirect spend can be a recurring area of inefficiency and waste. While indirect spend may not be directly tied to a company's revenue, it can still have a significant impact on the bottom line. It spans many stakeholders and departments and is often characterized by high volumes of low value transactions that are easily overlooked, evade approval processes, and silently add up without a trace.
Managing indirect spend is important for several reasons. Firstly, indirect spend can account for a significant portion of a company's total spending. With more indirect spend under management, companies can reduce costs and free up resources to invest in more strategic areas of the business. Failing to prioritize the management of indirect spend can result in significant missed cost-saving opportunities for companies.
How to achieve spend under management in your organization
Achieving spend under management involves a systematic and holistic approach that encompasses various strategies and processes. Here are some key steps that organizations can take to achieve spend under management:
Leverage technology: Implementing procurement technology such as e-procurement, spend management and spend analytics tools can help to automate procurement processes, improve supplier management, and provide real-time spend visibility and control.
Analyze your spend: Conducting a detailed spend analysis is a critical first step to identifying all sources of spend. This helps to identify areas of opportunity for cost reduction and determine the effectiveness of current procurement processes and vendor engagements. Reporting on spend and benchmarking purchasing cycles can help to measure the effectiveness of procurement processes, identify areas for improvement, and track progress towards achieving spend under management.
Establish effective procurement policies and procedures: Establishing effective procurement processes and policies and enforcing compliance can help to ensure consistency and transparency in purchasing decisions, reduce risks, and improve spend control.
Implement internal controls: Technology can help drive internal control and mitigate risks. Overall, effective internal controls are essential for achieving spend under management. They help to ensure that spending is controlled, compliant, and aligned with the organization's goals, and can help to prevent fraud, errors, and waste.
Focus on vendor relationship management: Building and maintaining strong relationships with preferred vendors and directing more purchasing to pre-negotiated contracts can help you qualify for more favorable terms, volume discounts and early settlement savings.
By taking a holistic approach and implementing these key steps, organizations can achieve spend under management and realize significant cost savings and value creation opportunities.
Accelerate spend under management with automation
Automation can help accelerate spend under management by simplifying procurement processes, reducing the time and resources required for manual tasks and ensuring compliance at each touchpoint in the procurement process. The auditability of spending that automation enables drives accountability and cultivates a responsible and cost-conscious spending culture. By automating procurement and spend management, business leaders are primed to achieve greater efficiency, reduced costs, and informed decision-making.
How spend management software can help
The deployment of spend management software, like Fraxion can help organizations achieve spend under management by providing more visibility, control, and compliance across indirect spending and procurement processes:
- Automate and simplify purchasing processes
- Implement internal spending and policy controls
- Centralize purchasing records and audit trails
- Accelerate and ensure approvals and delegation of authority
- Gain real-time budget and spend visibility
- Analyze and report on spending patterns and trends
- Streamline invoice approvals, receiving and matching
- Simplify vendor onboarding and approvals
- Enable contracted vendor catalog hosting and integrations
With spend management software, finance and procurement leaders are equipped to track and manage spending and identify efficiency and cost saving opportunities within the indirect spend category to attain and optimize their spend under management goals.
By closely monitoring and controlling spending with a software-led spend under management strategy, organizations can better understand their expenses and make informed decisions that can drive meaningful results.
If you’d like to find out how you can identify and optimize operational cost savings and achieve purchasing policy compliance in your business, contact Fraxion today to book a spend management discovery consultation.