Our guest blogger, Kelly Barner, discusses why getting spend under management is a primary objective of all procurement departments. The eSourcing Wiki defines “Spend Under Management” as: Total Spend Under Management / Total Spend. This is a straightforward calculation. .
The challenge most procurement professionals face is not with our ability to divide one number by another, but in defining the inputs to the equation. Total spend should be easy, although your department may use either total annual spend or total addressable spend (which is likely to exclude taxes and salaries). The real question is to decide what spend is designated as being ‘under management’.
As Torbjörn Thorsén noted in a CapGemini post:
“Although I understand why it is important, the fuzziness of spend under management actually makes the metric stumble on its own merit. This is because while spend may be crystal clear and easily defined, under management is something that can be defined in a million different ways.
Does spend under management imply that spend is consistently managed using a well defined category management process? Or does it mean that the procurement organization has a contracted and preferred supplier in place (although no one is really sure if the contract is being used or not)? Or does the truth fall somewhere in between? Regardless, the clash between what is clear and simple (the spend part) and what is actually unclear and complicated(the under management part) requires those who want to effectively benchmark their performance to do quite a bit of thinking.”
So to help the rest of us get started on our ‘quite a bit of thinking’, I’ve pulled together some quotes and definitions on spend under management.
Quote 1: Andrew Bartolini, as quoted in a guest post by Caroline Robinson on the blog, “Supply Excellence” in March 2010
Now, what does “managing the spend” mean? And I think we’re in the early parts of this transformation, but as you look to answer that question for yourself, you should ask if you have visibility, first and foremost, into the spend. Maybe I don’t have the buy-in of the stakeholders, but can I see that there’s an opportunity for sourcing? Am I sourcing it? Do I have visibility into the contracts? Is there a system of record that I’m able to see the transactions as they occur? We don’t play so hard and fast with the definition because some smaller organizations don’t have eProcurement systems. It’s really the sense of how much of a potential impact a procurement organization can have.
Spend that is currently under control or management. Control includes the use of structured events (RFX, auctions), contract management, preferred suppliers with active supplier development programs, and spend analysis/visibility involving spend data management (definition below) and the use of third-party content.
Quote 3: Spend Radar post on their blog, SpendZen, June 2011
Spend management incorporates all aspects of spend analysis, spend categorization/spend classification, spend data management and spend performance management. Spend management is an ongoing process and a company-wide initiative to control and optimize a company’s spend, effectively improving their bottom line.
Quote 4: Canda Rozier, former SVP/Chief Procurement Officer at First Data for the Shared Services & Outsourcing Network blog
Spend under management is one of the cornerstones of a robust procurement function. This means that an expenditure has come through a defined procurement and sourcing process, has been competitively sourced, and is recorded in a repository of analytical data for use in future expenditures. As a company’s spend “under management” increases, so does the ability to reduce costs, forecast expenses, and manage vendors.
So we can take a few things away from the combination of the above quotes:
- Getting spend under management is a primary objective of all procurement departments
- Managed spend has been through a structured process, which may include RFx or negotiation and ends in an agreement or contract
- Procurement has visibility to the transaction level for managed spend
- Keeping spend under management is just as important as getting spend under management; it is an ongoing process, not a step that can be completed
About the Author: Kelly Barner is co-owner of Buyers Meeting Point (www.buyersmeetingpoint.com). She has her MBA from Babson College, an MS in Library and Information Science from Simmons College, and a BA in English and History from Clark University. Kelly has a unique perspective on supply management that includes time as a practitioner, a consultant at a solution provider, and now as an independent thought leader.In 2012 Kelly was awarded a Provider ‘Pro to Know’ award by Supply & Demand Chain Executive Magazine.