A thriving business surely has a good handle on managing its spending. Being fully aware of company costs, budgeting and planning, and forecasting are each an important and vital part of ensuring the most strategic business decisions are made. It allows for the opportunity to scale and provides a solid foundation for future growth. Keeping spend under management is a part of this strategy, but it often gets confused with different spend or expense management definitions.
We’ll explore the true definition of spend under management so teams can have a unified understanding of this goal and the processes required to achieve it.
What is Spend Under Management?
Spend under management (SUM) is the amount of business spend that is overseen and managed by the procurement function in relation to total company spend.
Some organizations consider SUM to be the same as spend under procurement, but it really depends on what policies and practices the business has in place that influence the defined terms to go by.
Other commonly used terms to understand include spend under contract, which is the amount of spend being managed under contract with a supplier, which would also usually fall into the spend under procurement category.
What Spend Under Management is Not
SUM as a value is often incorrectly used interchangeably with the terms above, and can be confused with other industry terms too.
We mentioned that addressable spend is all organizational spending regardless of the type. But what is spend under influencing? Spend under influence is the portion of spend that the procurement function influences by controlling the sourcing or supplier process, with specific strategic procurement policies, contracts, etc.
To make more sense of the variation of terms floating around out there, it’s extremely important for each individual team or department to agree on a definition, as well as what policies affect these definitions, and implement them within the larger organization. That way, there will be a unified understanding of the different parameters your business is working with, and it will be far easier and more effective in the long term to enact a strategic spend management practice.
How to Calculate Spend Under Management
Spend under management (SUM) can be calculated as the total amount of company spending (including direct and indirect spend) that is managed by the procurement department, divided by the total organizational spend (also called addressable spending). Total organizational spend does not include paying employees’ salaries or tax payments). When calculating for the same time period, you’ll get a percentage which is your total SUM for that period.
SUM = Total procurement-managed company spending
Total organizational spend
where, Total organizational spend = Addressable spend
You can perform the SUM calculation for spend under management at the business entity and corporate level and also measure it on a per-employee basis.
Spend Under Management KPIs
Besides spend under management, we have mentioned and defined other spend under procurement KPIs in this article.
Some useful spend under management and spend under procurement KPI metrics are:
- SUM (spend under management)
- Spend under management per employee
- Spend under influence
- Spend under contract
- Spend per supplier
- Percentage of rogue spend
Want to know best practices for procurement spend under management?
Explore the current state of procurement and how the most forward-thinking businesses are leveraging technology to stay ahead of the game.
How Can You Increase Spending Under Management?
Every organization will benefit from bringing more spend under management. More spend managed equates to more visibility and less maverick spend trickling out unnoticed. Even with the best intentions and spend management processes in place, mismanaged spend happens and can cancel out the benefits your management processes have afforded you.
Consider Your Processes
When determining where you can better address purchasing to be able to bring more spend under management to optimize spend, you have to go back to the source. What purchasing process or procurement process do you already have in place? Slow or clunky purchase approval processes can lead to limited visibility, requests (purchase approvals) being approved when they shouldn’t be, or duplicate requests being submitted and approved. Those extra unnecessary purchases are simply money spent in excess.
Does your company understand cloud spend management and monitor employee subscriptions enough to properly control the costs without wasting money?
What are your current company policies and practices shaping spending processes that might be holding you back? Are you using category management to make your procurement process more efficient and to identify areas for savings? Understanding the foundation of your spend culture can help you establish a more streamlined workflow process, and once you get stakeholder buy-in you can implement it company-wide.
Gain Visibility
That streamlined process will produce greater visibility. This byproduct is extremely important – you need to know just what you’re spending, and on what, in order to manage spend properly. Improved spend visibility can come from being aware of common spend categories through spend data management, or what types of goods or services your team is purchasing from its supply chain, and with which suppliers.
Monitor how long a standard approval flow takes and pay attention to where things may be getting stuck or falling through the cracks. Purchases that are lost or unaccounted for end up contributing to unnecessary maverick spend (a.k.a rogue spend or unmanaged spend), or resurface later as surprise invoices making things more difficult between accounts payable and procurement departments. More visibility also contributes to better data. Only once you are able to see the full picture and sub-categories, will you be able to conduct proper spend analysis measures to improve decision-making.
Focus On Your Suppliers
Investing in better supplier management practices can have a big impact on company spending. Is it currently easy for your team to manage the suppliers you work with? How is your process for onboarding new suppliers? Ensuring your business is working with trustworthy suppliers (selected through a good tactical and strategic sourcing program) who have a quick turnaround keeps prices lower, there’s more compliance and less risk, and issuing payment is more organized.
Many companies use their procurement team for the strategic practice of conducting regular evaluations of commercial suppliers. This investment in supplier tracking gives you the opportunity to monitor quality and supplier performance, mitigate risk, encourage continued improvement, and access better quality data from your preferred suppliers.
Look To Technology
Besides having an excellent procurement strategy, every organization can benefit from a bit of technological assistance. Have you considered adopting automated procurement management software to streamline processes and provide better cost management, document and contract management, organization, and visibility? Simpler purchase requests are more time efficient, get seen by the right approvers faster, and contribute to smarter, ultimately more managed spending with efficiently produced purchase orders. An automated system can also help you easily implement newly established processes or tools that will allow you to define unified company metrics for measuring total spend, spend category, and subcategories.
Spend under management as an effective practice will also make the AP function’s work go more smoothly. There will be greater synchronicity between procurement professionals and the accounts payable team.
Bring Team Members On Board
Getting your employees on the same page is a big part of the process. Take the time to get them involved in any upgrades you make to your spend management practices, whether that means training sessions or teaching opportunities. A little effort in the beginning will be worth ensuring they have a real understanding of the importance of taking steps to bring spend under management. When key stakeholders are on the same page, they are working in a unified way toward reaching your business goals.
Whether it’s a newly automated, real-time e-procurement solution or new ways to create checks and balances within the finance and accounting processes, be transparent and give employees what they need to carry out purchasing and spend management efforts for decision-making to the best of their ability. In the process, they’ll contribute to better supplier relationships.
The Importance of Spend Under Management
Spend under management is important for controlling business costs for expenditures, preventing bottom-line profit leaks from using uncontrolled suppliers, and lowering cash requirements. The way your organization’s spend is conducted, measured with procurement metrics and benchmarks, and monitored for spend control, greatly influences overall organizational performance.
Taking measures to bring more of your business spend under management will pay off in:
- Better spend management visibility and spend data organization
- Understanding purchasing habits
- Higher company policy compliance (with better policies, if needed)
- Better approval processes
- Cost savings
With unified procurement automation and AP automation systems, you can perform procure-to-pay (P2P) processes more efficiently and earn early payment discounts as a cost-reduction strategy. To get your business spend under management with procurement automation software, explore more.
