How to Bring More Spend Under Management: 6 Best Practices
By Hugo Britt | May 4, 2021
In part one of this two-part series, we defined spend under management (SUM) and outlined why it’s such an important metric for procurement teams to measure.
To recap, procurement professionals apply the term spend under management to measure and communicate their team’s impact on the organization at large. While the precise definition occasionally varies from organization to organization, it is generally defined as the percentage of an organization’s spend that falls under procurement’s management.
Some organizations define SUM as any spending that leverages preferred supplier contracts.
Below, we outline how to bring more spend under management using six of the best practices.
1. Sourcing and managing suppliers
Your procurement team’s sourcing strategy might favor a strategic, project-based, long-term contract, or one-off spot-purchase approach. It will typically involve a multi-candidate competitive process and will be overseen by procurement leaders or a cross-functional category team.
A strategic sourcing strategy is key to ensuring vendors with the potential to deliver the most value (in terms of quality, risk, service, and price) are identified as preferred suppliers and effectively and consistently managed.
Once onboarded, procurement teams must allocate substantial SRM activities to ensure these suppliers continue to deliver value. This includes performance monitoring, regular communication and collaboration, and timely contract reviews.
If a contract with a preferred supplier is automatically renewed at the end of a year, for example, procurement can’t reasonably claim this portion of spend as SUM. They won’t have given any consideration to changing circumstances, opportunities for re-negotiation, or alternate vendors.
To drive a higher percentage of SUM within your organization, you’ll also have to focus on encouraging buyers to choose the right vendors. How can you make it easier for them to find and spend with your preferred suppliers? Consider offering incentives, implementing better technology, or providing additional education and training.
2. Proper purchase authorization
Formal approval requests aren’t always necessary because buyers are often authorized to make certain low-value purchases or claim expenses (e.g. for corporate travel).
However, in a situation where authorization is required, you want to be sure your buyers are getting it right so you have the opportunity to identify and prevent maverick spending.
Proper purchase authorization refers to spending that complies with an organization’s purchase approval policies. The purchase is approved and an invoice arrives, before an order is placed, which enables procurement teams to validate invoices and improves visibility across the organization.
3. Coding systems
Departmental expense and purchase history accounts can consist of hundreds, if not thousands, of detail items. A failure to accurately code transactions makes it difficult for procurement teams to manage their budgets, leads to confusion or misinformation surrounding how much is being spent where, and results in bad sourcing decisions.
Implementing a robust coding system will reduce human error and enable procurement to better analyze SUM. Ideally, buyers should be able to quickly access pre-existing information on suppliers, contracts, goods, and services, not least because it negates the need for them to manually enter this data.
4. Contractual terms
The value unlocked through the implementation of a preferred supplier program is heavily reduced if the terms negotiated and documented in the original supplier agreement are not upheld by your organization’s buyers. You can easily end up spending more than necessary or losing out on additional favorable terms outlined in the contract, such as expedited shipping or volume discounts.
One way to minimize this risk is to require buyers to reference the relevant contractual terms when a purchase is made. To improve compliance, procurement must ensure contracts are well-documented, up to date, and easily accessible.
How easily are buyers able to apply the correct procurement processes? Clunky and confusing manual processes not only frustrate buyers but they also add significant indirect costs to the business as a result of time wasted. For this reason, efficiency must not be ignored when it comes to defining or calculating SUM.
Procurement teams should identify where and how their processes can be better streamlined, whether it’s through employee education, contract management, supplier engagement, sourcing strategy, catalog management, technology implementation, or by partnering with a group purchasing organization (GPO).
The more effective the systems in place, the more scope procurement professionals have to SUM across the organization.
For organizations to properly bring more spend under management, purchases must be visible during two different time periods:
- The request-to-payment period
- The historical period (several years after a purchase is made).
Longer-term historical data, which includes the details of each transaction, is especially beneficial to procurement professionals when it comes to performing accurate spend analyses. Without an eProcurement system, it becomes very difficult to manage the sheer volume of data.
Need help gaining visibility into your organization’s spend? Una can help. Contact us for a free cost analysis today.