Spend Under Management Explained
By Hugo Britt | April 27, 2021
Spend under management (SUM) is a frequently used term but also a widely misunderstood metric, not least because organizations often misinterpret its meaning.
In the plainest terms, spend under management can be defined as the proportion of annual addressable spending that uses preferred supplier contracts or falls directly under procurement’s management.
Before we delve into the details of SUM, it’s important to understand:
- addressable (or total) spend
- spend influenced, and
- spend under sourcing
What is Addressable Spend?
To help paint a clear picture, imagine that your organization’s total spend is represented by a two-tiered chocolate cake.
Addressable spend is the cake in its entirety – the two layers topped with thick chocolate icing. It comprises every last dollar that an organization spends with commercial suppliers on direct and indirect materials and services each year.
The only expenditures excluded from addressable spending are tax payments, charitable donations, employee base salaries and bonuses, dividends, stock repurchases, securities, and organizational memberships.
It’s important to clarify that addressable spend means all sourceable spend and not simply the products and services that are strategically sourced by procurement professionals.
What is Spend Influenced?
Spend influenced is the bottom tier of the chocolate cake. Because only a small amount of icing has trickled down to this layer, it ends up being the least desirable part of the cake.
Spend influenced is the area of spend within an organization’s addressable spend in which procurement teams exert some influence either by overseeing or managing the sourcing process and enforcing procurement policies and processes.
For example, procurement policy might require a buyer to obtain three quotes when purchasing goods or services over a certain price threshold. It’s also extremely difficult to calculate this metric if an organization has no clearly defined buying policies.
What is Spend Under Sourcing?
Spend under sourcing encompasses the cake’s second tier. This layer is considerably more saturated with chocolate icing, and it’s all the better for it.
Spend under sourcing is the area of spend within an organization’s addressable spend which is covered by formal sourcing strategies, including documented category plans.
Category plans might include approaches such as specified geographic sources of supply, business process sourcing decisions, recommendations related to goods and services that require multiple suppliers, “buy splits” among the targeted supply base to mitigate supply chain risk, and recommendations related to alternative sources of supply.
What is Spend Under Management?
Now comes the best part; the final component of the cake is the layer of icing on top. This represents the area of spend within an organization’s addressable spend that is fully managed by procurement professionals, from the supplier selection process to negotiations on pricing and contractual terms.
Once you segment an organization’s spend into these sub-categories, it’s not hard to see where the confusion surrounding SUM comes from. Some organizations only apply this term when goods and services are obtained via robust procurement processes. Others simply equate SUM with their preferred supplier program.
It’s perhaps most helpful to equate SUM with strategic procurement. Just because a buyer adheres to the processes outlined by procurement, it does not mean they are sourcing strategically.
Spend under management will largely be comprised of preferred or strategically sourced suppliers managed by procurement professionals. But if buyers are well-informed and properly adhering to procurement’s guidelines and regulations, preferred suppliers should also feature heavily within the “spend under sourcing” or “spend influenced” layers.
For a small organization with no official procurement policy for its buyers, the percentage of SUM will likely be a lot lower, and spend will likely be divided into just SUM and addressable spend.
Meanwhile, for an organization with robust procurement processes and policies, SUM will overlap with spend influenced and spend under sourcing.
To keep things simple, some organizations refer to SUM as “spend with preferred suppliers.” But whichever way you choose to look at it, the higher the percentage of SUM, the better.
Why is Spend Under Management important?
Driving SUM within your organization improves efficiencies, reduces cost, encourages collaboration between vendor and buyer as well as between cross-functional teams, and improves procurement productivity.
Calculating the percentage of spend under management is also an important way of communicating procurement’s value-add to your organization’s leadership team. But what constitutes a good level of SUM? It’s actually pretty difficult to say because procurement influence differs so hugely across organizations, as does the definition of spend under management.
Some teams might strive to meet 80%+ SUM while, for others, 40% is considered a big achievement.
The second part of this two-part series will explore the best practices for bringing spend under management. Stay tuned!