Why Enterprise Spend Management Must Come Before ESG

Most large enterprises are accelerating ESG initiatives, but many are doing so before they have full control over company spending.

Manufacturing and logistics cause the majority of carbon emissions and business investments have a large impact on social concerns. As a result, executives are putting ESG at the top of their Procurement expectations lists.

However, ESG is an advanced stage of procurement maturity. If Procurement doesn’t have basic enterprise spend management processes nailed down before focusing on it, they put the business’ entire operational flow at risk.

This is a real issue— Ardent Partner’s 2023 CPO Rising report revealed that the average procurement team only has 64.9% of its spend under management. In other words: teams are prioritizing ESG without full spend visibility into their spending data and expense management processes. At the same time, 27% say ESG is a top priority. What risks are these teams exposing themselves to when they turn their focus to ESG too early in the Procurement maturity curve? Let’s explore a few here.

Without enterprise spend management, costs run amuck

In our recent webinar on the CPO Rising 2023 report , Ardent Partners’ founder Andrew Bartolini reported that every dollar placed under Procurement’s management leads to a 12-18% increase in savings. The opposite is then true as well. When Procurement doesn’t manage spend, the business loses up to 18% more money.

What This Means for Your Business

• Reduced cost savings across procurement
• Limited visibility into spending patterns
• Increased tail spend and unmanaged business expense
• Strain on the finance team to track and reconcile employee expenses

This fact has a few key implications for Procurement’s relationship with ESG initiatives. First, that 18% is a significant amount of money that companies can’t dedicate to ESG. Additionally, since many teams lack enterprise-wide spend visibility in the first place, this loss means they can’t make any ESG investments without the risk of double-spending. An even bigger issue is how a 12-18% savings leakage affects the rest of the business. This kind of loss severely decreases top-line growth and takes away from operating expenses.

Without modern expense management software and a centralized spend management platform, these problems compound quickly. If you haven’t already established some degree of enterprise spend management that runs without your constant oversight, the problems you know about are going to grow like cracks in a dam when your focus is on advanced projects. That means a standard savings leakage of 8% won’t stay that small. Even worse, new cracks are going to appear and you won’t have the visibility or processes in place to discover them in real time.

Where Things Break Down

• Reliance on manual processes instead of automation
• Lack of expense tracking and real-time expense reporting
• Poor control over card expenses and employee expenses
• No defined spending limit or approval workflows to approve expenses

The result isn’t only lost money. When Procurement doesn’t have enterprise spend management established, you don’t have a baseline to evaluate opportunities or plan projects. When you’re ready to make ESG investments, you may be shocked to find that you don’t have the resources you need because out-of-contract and unmanaged employee spend have already taken them. If you want to find success with ESG programs, you need to establish enterprise spend management first.

Enterprise spend management enables supply chain management

Of course, spend doesn’t devolve into chaos in a vacuum. All spend is related to strategic decisions (or lack thereof) around vendors. When you choose non-financial factors over enterprise spend management software and supplier management processes, businesses expose themselves to supply chain risk and inefficiencies.

Contracts are crucial

Contracts are at the heart of managing spend and protecting the business’ interests. They drive cost savings, improve supplier collaboration, and support better contract management across the value chain. Turning to ESG before you’ve formed agreements that give you these benefits is a recipe for disaster.

First, contracts save companies money overall. This is a basic procurement concept, but because immature procurement organizations usually lack enterprise spend visibility, it’s almost impossible for them to identify the best contract opportunities. Is another vendor quickly becoming a preferred supplier? Is spend with the company’s longest active vendor decreasing? When teams can’t find definitive answers to these questions, the contract and RFP process becomes a lot like Blackjack. You’re forced to bet on a very limited set of information.

Additionally, turning to ESG without strong contracts in place sets the stage for ballooning categories. While you’re busy lowering scope 3 emissions, buyers across the organization can collectively introduce a slew of new vendors without realizing it. Before long, these suppliers’ varying prices can increase spend dramatically. If you don’t have real-time access to spend data or contracts, you won’t even know it’s happening. Clearly communicated contracts are the only way to avoid this issue.

Finally, contracts also set expectations with vendors and protect your business. Without agreements, there’s little guarantee that you’ll get the prices, quality, and fulfillment terms that you need. Turning to ESG before you’ve protected the business just makes the spend problems from the first section even worse.

There’s no ESG without supply chain management

Trying to execute ESG initiatives without control over supplier management and company spending is ineffective because most of a company’s ESG impact comes from its supply chain. If you don’t have a holistic view of who the organization is purchasing from, there’s no way to establish this control or maintain it. When you turn your focus to identifying diverse suppliers or reducing scope 3 emissions, you’re introducing another variable into what’s likely already a chaotic process environment. In this situation, invaluable data like that from EcoVadis or Supplier.io loses most of its value because, while it gives great insights, you can’t do much with it.

Even if you do manage to get traction and buy-in early, you won’t have the processes in place to maintain it. Supplier decisions that purchasers comply with one month in won’t have the same sticking power a few months later if you haven’t already built a culture of spend under management with processes that run without your team’s constant oversight. In short, ESG success doesn’t exist if you don’t have enterprise-wide spend management.

Conclusion

Enterprise-wide spend management is non-negotiable for procurement teams that want to evolve into strategic and non-financial impact. These are advanced projects and pursuing them without having critical operational functions buttoned up can hurt far more than it helps.

However, there’s no way to manage spend across the organization without spend intelligence. Until you can see your entire spend profile and drill down into the spend data to find a specific angle, there’s no way to set up high performing spend management processes.

Many organizations rely on fragmented tools like accounting software, AP automation tools, or point solutions like Tipalti Procurement, Rippling Spend, or Clarity Enterprise that fail to provide complete visibility. There’s no way to manage spend across an organization when more than half of it’s missing.

Thankfully, our platform takes a different approach, using machine learning to compile, normalize, and categorize 97% of an organization’s spend to give you real-time visibility into your spend profile. Once you’re equipped with deeper spend intelligence, you’re ready to build the processes that will allow you to graduate from tactical purchasing to strategic sourcing.

And we have you covered there as well. With the integration of Procurement Performance Management, pulling the resources together to launch these processes has never been easier or more transparent.

The Result

• Improved expense management and expense tracking
• Better app functionality and a more intuitive better app experience
• Stronger control over company spending and approvals
• Scalable solutions for large enterprises

So if you’re ready to harness Procurement’s potential for good, let us help you get your spend under management first. Click the button below now to schedule a no-risk demo to see how Spend Intelligence and Procurement Performance Management make it simple.

FAQ: Spend Management and ESG