What is Spend Management and Why Should it be Your Priority?
Before ESG, fair trade, and non-financial impact, Procurement existed to help companies purchase goods and services in reliable, thoughtful ways. Over the past few years though, the function has taken on new responsibilities that have made Procurement’s core mission less clear. As a result, many teams have declared that they’re focused on moving beyond tactical purchasing to strategic sourcing. However, this has left many teams with questions. What is spend management? How does it fit into Procurement’s evolving priorities? Why does spend management matter? We’ll answer each question here.
What is spend management?
Procurement departments are similar to shepherds. Their job is to make sure that neither the group nor any of its members wander off or get themselves into trouble. Similarly, spend management is the ongoing process of overseeing and, at times, controlling what an organization buys, how much it costs, and who it buys from.
It’s an in-depth process that revolves around forming relationships with internal stakeholders, executive leaders, suppliers, and entire business units to ensure that the company is aware of what it’s buying and that purchasing doesn’t get out of control.
There are several pillars of spend management. They include:
- Spend analysis – The process of evaluating spend data to find cost savings opportunities and operational breakdowns that are increasing costs.
- Contracts – Entering agreements with suppliers for better per-unit prices in exchange for guaranteed business.
- Category management – Managing spend in a purchasing category, like shipping or MRO. Category management is essentially the spend management process applied to a single category.
- Supplier relationship management – The process of building and cultivating relationships with suppliers to maintain fulfillment rates, set the stage for better contracts, and protect the company from supply shortages.
Each of these pillars comes together to help Procurement lower costs, prevent cost increases, and build supply chains that the business can rely on. So, what is spend management? It’s basically playing shepherd in order to drive a company’s financial impact.
How does spend management fit into Procurement’s priorities?
Spend management is at the heart of everything Procurement does. Without it, there are no overarching processes or governing bodies to ensure that the purchasing process actually works. Buying the goods and services a business needs to run breaks down into something resembling the Wild West or a farm with no fences. Every department is free to do whatever it sees fit, which as you can imagine, leads to chaos.
Therefore, spend management is one of the most important responsibilities a procurement team can have. For reasons we’ll discuss soon, it even has to come before non-financial matters like risk and ESG. Otherwise, teams are effectively neglecting Procurement’s core function, and if no one is managing spend, spend will find a way to manage the business.
Why is spend management important?
Now that you understand what spend management is and where it fits into Procurement’s priorities, let’s explore why it matters. At a high-level, managing spend stands in the way of uncontrolled purchasing, but there are several specific ways it accomplishes this goal. Here are three of the most important ones.
Increasing company productivity
As we’ve established, not managing spend invites mismanagement, confusion, and general inefficiency into the procurement process. However, spend management doesn’t only protect companies. It also helps them achieve better results overall.
This is because purchasing plays a role in everything a company does. Therefore, managing spend allows the function to create processes that improve nearly every aspect of a company’s operations. For example, when Procurement contracts with suppliers, it saves the business money and ensures that teams have the goods and services they need, when they need them. When the function analyzes spend, it can catch the warning signs of cost increases and find ways to avert or lessen their impact early. Even just working with business unit leaders on projects can create better workflows that benefit every purchaser in the organization. When Procurement is aware of spend and manages it effectively, the entire company flourishes as a result.
Clearing the way for strategic initiatives
Because spend management prevents disaster and improves operations, there’s no way to tackle strategic initiatives without it. Trying is equivalent to running before you can walk—sheer momentum may carry you for a few steps, but you’re going to fall, and hard.
Of course, that doesn’t mean that teams can’t turn to ESG until they’ve mastered 100% of their spend. But it does mean that they should have a large amount of their spend under management first. Otherwise they risk letting a Wild West scenario develop. In many cases that can be more damaging than letting one continue, because it erodes the organization’s trust in Procurement and introduces new purchasing problems while the function is in the middle of working on large strategic projects.
Getting spend under management before turning to strategic initiatives also just makes the following projects far easier. If a team already manages subcategory spend and vendor relationships, then searching for diverse suppliers will be a straightforward process. They won’t have to unravel confusing email chains and talk to multiple stakeholders just to kick off improvement projects.
The perfect collaborative tool
Finally, when Procurement and other business units work together, they can produce results neither could ever achieve on their own. Managing spend facilitates this kind of collaboration in two ways.
First, spend management paves the way for collaboration. When costs and purchases are under control, departmental trust can grow because Procurement doesn’t have to shut projects or purchases down. Additionally, having spend under control gives teams something to work with Procurement on instead of reacting to problems together.
Secondly, the process creates lines of communication between Procurement and individual business units. As teams work with Procurement to initially place spend under management, they’ll naturally exchange ideas and brainstorm projects. The longer this continues, the bigger and more impactful the projects will be. But what makes this special is that the projects the departments tackle will be bigger than them both because they’re sharing their resources to accomplish them.
Like a fence on a farm, managing spend helps businesses operate within safe boundaries. So, there’s no way to answer the question “What is spend management” in just a few words. It touches so many different parts of a business that giving it a simple definition would be misleading.
Businesses that manage their spend analyze it; they pursue contracts to control it; they optimize categories to minimize it; and they build lasting relationships with vendors to make it go as far as possible. In short, managing spend from a Procurement perspective is about chasing improvement at every possible turn. So, what is spend management? It’s the vital, ongoing process that is the foundation and guiding principle for everything else Procurement does.