Why Enterprise Spend Management Must Come Before ESG
With climate change and various social issues taking up more room in social consciousness every year, it was inevitable that businesses would find themselves involved, and for good reason. 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.
Yet while ESG is a critical issue, it’s also an advanced one. If Procurement doesn’t have the basics of enterprise spend management nailed down with reliable processes 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. 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.
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.
In addition, business spending problems naturally worsen when companies don’t have expense management processes in place. 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.
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, you open the business to several supply chain-related financial issues.
Contracts are crucial
Contracts are at the heart of managing spend and protecting the business’ interests. They can introduce significant costs savings by reducing per-unit prices and also mitigate risk by making you a preferred customer when scarcity rears its head. 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 impact ESG issues without control over vendor spend is an exercise in futility 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.
Unfortunately, many companies struggle to manage their expenses holistically because the spend management software they rely on leaves them with about 40-60% of their spend data accounted for. 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. 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.
