The Moveable Feast of Spend Management
Spend management. No other topic in procurement has been discussed more without actually settling upon a concrete or consistent definition. The phrase doesn’t even have any particular intrinsic meaning. You take corporate spend (which is easy to define) and you manage it, which means… ?
Without definition, it is nearly impossible to know if an organization has a spend management program, let alone to know if they have a good one. Attempting to adopt an ‘all inclusive’ perspective on the phrase - i.e. not providing one definition of spend management in order to imply alignment with all perspectives on the phrase – waters down the potential impact and ensures that all investments in spend management are wasted. You can’t be all things to all people and still do a good job – more specificity is required if spend management is to be associated with successful execution and measurable results.
In the absence of an industry standard definition for spend management, each company is left to their own devices to decide what it means and set expectations for what it must accomplish. But this should not be considered a problem. What it means to bring spend under management should be highly tailored to each organization. If you consider what it means to bring something ‘under management’, you quickly arrive at the realization that the ‘management’ in question is highly subject to the context of your company’s current experience, maturity, and the complexity you face.
Spend management could mean implementing a spend analysis solution, putting improved contracts in place, or renegotiating with an incumbent supplier under a more relational model, but it MUST ensure that the maximum value is extracted from the category of spend and relevant supplier relationships. Leaving spend management loosely defined may actually be one of the greatest favors that thought leaders and pundits have done for practitioners.
If the phrase as a whole has no intrinsic meaning, perhaps we can find direction from its individual components. Is it the spend or the management that delivers the majority of the value?
A spend-driven approach to spend management resembles a land grab. If you focus first on the spend, and track every dollar spent by a company and follow it from the beginning to the end of its journey, you will extend far beyond the traditional reach of procurement. In addition, the vast majority of procurement’s time will be spent on non-value added activities that should be handled through automation: spend analysis, sourcing, savings tracking, contract management, category management, supplier management procure-to-pay, etc.
Perhaps the real opportunity is wrapped up in the management aspect of the phrase. Some people in the organization may actually see spend management as ‘procurement plus’ – meaning the traditional procurement scope plus anything else having to do with money. While this approaches the idea that procurement professionals can be generalist or process-oriented value creators, it does not pass our ‘specificity test’ to succeed in the long term.
Since neither of the above examples provides the answers we seek, spend management must be addressed as one cohesive idea, as a concept that is bigger than the sum of its parts. Each organization’s definition must align with why they decided to extend their existing procurement efforts.
The fact that there is not a one-size-fits-all definition for spend management provides all the evidence that is required to characterize it as an elite approach.
Spend management is not a process with a variable beginning and end but rather a customized elevation of traditional procurement approaches that increases impact by fine-tuning strategy, timing, and scope. Spend management is procurement done properly, which means rolling out the right process at the right time and ideally leads to the right decision. Just as importantly, it means doing things in the optimal way for the right reasons, rather than being held back by legacy processes or systems that are too confining to match the dynamic world in which spend is created. Both process and technology need to come together and enable procurement to create value.
Ironically, the elevated, strategic effort associated with spend management starts with the tactical parts of procurement and escalates their contribution to profitability or competitive advantage through careful consideration of the bigger picture. This higher level view might incorporate macro industry trends, advanced data analytics, enterprise-wide initiatives, or the effects of seasonality. Most importantly, it shifts the objective of procurement from negotiating savings to helping the company acquire the products and services they need in the best possible way. Alternately, taking a higher level view might bring several categories of spend together into one project for the cost or efficiency gains associated with managing them at the same time. In al of these cases, the focus is on altering the process procurement uses to get a different kind of result.
As much of a challenge as it may present, rethinking procurement and what it offers to the organization is the best first step towards better defined spend management. Over time, procurement has become closely linked with our concrete deliverables - contracts, savings, supplier relationships, solutions – when in fact, procurement is a process. Procurement, whether we are referring to the team or the activities they engage in, should be considered a vehicle for improved acquisition. Anything that constrains procurement’s ability to be a vehicle, whether it is a confining technology solution or the wrong performance metrics, has to be replaced if procurement is to be elevated to the level of spend management.
Look at how you have analyzed spend, run strategic sourcing projects, and collaborated with stakeholders and suppliers up to this point. Stop for a moment and step back: how could you be doing all of those things better? It is the answer to that question that holds the unique definition of spend management for your organization. And anything that is currently holding you back from taking the ‘better’ approach – technology, skills, hierarchy – is a roadblock to spend management. Clearing them out of the way serves as the first step towards both defining and executing against the strategic promise of spend management.
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