This week’s eSourcing Wiki-Wednesday topic is Metrics for the Rest of Us – an article that breaks metrics down into Cost Avoidance and Reduction, Process Improvement, Operations, Customer Service, and Asset Utilization.
The last of the Cost reduction and avoidance metrics, “Spend Under Management” is defined as: Total Spend Under Management / Total Spend.
As noted in the eSourcing Wiki, this is a straightforward calculation. The problem is not with our ability to divide one number by another, but in defining the inputs to the equation. Total spend should be easy, although your department may use either total annual spend or total addressable spend (which is likely to exclude taxes and salaries). The real question is to decide what spend is designated as being ‘under management’.
As Torbjörn Thorsén noted in a CapGemini post from last week:
"Although I understand why it is important, the fuzziness of spend under management actually makes the metric stumble on its own merit. This is because while spend may be crystal clear and easily defined, under management is something that can be defined in a million different ways.
Does spend under management imply that spend is consistently managed using a well defined category management process? Or does it mean that the procurement organization has a contracted and preferred supplier in place (although no one is really sure if the contract is being used or not)? Or does the truth fall somewhere in between? Regardless, the clash between what is clear and simple (the spend part) and what is actually unclear and complicated(the under management part) requires those who want to effectively benchmark their performance to do quite a bit of thinking."
So to help the rest of us get started on our ‘quite a bit of thinking’, I’ve pulled together some quotes and definitions on spend under management.
Quote 1: Andrew Bartolini, as quoted in a guest post by Caroline Robinson on the blog, “Supply Excellence” in March 2010
"Now, what does “managing the spend” mean? And I think we’re in the early parts of this transformation, but as you look to answer that question for yourself, you should ask if you have visibility, first and foremost, into the spend. Maybe I don’t have the buy-in of the stakeholders, but can I see that there’s an opportunity for sourcing? Am I sourcing it? Do I have visibility into the contracts? Is there a system of record that I’m able to see the transactions as they occur? We don’t play so hard and fast with the definition because some smaller organizations don’t have eProcurement systems. It’s really the sense of how much of a potential impact a procurement organization can have."
Quote 2: Lora Cecere of AMR Research as quoted on Spend Matters, August 2005
"Spend that is currently under control or management. Control includes the use of structured events (RFX, auctions), contract management, preferred suppliers with active supplier development programs, and spend analysis/visibility involving spend data management (definition below) and the use of third-party content."
Quote 3: Spend Radar post on their blog, SpendZen, June 2011
"Spend management incorporates all aspects of spend analysis, spend categorization/spend classification, spend data management and spend performance management. Spend management is an ongoing process and a company-wide initiative to control and optimize a company’s spend, effectively improving their bottom line."
Quote 4: Canda Rozier, former SVP/Chief Procurement Officer at First Data for the Shared Services & Outsourcing Network blog
"Spend under management is one of the cornerstones of a robust procurement function. This means that an expenditure has come through a defined procurement and sourcing process, has been competitively sourced, and is recorded in a repository of analytical data for use in future expenditures. As a company’s spend “under management” increases, so does the ability to reduce costs, forecast expenses, and manage vendors."
So we can take a few things away from the combination of the above quotes:
- Getting spend under management is a primary objective of all procurement departments
- Managed spend has been through a structured process, which may include RFx or negotiation and ends in an agreement or contract
- Procurement has visibility to the transaction level for managed spend
- Keeping spend under management is just as important as getting spend under management; it is an ongoing process, not a step that can be completed
Interested in more? For detailed information on processes and success factors, we recommend the book ‘Managing Indirect Spend’ by William Dorn and Joe Payne from SourceOne.