What is Spend Management and Why Is It Important?

The last few years have put the maturity and competencies of procurement organizations to the test. Supply chain shocks caused by pandemics, wars, climate crises, and economic uncertainty require adaptability and fast decisions.

“Companies cannot predict every event – but the companies that are quickest and most strategic to react and make the right decisions will have the competitive advantage against slower-moving peers. The dire need among enterprises for faster data and analytics could not be more apparent amid the current environment,” Sammeli Sammalkorpi, CEO and Co-Founder of Sievo, says. 

Organizations that are slow to adopt new technologies and methodologies are finding it difficult to stay competitive. Effective spend management is crucial for building a resilient supply chain, enhancing future profitability, and maintaining operational flexibility.

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What Is Spend Management?

Spend management refers to managing and continuously improving the company's spending. It is a set of processes and practices that ensure smart procurement decisions and efficient purchasing toward business goals.

• Optimizing purchasing processes to achieve the best total cost of ownership.
• Mitigating risks to identify and address potential supply chain vulnerabilities.
• Aligning spend management with business priorities to support sustainable growth.

Spend Management Process

Most organizations have a source-to-pay process and procurement policies to manage and guide their spending.

Depending on the size and complexity of the organization, the process may be more formal or informal and involve different stakeholders and approval points.

These processes take place in digital environments. Digital workflow enables communication, formal approvals, and follow-up.

Common Spend Management Challenges

Lack of centralization

It is common for department heads to have budget responsibility while the finance team is responsible for the budgeting and its accuracy. Without spend visibility and accurate data, tracking spending in real-time is impossible. This may lead to budgeting hiccups getting closer to the end of the year.

Unclear Purchasing Policies

The procurement policy or purchase policy is the document that states the roles, responsibilities, and boundaries for using company money.

If the purchasing policies are poorly communicated or adopted, teams may not know what is expected of them. Common misunderstandings can lead to process non-compliance, missing approvals, and maverick buying.

Complex Processes

The usual side-effect of unclear policies is the complexity of processes. Processes should be easy to follow and intuitive for company purchasers to follow. If the purchase process is slow and complex, there is a higher likelihood for people to drop off and go maverick.

Frustrated with procurement inefficiencies? Download the full Spend Analysis 101 guide to discover actionable strategies to regain control. 

Human error

Manual processes and handling cause mistakes and errors in data. The more human input is involved, the more errors there will be. The more you streamline purchasing, the better chances you have of avoiding human error and duplication of effort. Purchase catalogs are one way to guide spending and make it less prone to errors.

Fear of transparency

Simply put, some teams and individuals don’t want their colleagues to know how much they spend and where they buy. Transparency enables criticism and benchmarking and can feel uncomfortable. Unfortunately, lack of transparency is not an option when it is about company money.

Value of 360-Degree Spend Management

Procurement organizations aim for a holistic view of their spending. The big picture view enables increased spend visibility, transparency, and spend under management. Understanding your spending and controlling it allows for driving more organizational value.

The goal of spend management is sustainable growth and profitability of your company.

Spend forecasting and accuracy of such forecasts directly impacts financial budgeting, planning, and predicting future profitability.

In addition to financial drivers, spend management enables legal compliance, environmental aspects, social responsibility, and supply risk management.

Spend management value is derived from:

• Greater efficiency through automation of manual processes
• Cost savings by finding the best available prices
• Effective collaboration through supplier relationship management
• Lower supply risks by knowing your contracted suppliers
• Supporting financial budgeting and planning with accurate spend forecasts
• Factoring in ESG of all managed spend.
  
  

Digital Spend Management Solutions

Many software vendors promise a one-stop shop for digital spend management. These source-to-pay (S2P) suites are so-called “full-suite” procurement software solutions.

Alternative solutions include the source-to-contract (S2C) suite covering strategic sourcing activities up to contract signature and the purchase-to-pay (P2P) suite covering purchase ordering, invoicing approvals, and automation.

After two decades of work, digital transformation is still a work in progress in many procurement organizations. Kearney's detailed study on the future of Procurement observes that many procurement organizations are too complex to operate under one linear process. Therefore the solutions need to adapt as well.

Explore solutions built to help you gain full visibility over your company’s spending.

The Future of Spend Management

Spend management practices are changing, thanks to technological improvements and digital transformation.

Agile spend management is powered by real-time data and actionable insights.

Traditionally procurement category analysis and strategy work were done annually or quarterly, depending on the frequency of spend data input. Nowadays, accurate and timely data enables reacting to supply market changes and harvesting opportunities as they emerge.

Automating spend management processes enables more time for strategic activities, turning insights into action, and collaboration.

Procurement organizations that have the visibility and the tools to manage their spend can see their impact on the bottom line.

Header photo by: Jezael Melgoza