Finance and Procurement leaders dread the end-of-month (or end-of-contract) surprises lurking on corporate cards and in expense reports. Even when the purchases are deemed necessary, they often escape compliance and legal review. They also make it more difficult to achieve spend optimization objectives because they lack the leverage of well-managed negotiations.
Getting spend under management has the potential to improve cost efficiency significantly. It increases visibility into spending trends and insights. But it requires some groundwork and buyer education.
Today, we’ll discuss a procurement strategy to bring more of your procurement spend under management, and we’ll answer the following questions about the process:
- What is unmanaged spend?
- Why is bringing spend under management important?
- How can a business improve their percentage of spend under management?
- How can technology help bring more spend under management?
What is unmanaged spend?
Unmanaged spend is purchasing that happens outside your organization’s procurement process or control. These purchases may happen on a corporate card, in an expense report, or through an undocumented buying process. The difficulty of unmanaged spend is that it limits Procurement’s ability to track it, report on it, or mitigate it if it’s deemed unnecessary.
Unmanaged spend is sometimes further segmented into addressable spend, meaning spending that Procurement can manage and improve. While your total spend may not all be Procurement-managed, the vast majority of spending within the organization can be better managed through the procurement department.
Types of unmanaged spend
Spending comes in all forms. Everything from a catered lunch to a new SaaS tool incurs costs that are more efficient if they’re managed through Procurement.
There are a few common categories of spend that often go unmanaged. Increasing the percentage of these types of spend under management will significantly improve cash performance:
- Indirect spend: This non-project-related spending (also called tail spend) refers to small-dollar, overhead spending that keeps the company in motion. This spending category is made up of supplies, services, travel, and incidental expenses. Considered individually, these purchases are often small, but cumulatively, tail spend is often one of the most impactful components of spending. Bringing more of your tail spend under management is key to better cash efficiency.
- Maverick spend: This is spending that occurs outside the procurement process, often on a corporate card or within an expense report. Often, these purchases are made with good intentions by employees who believe they are getting a good deal. Unfortunately, most buyers lack the larger contract or spending context to make decisions effectively. In some cases, maverick purchases may even create a breach of contract with established suppliers with whom an exclusive or volume purchase agreement has been formed.
- Treasury spend: This is non-procurement spending, such as foreign exchange (FOREX) payments that require a currency conversion. These transactions are often used for large-dollar, single purchases or spending from off-shore suppliers.
Why is it important to increase spend under management?
Unmanaged spend does not necessarily mean unauthorized spend (for instance, in the case of spot buys approved by a direct manager). But this type of spending often robs the organization of leverage in negotiating price and visibility in conducting spend management and analysis.
Better cost efficiency
When Procurement has visibility into spending, it can better control transactions and more effectively manage costs through volume pricing, effective negotiation, exclusive supplier arrangements, and more effective inventory management. Visible and well-crafted supplier management reduces order duplication, wasted spend, and overhead costs like invoice processing fees and employee productivity costs.
Procurement can ensure a high level of contract management with spending it controls. This includes internal compliance (ensuring the organization holds up its end of the agreement) and compliance from your suppliers. Better contract performance results in stronger supplier relationships that yield dividends, such as advantageous contract terms, flexibility in payment arrangements, and more.
Third-party risk is an expensive problem. It results in lost revenue and costs for mitigation. Bringing spending under management allows closer monitoring for supplier non-compliance and fraud, reducing the company’s overall risk profile. The increased visibility also creates an inhospitable environment for fraudulent activity.
How to increase spend under management
Organizations that have struggled with unmanaged spend often struggle with the move to better budgetary controls. Using these best practices alleviates some friction when establishing better spend management practices.
Formalize the purchasing process
A formal purchasing process sets the stage for better spend management. It tells your stakeholders the exact expectations for different spending categories and outlines processes to ensure these expectations are met. Work with interested departments (Finance, Legal, and Security) to establish guidelines for every type of spending.
Build buyer communication
Employees want to do the right thing where spending is concerned. In many cases, unmanaged spend comes from inadequate buyer education.
Once Procurement and Finance formalize the buying process, be sure employees understand the process, have clear guidelines for performing within policy, and have a method for getting their questions answered in cases of confusion. With a clear, actionable process that is thoroughly communicated to every buyer, managing the company’s spend becomes far easier. Make this spending education part of the onboarding process to ensure your process continues to scale with the company.
Use workflows to increase visibility
Creating a standard intake and approval workflow gives everyone a starting point for making requests. It ensures all key departments have the visibility and process to approve requests or conduct research. It also ensures Finance approves all spending, and Procurement captures the necessary information for spend analysis, supplier performance monitoring, order tracking, and category management.
Increase strategic sourcing
Building a procurement process with a preferred vendor list drastically reduces the opportunity for out-of-process buying. It also improves the overall cash efficiency of your procurement practice. Strategically sourced goods provide better pricing, more supply chain resilience, higher levels of sustainability, lower risk, and better business outcomes.
Establish procurement metrics
Defining your spend goals and tracking your results via KPIs greatly increases the success of your program. It outlines the most important outcomes for the procurement team and larger organization. Note that this may not always be bottom-line cost savings.
Use software to increase spend under management
Totally managing procurement spend is a challenge, especially in fast-growing organizations with multiple locations. Implementing spend management software like Order.co helps procurement teams stay current with all spending, manage compliance issues, and conduct spend analysis to ensure efficient cash utilization.
Order.co streamlines and automates the procurement and payment process with features that remove manual tasks and improve the accuracy of your spend management data:
- A centralized purchasing platform for all supply purchases that gives buyers independence while providing vendor guidance and dynamic spending limits
- Automation for approvals to route every purchase request to the required reviewers and ensure a timely and compliant purchase process
- Line-level general ledger (GL) coding for correct allocation of purchases every time
- Three-way matching, invoice reconciliation, and automated payments to eliminate manual accounts payable processes
- Spend analysis tools that increase your organization’s spend visibility and enable data-driven decision making
Bringing spend under management becomes easier when you use a platform designed to streamline the process and improve financial outcomes. Get started by scheduling a demo of Order.co.
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