Addressable Spend: Your Guide to How To Optimize It

Addressable spend is spending that procurement teams should optimize through sourcing and negotiation tactics. Get spend under control with our best practices.
Written by:  Mark Saltarelli
Last Updated:  January 30, 2023
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Addressable Spend: Your Guide to How To Optimize It

As a best practice, your procurement team should have a hand in sourcing and purchasing the supplies, services, and goods your company needs to thrive. A well-run procurement organization sets strong procurement policies, optimizes company spend, secures the supply chain, and ensures your spending initiatives yield the best results. They handle what is called “addressable” spend to ensure the total cost for these expenditures stays competitive. 

Yet many organizations don’t follow best practices when it comes to spending. This results in uncontrolled or unseen spending—driving up total spend, making cycle times longer, and presenting undue burdens on stakeholders procuring their own goods. Tacking addressable spend is one of the best ways to increase cash efficiency and productivity in your organization. 

Today we’ll cover the basics of addressable spend:

What is addressable spend?

Addressable spend is spending that an organization optimizes through procurement activity. 

Companies use procurement activities like competitive analytics, negotiation, volume-based discounting, usage reductions, and strategic sourcing to improve cost efficiency in addressable spend. One or more of these tactics used on current procurement costs may help organizations reduce spending, thereby improving profitability and financial health.

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Addressable vs. non-addressable spend

Addressable spend refers to spend under management within the procurement department, whether or not it is currently in a contract. Therefore, not every dollar is considered “addressable.” 

Non-addressable spend happens outside of the procurement function. It can include:

  • Real estate costs
  • Employee wages and compensation
  • Facilities and overhead costs
  • Taxes
  • Finance costs

Fortunately, the majority of spending that occurs in most organizations does fall under the addressable heading. Taking the time to negotiate and optimize spending on addressable items and contracts can have an immediate and long-lasting positive impact.

What are the benefits of tackling addressable spend?

Taking control of spending through addressable spend tactics positively impacts the bottom line, eliminates common cash leaks, and strengthens your organization's financial performance. The following benefits all improve operational efficiency.

Increased visibility

Organized and well-negotiated contracts bring all your spending into view. They allow you to understand every dollar spent in procurement and make data-driven decisions about future purchasing. You also lower risk and improve performance for vendor contracts. Visibility reduces unfavorable spending and sourcing activities like maverick spend. 

Lower costs

Well-negotiated contracts and aligned spending are significant cash savers. Tackling addressable spend as contracts or subscriptions renew creates opportunities for cost reduction and improved terms for supplies you rely on continually. It also helps identify spending you can cut or minimize to improve cost efficiency. 

Stronger cash position

Bringing more spending under procurement management strengthens the financial position of your organization. This buying power translates into faster time to market, opportunities for investment, and stronger potential to leverage financing to fund growth. 

Better supplier relationships

Transactional supplier relationships make it less likely to reap the best price and contract performance benefits. A natural consequence of improving addressable spend is building stronger, more mutually beneficial relationships with your vendors. Doing so ensures not only that you get the best pricing but also that you have reliable vendor support when issues arise.

Fewer invoices

Addressing spend often results in consolidated vendor relationships, which means that the bulk of your spending happens with fewer vendors supplying a larger percentage of your needs. As a result, there are fewer invoices to process for the supplies and services your organization needs.

5 Ways Your Purchasing Process Is Leaking Cash, (and How to Fix It)
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5 Ways Your Purchasing Process Is Leaking Cash, (and How to Fix It)

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Spend optimization tactics

Optimizing addressable spend doesn’t have to be a big effort. Small changes in contract terms and utilization levels help companies take advantage of significant cost savings opportunities. 

Use one or more of the following tactics when buying supplies or negotiating with vendors to improve your addressable spending outcomes.

Demand management

Addressing usage in your procurement contracts is a fast and effective way of reducing spending costs. This tactic begins with an audit to determine current supply or service usage. For instance, fluctuations in staffing numbers or changes in a product roadmap may reduce the number of licenses or peripherals you need to meet employee demand. If an audit reveals this, work with your supplier to right-size the volume of that product or service. 

On the other hand, you may save money even when product usage has increased over the past contract period. Work with your vendor to secure more advantageous pricing based on the increased volume when usage goes up. Becoming a better customer should offer rewards, not drawbacks.

Category management

Many enterprise organizations implement category management to control costs on their largest procurement projects. However, category management can work for companies of any size. 

Using a category management approach, organizations consolidate the purchasing process in one category to one or more preferred vendors who meet the specifications and capability to deliver those products and services most efficiently. The upside of consolidation is the ability to leverage better pricing.

Incumbent suppliers

When leveraging market conditions, it’s possible to negotiate price, even when dealing with an existing vendor. Using competitive spend analysis and price benchmarking, organizations successfully negotiate better supply pricing off list price as market conditions fluctuate. When negotiating or extending a contract with a supplier, use relevant market data to support optimized pricing.

Supplier performance analysis provides a continuous pulse on your vendors' ability to deliver quality products and services at a competitive price. When considering a new vendor or renewing with a current supplier, consider alternatives to your current provider and use competitive analysis to secure fair pricing.

Negotiation

Work with new or existing suppliers to create better contract and pricing terms. Start with an audit of your current usage and needs, assessing the changes in usage for recurring items or categories. From there, you’ll clearly understand your needs (whether reduced or increased) and have a reference for negotiating better rates with suppliers. As a general rule, increased volume results in more competitive pricing.

Spend reduction

General spend reduction tactics are another easy and effective way to optimize spending within your organization. Conduct an audit to ensure all spending is necessary and beneficial. While a general audit is a larger-scale project, its cost benefits make it a valuable investment.

How to use Order to tackle addressable spend

Implementing procurement software like Order helps organizations contextualize and control their spending. Order makes it easy to understand what products your company relies on to get things done. It also creates a reliable record for purchases that form a solid foundation for better negotiations:

  • Creates total visibility into all spending within your company 
  • Allows the procurement organization to effectively benchmark and compare prices
  • Enables stakeholders to get the supplies they need independently and within spending limits
  • Automates the process of strategic sourcing from a list of preferred vendors 
  • Allows procurement to make good decisions with the help of spend analytics and real-time data

To learn more about bringing your organizational spending under control with a powerful and flexible spend management platform, schedule a demo of Order.

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