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It's more crucial than ever for procurement professionals to have complete visibility and control over their spend. World-class procurement organizations claim to Spend Under Management of up to 96%. The more SUM, the greater the Procurement organization’s influence, and the higher the likelihood of an increased budget to run the operation.
But what does spend have to be subject to so it can be considered managed? This is a relative measure because there is so much variability in how it can be defined.
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Managed Spend is a key procurement metric. Some in the procurement profession would argue that spend is managed when it goes through a preferred, vetted supplier under a Master Services Agreement (MSA). Other thought leaders would say that SUM should also follow the right Procure-to-Pay (P2P) process, including a Purchase Order (PO) before invoice. Another opinion is believing SUM needs to follow a sourcing process with procurement being involved in the negotiation of terms & conditions and the review of the Statement of Work (SOW).
Each of these conditions has value because they:
However, these processes only manage where and how the spend is being sourced and committed, but not the actual management of the spend itself.
Keeping all of this in mind, our definition of Spend Under Management is spend that is committed according to Procurement’s policies and is afterward managed through completion/delivery to ensure adherence to the terms of the engagement, as outlined in an SOW.
According to Ardent Partners every non-compliant dollar of spend costs the enterprise 12-18%, so there is surely value in following a “compliant process.” But it’s also estimated that ineffective supplier governance in services causes over 20% of the services spend to be lost due to a combination of hard and soft value leakage (SirionLabs). This is truly why management of the spend is critical. Consider this scenario:
In this scenario, the compliance box is checked because we have an approved supplier, an MSA with accompanying SOW and a PO before the invoice. But what happens then? It’s at this important juncture, and for the duration of the engagement with the supplier, where true management of the spend is the most critical.
Your compliance metric doesn’t tell you what happened once that engagement began, so then the following scenario unfolds:
This is where I would argue Managed Spend becomes the critical metric of a procurement organization – but only when it’s properly defined and measured to that standard.
You could source a great deal, negotiate favorable terms and what you believe to be a good, competitive price. Then when the Chief Procurement Officer (CPO) runs a spend report and reports to the CEO that 80% of the spend is with 20% of the supply base. Under naïve perspectives, the majority of the spend is managed. If you can also show that there was significant compliance to the PO before the Invoice metric of financial approval/committal, you’ve also checked the process/compliance box.
But many procurement suites aren’t built to effectively give you the details of the buy itself – specifically when it comes to labor and services. The utilization of tools like a Vendor Management System (VMS) allows you to go deeper into the details of the transaction and engagement to know whether the supplier delivered to defined terms, on time and within budget and whether the outputs were any good. Further, and of critical importance to a total talent strategy, they can provide you with visibility to the external workforce that's involved in the delivery of the work.
If a Procurement team has leading-edge, fit-for-purpose technologies and centralized, meaningful data, then spend portfolios can be more effectively monitored and measured. When is the last time you looked to optimize your procurement system, including:
These questions don’t have a one-size-fits-all answer and each organization will have unique needs. But CPOs must strive to stay competitive with innovative digitization strategies and leverage the best technology for the applicable and relevant spend portfolios.
All the steps of the traditional procurement process are important: RFP, contract, requisition and PO. We also know that someone spent a fair amount of time putting together the SOW: negotiating it and completing it. But if you’re not managing the terms of the promised engagement via the SOW, then you’re not really managing the spend. Instead, you’ve only managed the commitment and the process from which the spend is derived. You could be leaving significant money on the table in that fallacy of a SUM metric that produces a favorable result but could be exposing your organization to risk and not holding your suppliers accountable.
QuantumWork Advisory has experts who know how to find the opportunities in the services procurement process to enhance the end-user experience, drive compliance, identify significant cost savings and leverage data to provide practical advice on how to best extract these savings, without losing sight of quality and compliance. We bring urgency to the focus on the extended workforce, to align Procurement, Talent Acquisition and HR in the development of services and labor procurement strategies and to leverage the best technologies to drive change and results.
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