Spend Under Management:
Why It’s the Most Important Measure of Your Procurement Organization &
How to Improve It
Spend Under Management (SUM) is one of the most commonly used but often misunderstood procurement metrics. The key is defining what it means for spend to truly be “under management.” Does it mean purchases are made through the P2P system? Does it mean a purchase order (PO) was used? Does it mean procurement approved the contract? Or does it mean procurement negotiated pricing?
These are all important elements of procurement’s role in the source-to-contract process, but in our view, true Spend Under Management is defined as spend categories in which procurement influences and optimizes vendor selection, cost, quantity, quality, and service levels. Achieving this level of management, or influence, often requires proactive planning, deep category expertise, rigorous analytical capabilities, and most of all, alignment and relationships with stakeholders.
Using this definition, the majority of procurement organizations are well below leading benchmarks. Among the 200 procurement organizations our firm has worked with over the past 24 months, the average Spend Under Management was 17%. Leading procurement organizations strive to achieve 80%+ Spend Under Management.
Why is Spend Under Management so low?
In our experience, there are three primary reasons why Spend Under Management is lagging below benchmark:
- Poor spend visibility – Lack of visibility into spend by business unit, department, category, subcategory, and vendor inhibits procurement’s ability to proactively address both issues and opportunities.
- Reactionary activities – Many procurement organizations are under constant assault with requests from the business—new vendor setups, contract renewals, business support; this list goes on and on.
- Lack of organizational alignment – Last but not least, increasing spend under management requires strong alignment with business partners across functions and divisions.
Why does Spend Under Management matter?
Spend Under Management, as we have defined it, is arguably the most critical procurement metric because it is inextricably tied to almost every other procurement metric or value driver. For discussion, let’s examine how SUM impacts three other common procurement metrics—savings delivered, customer/business partner satisfaction, and risk mitigation:
- Savings Delivered – If we assume that procurement can generate 8-12% savings on unmanaged spend categories, then savings delivered is essentially a byproduct of how much spend procurement is managing.
- Customer/Business Partner Satisfaction – Similarly, our experience shows that SUM and customer satisfaction are positively correlated. When procurement does not truly manage spend for a significant portion of customers or business partners, it is more likely that those customers do not understand procurement’s purpose or objective and therefore are less likely to see value in procurement’s service or partnership.
- Risk Mitigation – For example, if risk mitigation is a key metric, high SUM allows procurement to manage (and minimize) risk on a higher proportion of spend.
How to increase Spend Under Management
From our nearly 10,000 procurement projects, we have mastered the art of increasing Spend Under Management, which lays the groundwork for maximizing the value that procurement is able to drive for every organization. We recommend the following four strategies for any team looking to increase SUM:
- Gain visibility into spend across the organization. Doing this, even at a high level, provides several key value drivers. First, you have a map of the entire organizational spend across divisions and regions. You have thrown a net around the “universe” and have a framework to use in the development of your strategy. Second, procurement can use this data in their meetings with stakeholders as part of their “currency” for relationship development and to position them as valuable business partners. You can learn more about the four most common challenges to gaining spend visibility and how to navigate around them in this guide.
- Build a plan. Press pause on the influx of daily distractions and commit to building out category strategies. For each category, a high-level overview should be developed that includes the subcategories, definitions, major suppliers, key requirements, internal controls and policies, and the category history, along with successes and challenges, and current trends within the category. Following this assessment, your plan should include a category spend analysis, a supplier spend analysis, category segmentation, and project prioritization.
- Gain executive sponsorship and alignment. Sell your executive team on the art of the possible and what procurement can do. There are many ways to go about this, and Phil Ideson at Art of Procurement has a great podcast episode on Getting Executive Buy-In for Procurement Change Initiatives.
- Change what’s needed to accomplish the plan. This could involve realigning resources, investing in third-party support, and having some tough conversations, both within the procurement function and outside of it.
In conclusion, we believe Spend Under Management is the cornerstone metric for high-performing procurement organizations. If you believe your SUM is well below the 80%+ benchmark, reach out to us for a conversation on how to leverage the strategies above to become world-class.