CFO, Why You Too Should Care About Spend Under Management
Bringing more spend under management is a priority for the Chief Procurement Officers. This blog discusses why the metric matters for the Chief Financial Officers, too.
Managing 100% of spend 100% of the time is the ultimate procurement goal. Whether it is achievable or not, is a debate on its own. In any case, bringing more spend under management has become one of the top priorities for modern Chief Procurement Officers (CPOs) and an important measure of procurement performance.
I wonder why “spend under management” has to frequently make way for metrics such as the often inexplicit “savings” when the organizational performance is looked through the eyes of the Chief Financial Officer (CFO). After all, in order to measure savings for instance over a period of time, you have to first establish a reliable frame of reference. Spend under management is a helpful KPI for this exercise, as long as the organization can first agree on what to address when tracking spend under management since we cannot rely on a universally accepted definition.
Before taking a closer look at spend under management from the CFO angle, let’s briefly explore why defining it is challenging in the first place. While it may seem like a simple metric at face value, it is the “…under management” part where opinions vary. Some commonly suggested definitions include spend that passes through an e-procurement system, contract coverage, contract and sourcing policy compliance, spend visibility, or a combination of these. Arguments can be made for and against each of these points. In either case, a failure to adopt a multifaceted approach to spend under management might severely limit your understanding and influence over the spend. This, in turn, increases the risk of erroneous savings tracking.
Why does spend under management matter for Finance?
Let’s broaden the perspective. When an organization is looking to increase spend under management, the focus is often on strategic procurement, for example establishing category strategies, negotiating contracts that are aligned with the market, and selecting preferred suppliers. Or it is on compliance, for example drafting and implementing a sourcing policy, and creating a requisition workflow with approval steps and setting control limits. These responsibilities are often attributed to procurement.
But in the broader source-to-pay chain, we have barely reached the halfway mark. Sure, spend is increasingly under procurement’s influence and a solid platform for capturing savings has been established. But is the organization’s spend truly under management if operational procurement and by extension the Accounts Payable (AP) department are unable to make use of the groundwork laid by sourcing? If you overlook these aspects, you might miss out on capturing the full impact on the bottom line.
It is not rare, that even if the source-to-contract process is in good shape, inefficiencies in everyday purchasing practices eat away the benefits.
Firstly, employees might not use the preferred purchasing channels with the contracted prices and terms if procurement is unable to guide buying behavior. A lack of functionalities and flexibility in the purchasing tools may prove as a barrier for adopting the intended ways of working and, for example, increasing contract compliance. The complexities of a given procurement contract need to be supported by the solutions the buyers have at their disposal, especially when it comes to typically challenging areas such as services procurement.
Secondly, and especially from the CFO’s perspective, inefficiencies in the purchasing process translate into more manual, time-consuming work and costs in the Accounts Payable (AP) department. Without purchase order numbers, goods receipts, and proper service delivery reporting and tracking, automation in the supplier invoice handling process becomes cumbersome.
How to close the source-to-pay loop?
The CFO should look at the concept of spend under management as an automation enabler. Controlled spend together with best practice purchasing processes lay a foundation for Accounts Payable excellence. An efficient AP process – being able to make payments to suppliers on time – should, in turn, be something of interest to the CPO.
If you approach spend under management from this holistic source-to-pay perspective, it is clear to see it is a relevant metric for the entire organization. It should be enough to bring the CPO and the CFO around the same table.
To get started, we have created a best practice framework that covers the important steps that need to be taken both in operational procurement and in finance to get more spend under management (watch a recording of our webinar where we present it). Starting from the requisition workflow and purchasing practices all the way to invoicing and invoice processing, it is designed to map out the source-to-pay process and optimize it for different use cases. With a structured approach, it is easy to discover the common ground between the two functions.