How to Make an Ineffective Spend Strategy an Effective One
The implementation of a Spend Management Vision – a dedicated function within an organization is very common in most large organizations. While most organizations that have a Spend Management Vision and Department realize the benefits and efficiencies, organizations that do not have those functions resident in their organizations probably do not realize the costs of being highly decentralized.
Effective vs. Non-Effective Spend Management Function Should Look Like
What are the key characteristics and attributes of a well performing Spend Management Function? How would we recognize a successful function versus a poorly performing Spend Management function? The chart below will depict the differences. Where is your organization?
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Characteristic |
Effective Spend Strategy |
Ineffective Spend Strategy |
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Mission and Scope |
Control up to 130 expense categories |
Narrow category scope |
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Cost - Profit Impact |
Total spend reduced by 20%+ |
Overpay suppliers by 20%+ |
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Spend Visibility - Plan |
Sourcing plan, spend by supplier, category |
No plan, no spend visibility |
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Financial Strategy |
Long term pricing- terms, least total cost |
Spot buy - focus on price |
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Category Strategies |
Focus on high usage items, processes |
Focus on price |
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Supplier Selection |
Corporate - Narrow - Directed |
Local - Broad - Uncontrolled |
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Supplier Base |
Narrow- optimized - high performing |
Broad – large - no controls |
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Process - Controls |
Policies, Improved control, reduced risk |
Lack controls, increased risk |
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Compliance Audits |
Planned compliance audits |
No audits |
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Resources |
Highly trained, category expertise |
Lack training & expertise |
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Benefits of an Effective Spend Management Strategy
Research on the benefits of centralization of Purchasing or Spend Management function is clear from a number of research organizations. Cost savings, or new profits equal to 25% of spend can be realized with the centralization process. That does not include the benefits associated with the reduction of suppliers and the new efficiencies that will be generated with an optimized, leveraged supplier base. Expected benefits are as follow:
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Area |
Benefits of Effective Strategy |
Costs of Ineffective Strategy |
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Total Profit Impact |
Opportunity = 15% to 25% of spend |
Minimal, short term savings |
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Supplier Costs |
Fewer suppliers, reduced costs |
Many suppliers, additional costs |
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Invoices |
Fewer invoices, reduced back office costs |
Many invoices, additional costs |
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Supplier Compliance |
Price and term compliance measured |
Unknown compliance |
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Price Protection |
Sustainable long-term savings |
Short term savings |
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Business Terms |
Quoted, negotiated terms to reduce costs |
No business terms quoted |
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Processes |
Internal & payment processes reduce costs |
No process focus |
➜ Read Now: 8 Best Practices of Highly Effective Purchasing Operations
How to Implement an Effective Strategy
If you think ahead and envision the Spend Management function as it can, as it should look for your organization, a draft Spend Management Vision is outlined below that is certainly achievable in most if not all organizations.
1. Create a Sourcing Strategy
Up to 130 expense categories are planned, sourced, quoted and negotiated based on a methodical, prioritized plan.
2. Sourcing Approach
Suppliers are quoted based on pricing, terms, service levels, quality, (least total cost) reputation and client relationships where applicable. Preferred Suppliers will be selected, communicated and utilized at the category level and to leverage spend, improve supplier performance and create internal efficiencies
3. Financial Strategy
Pricing, terms, quality and service levels or a least total cost strategy with terms locked for 12, 24- or 36-month terms across all categories will be achieved routinely.
4. Solutions, Implementation and Training
Management will seek input from category experts and influencers for each category, source and quote the categories according to those requirements, then make informed decisions about supplier selections, implementation and training as required.
5. Leadership and Alignment
CEO’s that begin this process, and then promptly delegate the implementation of the Spend Management function to an Executive who isn’t a “believer” or doesn’t share the same vision will be extremely frustrated with the result. A strong leader that is aligned completely with the vision must be charged with leading this effort and utilize change management techniques to develop buy-in to a changing process.
Common Issues when Switching from an Ineffective Spend Strategy to an Effective One
Like any change, the process might not be smooth. These are the most common points of friction I see when an organization undertakes this process – and how to resolve them.
Anticipate Management Challenges
Change is difficult for some folks. When you attempt to centralize functions and, in the process, take authority away from staff that “enjoys” that authority, the change can be difficult. There will be challenges to this process…..I guarantee it. The only question is how long does it take for those challenges to occur and where does it come from? Be prepared for these objections and be prepared to listen, adjust as necessary, but move fully toward implementing your vision.
Prepare for Internal Pushback
Change can be difficult for some. Employees will try to “outshop” Category Owners for better prices on selected items and services in order to re-introduce old suppliers. One can never guarantee the cheapest price on over 10,000 items, but when these issues occur - and they will - then work with the “Preferred Supplier” to reduce the price as much as possible. This strategy will prevent the growth of the supplier base and prevent new inefficiencies from occurring from the addition of new suppliers.
Navigation of Supplier Changes
Suppliers build relationships with your employees, sometime appropriate and sometimes not. When management makes a supplier decision, discussions will come up asking for exceptions in order to utilize “old” suppliers based on price, service, quality, relationships. Management should be prepared for this because if too many exceptions are allowed to occur, supplier optimization and leverage will never occur. Management has to be willing to enforce the Preferred Supplier strategy to realize the spend management vision.
Resolving Supplier Issues
Supplier issues will occur with service, quality problems, incorrect pricing. When those issues occur, it is best to allow the supplier to resolve those issues with an expectation that the issues will be resolved quickly and permanently. Employees unwilling to make changes will look for opportunities for suppliers to fail. When suppliers drop the ball, it is fair to give them an opportunity to resolve the issue to your satisfaction.
Final Thoughts
The implementation of a spend management strategy and vision can have a significant impact on an organizations’ expense structure, profitability and internal efficiencies as evidenced by the many organizations that have that function in place today. Savings or new profits up to 25% of total spend is possible.
Spend Management functions should start with a clear vision of how the organization will perform in terms of scope, process, methods and expected benefits to the organization. The implementation of the Spend Management function is an exercise in change management for those groups that do not have that function today.
While this implementation is a sound strategic move, and will drive new profits and new efficiencies, realize there will be pushback from those uncomfortable with change. The question is this: will your organization allow that pushback to derail positive and necessary change for your organization? Strong management teams will not allow that to happen.
