Spend management

Definition Spend Management

Spend management is the extensive process of managing, tracking, analyzing and improving the spending within an organization. Who orders what from which suppliers? How often does this happen? And does this still fit within the budgets? In short: what is your money being spent on? And is it getting the most out of every euro?

By analyzing spending patterns, you can identify savings opportunities and better manage purchasing policies. 

Why is spend management important?

Spend management, or expense management, is crucial for any organization because it directly impacts financial health and operational efficiency. Here are some key benefits of effective spend management:

1. Cost reduction and control: By understanding where and how money is spent, organizations can eliminate unnecessary costs, negotiate better prices and manage budgets more accurately. This helps reduce waste and optimize spending.

2. Improved cash flow: Good spend management improves cash flow regulation by ensuring that money is spent in the right way and at the right time. This helps in planning future investments and preventing liquidity problems.

3. Increased operational efficiency: By streamlining processes such as procurement and supplier relationship management, organizations can operate faster and more efficiently. This results in less wasted time and resources.

4. Risk management: Spend management helps identify high-risk expenses and suppliers, which is essential for minimizing financial risk and ensuring compliance with both internal and external regulations.

5. Strategic decision-making: With a clear view of expenses, executives can make more informed decisions that support the organization's long-term strategies. These may include expansions, investments or cost reduction initiatives.

6. Transparency and accountability: A robust spend management system increases the transparency of financial transactions within the organization. This promotes a culture of accountability and helps detect fraud and misuse of funds.

7. Market competitiveness: Organizations that manage their expenses effectively can position themselves as more competitive in the marketplace. Cost savings can be turned into price advantages for customers or reinvestment in innovation.

In short, spend management is not only important for cutting costs, but also plays a strategic role in supporting an organization's overall operations and future growth.

Difference between spend management and procurement management

Spend management is a part of procurement management. Procurement management looks a lot broader than just the company's spending (which spend management is mostly about) and also pays attention, for example, to how procurement can contribute to innovation and sustainability goals within the organization. In addition, maintaining good relationships with suppliers and partners is an important part of procurement management.

In addition to spend management, procurement management responsibilities include supplier management, contract management, tender management and, of course, relationship management.

💡 Want to know more? On this page you can read more about procurement management and how to optimize your procurement management >>

Success story: TU Delft reduced ordering costs from 100 to 55 euros per order

TU Delft went to work on spend management. The educational institution wanted more control over expenses, a more user-friendly ordering process and better strategic purchasing.

Read in the guest blog how TU Delft made work of spend management >> 

Managing direct and indirect costs

The costs of your business can be divided into direct and indirect costs.

Direct costs are related to the product you make or the service you provide, such as the cost of raw materials or parts. Most companies have these direct costs well managed by the purchasing department. After all, these costs directly affect the core business. Preferred suppliers are used so that favorable price agreements can be made and there is greater certainty of timely delivery.

Indirect costs are not directly related to your product or service. Consider the purchase of pens and coffee for staff or the cost of marketing. These indirect costs are also called long tail spend. This is because it involves a relatively large number of orders from many different suppliers. The value of each individual order is generally relatively low.

But because it involves so many orders, it still involves a significant amount of money at the bottom line. So the impact of indirect or long tail spend on company finances should not be underestimated. Research by DirectResearch and ICreative shows that, on average, 34% of total company spending involves indirect costs. A considerable share, therefore.

Spend under management versus maverick spend

The same survey reveals that at nearly half of corporates (45 percent), the majority of indirect spending is not under management. Employees then order ad hoc products or services themselves without following a central procurement process. So there is little to no control or supervision over these purchases from the purchasing department. We call this maverick buying.

Maverick buying has several adverse consequences for an organization. For example, there is no control over corporate spending and it is unclear with whom your organization is all working. On average, organizations miss out on about 10 to 20 percent of their intended savings due to maverick spend, according to research by Basware.

In short, it is wise to avoid maverick spend as much as possible and get more spend under management.

 📖 READING TIP: In this blog, you'll read more about why it makes sense to increase the share of spend under management

Effective spend management: best practices

Whether it's just the direct or indirect costs, or both, effective spend management can greatly benefit your company. But how do you go about it?

• Map current spending
  The first step is to map out your business spending. What is being ordered? From which supplier? At what price? How often does it happen? And who makes the purchase? Let spend analytics software help you with this and get a clear picture of where your money is going. 

• Prioritize key products and suppliers
  Once you know what is being purchased from which suppliers, you can start prioritizing them. Which products and services that your organization purchases have the greatest impact on its bottom line? And which ones have a high (or low) supply risk ? Understanding these issues is important in determining what kind of relationship you establish with particular suppliers. Who will be preferred supplier and which party will you part with?

  The Kraljic matrix can help you do this. There are four categories to classify suppliers and the products they sell:

  Non critical items: low risk, low impact on profit
  Leverage items: low risk, high impact on profit
  Bottleneck items: high risk, low impact on profit
  Strategic items: high risk, high impact on profit

• Gain insight into current procurement processes
  The next step is to better understand current procurement processes. Where are the bottlenecks? And how did they arise? Only when you understand this can you start thinking about possible solutions. Lean Six Sigma is a proven method that can provide insight into your processes. The Lean Six Sigma method consists of five steps: Define, Measure, Analyze, Improve and Control.
  

• Centralize purchasing and set clear policies
  Put the purchasing department in the lead on all spend, including long-tail spend. Have them set up agreements with preferred suppliers for all product categories and a clear policy for the rest of the organization.
  

• Make preferred ordering process as simple as possible
  It is important to make it as easy as possible for employees to properly purchase products from the preferred supplier themselves. A purchasing portal or platform, such as Basware Purchase, offers a solution. Think of this asa "corporate webshop" where employees can order products from preferred suppliers themselves for their day-to-day work. Because the purchase is captured and known at the front end of the process, the financial expense is also predictable and the invoice can be processed automatically.

What does ICreative do

We are purchase-to-pay partner for organizations, institutions and governments with large and complex administrations. From procurement management to invoice processing, we are happy to help.

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