Spend management is an important practice that can help procurement teams reduce costs, drive growth, and improve the business’s profit margin. Yet when approaching spend management, companies often neglect to take their tail spend into consideration. Without incorporating tail spend it is almost impossible to get your entire spend under control. Here’s where digital tools can help. Spend management software can provide much-needed clarity and control over an organization’s cash flow—including its tail spend. Here’s how spend management software can help you add value to your organization, beat the competition and grow sustainably.
What is spend management?
It’s pretty easy to guess from its name what spend management is… It’s a procurement department function for ensuring that your organization’s overall spend is managed to budget and best practices. Spend management is about overseeing supplier relationships to get the most out of your vendors. It’s about identifying and tracking the money a company spends so that each dollar is not only accounted for but is also used to maximum effect.
Best practice spend management entails planning your spend throughout the year, but that’s just the beginning. Spend management needs to be incorporated into every facet of the business: budgeting, sourcing, contract management, order requisition, inventory management, and even product development so that your business has the items they need when they need them. This big-picture view of an organization’s spending leads to innumerable benefits, including better efficiency, lower costs and risk, more effective collaboration between departments, and overall improved productivity.
Yet comprehensive management of spend can be difficult without integrating procurement tools with the organization’s wider systems—including its enterprise resource planning (ERP) software and its financial and invoicing systems. Best practice spend management requires not just that systems talk to each other, but also that they make use of automation and holistic data analysis as well (more on this later).
Particularly problematic for many companies is bringing small or discretionary spends under procurement’s wing. Often things like stationary supplies or other discretionary spend flies under the procurement team’s radar. This so-called tail spend happens when individuals—maybe in field offices around the country—buy things without using purchase orders or other procurement spending tools. They may jump on Amazon to buy a laptop charger, or pop down to Office Depot to grab some more printer paper.
Where tail spend fits into spend management—are they the same?
Tail spend—purchases that aren’t managed by the procurement team—adds up. We reckon it’s probably about 20% of an organization’s overall spend, but it could be a lot more. Any way you look at it, the myriad spot-buys and indirect purchases your company makes add up to a lot of activity that needs to be managed. Tail spend management should be a vital part of a company’s overall spend management process.
Benefits of spend management software
By some estimates, firms that use digital tools to manage their tail spend can cut overall annual expenditures by 5% to 10%. That’s a big incentive to bring spending under the management of the procurement team. And spend management software aims to do just that.
Spend management software is any tool that helps manage, track and analyze an organization’s expenses—everything from paperclips to large real estate purchases and beyond. These tools help companies make procurement and sourcing decisions that are good for both their bottom line and their efficiency. Spend management software helps companies maximize value from company spend while decreasing costs, mitigating risk and improving vendor relationships.
In the case of tail spend and other discretionary purchases, the best tools automatically funnel non-compliant spend to preferred suppliers. They also make sure that purchases adhere to any policies the company may have on what to buy, when and from whom.
Spend management software helps you bring all your spend under control—including tail spend. They use data to competitively source items without any additional work needing to be done by the procurement team, or buyers from around the organization. They use automation to find the right items from approved suppliers, so that companies can benefit from better prices from compliant vendors.
Smart spend management tools also let you analyze your spend to see not only what’s happened in the past, but what you can do better in the future. With the analytics of a good spend management solution, you can develop key performance indicators that help you measure your progress towards better spend management.
What to look for in spend management software
Good spend management software gives you both a bird’s eye view of your organization’s spend as well as the granular detail of every small purchase. When evaluating spend management tools, ensure the one you choose provides a real time tracking analysis tool so that you don’t have to wait until the end of the reporting period to evaluate expenditure. With spend management, spend visibility is the name of the game. The best tools provide not only a quick and simple overview of your situation, but also the ability to drill down on spend categories, and even individual purchases.
Just as important as a feature of good spend management software is automation. Without automation, the procurement team is simply making more work for themselves. Purchasing workflow automation makes it easier for everyone in the company to stay compliant with their purchases. Automated reconciliation makes reporting and analysis easier and more accurate.
Finally, it’s important that whatever software you choose allows you to easily implement clear processes and policies for how your employees and stakeholders can make purchases. If the policies aren’t easy to understand and follow, it will be difficult for staff to adhere to them.
With the right choice comes great benefits
Choosing the right spend management system will have an incredible effect on your organization and its people. The right software can help you eliminate unnecessary purchases, catch duplicate invoices and avoid late fees. The procurement team will be empowered by their newfound ability to negotiate lower prices and volume discounts, secure lower prices by improving supplier relationships and reduce costs by canceling unwanted contract renewals.
Ultimately, look for a solution that offers a quick, secure and convenient procure-to-pay process.
For more advice on spend management, check out Fairmarkit’s blog, The Source.