Author: CEO & Founder of Trusli, Gloria Qiao
1. What Is Spend Under Management
Spend Under Management, sometimes known as “SUM”, means the portion of the spend that a procurement team or strategic sourcing team actively manages. So mathematically, it’s a percentage of the “Spend Under Management” over “Total Spend”. Let’s discuss these two portions separately.
On the bottom, we need to know “total spend”, which oftentimes means all the dollars that the company spends on various things. For a company that has a build of materials (a “BOM”) and/or produces physical goods, this means a combination of direct spend, i.e. money spent on the BOM, as well as indirect spend, i.e. money spent on other things that don’t directly go into the goods or merchandise that the company spends, such as software, services, and other expenses like travel expenses or IT expenses (can include both hardware and software). However, the “spend” could include spend that can often be overlooked, such as subscriptions that people sign up for and forget about, other things that people just put on a credit card, things that get paid by accounts payable without a PO, etc. More on this in the next section.
On the top, we need to know what a procurement team is managing. This could be actively-managed spend deal by deal, contract by contract. This could also include the portion of the spend that a procurement team has put in a system or services to oversee, such as tail spend, travel expenses, etc.
To derive an accurate understanding of this metric, a CFO or a procurement leader must have a deep and thorough understanding of both portions. If we leave things out of total spend, we may have a false positive feeling that things are under control, while overlooking the portion of the spend that goes out of the door without any oversight.
On the flip side, if we don’t have a good sense of how much spend we are actively managing by tracking all the deals and contracts that the procurement team is actually managing, including the portion that we are managing by deploying systems or other side services, we may become overly pessimistic and unable to show the full picture of the amount of effort that we are putting in to manage our spend.
In the grand scheme of things, if a chief procurement officer can report on a 80% spend under management, that’s an excellent percentage to hit, as it shows that we are focusing on the majority of our spend and most of the big ticket items are under supervision.
For a young company, even hitting a 50% spend under management is a great place to start.
2. Why is Spend Under Management So Hard to Keep Track Of
As alluded to briefly above, spend under management is hard to keep track of for several reasons.
First, many companies don’t even have a dedicated procurement team, or even if they do have a one- or two-person team, they are not aware of the existence of this metric.
This means the entire spend is in the dark, unsupervised, not measured, and out of control. This means everyone and no one is doing contract negotiation and pricing negotiation, every one and no one is actually “procuring”, and naturally, we leave a lot of money on the table. Many of you may be shocked to learn that this is not uncommon for many young startups. And if we don’t measure, we can’t control it.
Second, the bottom of this metric, “Total Spend”, can be tricky to track. As I mentioned above, the spend can take on so many forms that it’s very easy to lose track of how much money we are actually spending. Many companies use services such as “bill.com” in addition to an ERP system, and they may forget that the purchases on bill.com are spend as well. Other companies have many “P-Cards”, which should be used for expenses but can be used for many actual purchases such as small tools, subscriptions, memberships, etc. In addition, we have also seen so many purchases that are just “paid” by accounts payable, that are not properly tracked and logged as “purchases.” In procurement jargon, “non-PO backed” purchases. So for a procurement leader or a CFO, to dig deep in all these areas and collect data on ALL spend is the first step to get a handle on spend under management.
Third, the top half of this metric, while seemingly straightforward, may or may not be accurately tracked and reported on. Many procurement teams don’t have a good system to keep track of how many deals they manage and how much they are actually overseeing. They often need to dive into systems such as Coupa to get this information, which oftentimes may or may not be accurate, and this exercise alone can be very time consuming and tedious.
Here at Trusli, we have built out an end-to-end procure-to-contract system to help you keep track of your spend under management. No correlating deals with coupa. No spreadsheets. We can track all your deals in real time, end to end, with a click of a button.
Last but not least, if procurement leaders put in systems or services in place, such as travel expense management or tail spend management, these should be tracked as spend under management as well. We can integrate with all these systems to keep your total spend under management in one place.
3. What Does “Managing Spend” Mean
Now that we know the “what”, the “how” matters too.
A common frustration for procurement managers is to get a last minute purchase requisition that’s “urgent”, and the team must have it immediately.
In a case like this, even though they have a chance to “look at” the deal, it’s not truly “Spend Under Management”.
For a procurement team to properly manage the spend, they must 1) get a heads up of what the team needs, 2) have the time and leverage to select an appropriate supplier among a few, if not single sourced and 3) and have the time and leverage to appropriately negotiate the commercial and other legal terms for the deal.
If any of these conditions are not met, even if they are informed of the deal, they are not really “managing” the spend. The procurement team loses all the leverage if, for example, the engineering team tells the supplier that they are chosen, or the pricing is ok, or they can live with a certain warranty term. Procurement teams must be given ample time and space to properly manage the deals and suppliers.
That’s why here at Trusli, we are trying to solve this problem by giving the engineering team the right forum and channel to inform the procurement team about their significant purchases ahead of time, so that the procurement team is engaged proactively, as opposed to being told last minute that something must be purchased under the gun. This allows the procurement team to have the right infrastructure to properly manage the deals and ultimately their spend under management.
4. What Benefits Can Increased Spend Under Management Bring the Company
Needless to say, once a procurement leader knows what the total spend and spend under management is, they can build, track, and assess how to properly manage the spend.
For a team that the spend under management is very low, building a core team of procurement leaders is a great place to start. This may not be an entire full-blown team out of the gate. This can be spearheaded by one or two experienced procurement leaders, and supplemented with outsourced services as well as systems such as Trusli, thus reducing the dedicated full-time headcount to a minimum.
Once a team is up and running, by keeping track of the spend under management, combined with the savings % for deals under management, a CFO or procurement leader can easily access and construct the team as needed. For example, let’s assume for each dollar under management, the team can save 40%. So if our current spend under management is only 50%, by increasing the spend under management by 10%, we can save 4% more. For a company whose total spend is $100M a year, that’s a $4M savings. Is this worth a 5-person procurement team? Probably. Is this worth the few hundred thousand dollars we spend on infrastructure and productivity? You bet.
Ultimately, we can’t deliver on what we don’t measure. Getting to know the details of spend under management is the key to properly managing spend. Then, by keeping tight metrics regularly, we can measure how the team is doing and how we can increase the spend under management, as well as savings. For a company with a physical product and a BOM, this can hugely increase the margins, thus dramatically changing the bottom line. In the case procurement is no longer just a cost center, ultimately it becomes a profit center.
Thoughts or questions? Leave a comment or shoot us an email at firstname.lastname@example.org. We always welcome a healthy discussion and debate.