What is Spend Under Management?

Q: What is Spend Under Management?

Spend Under Management measures the percentage of an organization's total spending that is controlled through formal procurement processes, optimizing cost management and compliance.

Definition

Spend Under Management (SUM) is a key performance indicator (KPI) that tracks the percentage of an organization's total spend that is actively managed through formal procurement processes. This metric reflects how much of the company's spending is under the control of procurement teams, which helps to ensure that the organization maximizes value, reduces costs, and maintains compliance with internal policies and external regulations. A higher SUM suggests greater visibility and control over spending, allowing the business to optimize its purchasing decisions.

How It Works

Spend Under Management is calculated by dividing the total spend that is managed through approved procurement processes by the total spend for a given period, then multiplying by 100 to get a percentage. The formula is as follows:

SUM = (Managed Spend / Total Spend) × 100

Managed spend refers to the portion of spending that goes through formal procurement channels such as contracts, purchase orders, and approved supplier agreements. Total spend includes all company expenditures, both managed and unmanaged. A higher SUM indicates that a larger portion of the organization’s spend is under control, while a lower SUM suggests that a significant portion of spending may be uncontrolled or handled outside of the formal procurement processes.

Core Components of Spend Under Management

Several components contribute to the calculation and effectiveness of Spend Under Management, including:

Non-Discretionary Spend Management: This involves tracking essential spending that cannot easily be altered or delayed, such as utilities, taxes, and salaries, ensuring it’s managed properly.
Tail Spend Management: Managing low-value or infrequent purchases, which are often overlooked but can add up to significant costs. Ensuring tail spend is monitored and managed effectively improves overall SUM.
Contract Lifecycle Management: Ensuring that contracts with suppliers are tracked and managed throughout their lifecycle to capture all relevant data on spending, terms, and performance.
Vendor Management: Optimizing relationships with suppliers to ensure that procurement decisions are made based on value, rather than convenience or out-of-policy decisions.

Practical Use Cases in Business

Tracking Spend Under Management helps businesses optimize procurement processes and increase financial transparency. Some practical use cases include:

Using SUM metrics to improve non-discretionary spend management by ensuring that even mandatory expenditures are tracked and aligned with procurement guidelines to avoid inefficiencies.
Monitoring tail spend management to consolidate purchases and reduce fragmented spending, ensuring that smaller purchases are also managed and contracted appropriately.
Aligning spend management with corporate financial goals through enterprise performance management (EPM) alignment to make sure that all spend supports overall strategic objectives and not just operational needs.

Advantages and Best Practices

Spend Under Management provides several key advantages:

Cost Optimization: By controlling more spend through formal procurement channels, companies can negotiate better pricing and terms with suppliers, resulting in overall cost savings.
Improved Compliance: Having greater visibility into spending allows businesses to ensure that all purchases are compliant with internal policies and external regulations, such as those in treasury management system (TMS) integration.
Risk Mitigation: Managing spend through formal channels reduces the risk of fraud, waste, and unapproved purchases, ensuring better financial control.

Best practices for improving Spend Under Management include:

Implementing prescriptive analytics (management view) to gain actionable insights into spending patterns and identify areas for improvement in procurement practices.
Encouraging collaboration between procurement, finance, and other departments to ensure that all spending is captured and aligned with company policies.
Integrating procurement data with other financial systems to create a more unified and transparent spend management approach, improving decision-making.

Summary

Spend Under Management is a vital metric for organizations that want to optimize their procurement processes, improve cost efficiency, and ensure compliance with financial policies. By tracking how much of the total spend is being managed through formal procurement channels, businesses can better control their expenses, negotiate better terms with suppliers, and reduce the risk of fraud or overspending. Through effective management of non-discretionary spend, tail spend, and vendor relationships, businesses can enhance their financial performance and improve overall procurement efficiency.