Enterprise spend management: Where does the money go?
Enterprise spend management is one of the three legs of supply-side business performance, along with supplier relationship management (SRM) and product lifecycle information management. More of a chief financial officer-oriented approach to supply-side process management than SRM, enterprise spend management focuses on the capture of information about expenditures. This includes procurement, expense management, and internal spending on development and maintenance.
Many organisations are attempting to cut costs to offset flat revenues, but they often fail to intelligently manage business expenses because they lack an enterprise spending strategy (and tools). Many firms do not have an understanding of enterprise spending; consequently, they do not leverage a consolidated spend with key suppliers and cannot compare their spending behaviour to industry benchmarks.
Enterprise spend management begins with developing an understanding of what an organisation is spending, using purchasing analytics to determine spending by expense/capital type and vendor. According to META Group analyst John Van Decker: "CFOs are concerned about consistently managing spending across the enterprise, which includes visibility across diverse ERP and best-of-breed solutions and all spending categories (eg, travel; commodity goods and services; projects; maintenance, repair and operations [MRO]; direct materials)."
Contract management is another key component of enterprise spend management. CFOs often do not have visibility into contracts because they are kept in multiple different storage systems - or, worse, on paper - making them inaccessible. Companies need contract management solutions that can reach across those repositories to help managers gain a comprehensive understanding of the trade agreements under which the enterprise operates.
Spend management also requires principles and governance to enforce compliance. This means establishing methods of monitoring spending against the budget and providing appropriate escalation processes for dealing with spending that exceeds budget levels. Such measures can include anything from clear rules for routing outlying isolated events to the proper individuals for resolution, to hard stops on spending that exceeds specific limits. To execute this new strategy, a firm will need to re-engineer procurement processes (including adopting purchasing and front-end e-procurement processes) and manage resulting change, enable suppliers to participate in automated processes, and integrate contract information into ERP processes to ensure compliance.
Much of this sounds easy, and it is, when the transactions are simple. For instance, it is simple to manage a vendor transaction if the vendor sends the right item in the right quantity on time, if the shipment works properly and is not damaged, if no mistakes were made on the bill, and if there are no credits or other billing adjustments. However, in reality, transactions are often not that simple. As a result, spend management provides a great deal of opportunity for improvement, and automation techniques can result in real cost savings and possible headcount reductions.
Implementing spend management can be complex - in part because it involves numerous different groups within the organisation - the CFO`s office, the CTO and/or CIO, and the supply chain managers, among others. The object is to blend money management, transactional operations, procurement, product, direct or indirect materials, and performance measurement into a continuous business improvement initiative that goes beyond supply chain management to focus on managing expenses. Firms must develop integrated approaches to spend management strategies and make a decision whether to leverage an integrated suite approach (eg, SRM, ERP, ESM) or piece together and maintain the application (and business) integration for a set of point solutions.
USER ACTION: Ineffective spend management processes will cause an organisation to stumble as it attempts to contain enterprise costs. An integrated approach to spend management must include gathering information from all spending processes to effectively leverage and manage the spend. Firms must develop a closed-loop lifecycle process for enterprise spend management and integrate disparate purchasing, sourcing, execution, and analytical/benchmarking processes to increase competitive position through sound cost management in the current economy. Organisations need to leverage enterprise spend management and ensure visibility into processes as well as compliance with budget and contractual obligations. In addition, they must drive incremental improvements in supplier relationship management and ensure cross-discipline alignment.
META Group analysts Kip Martin, John Van Decker, Nick Gall, Dale Kutnick, Bruce Hudson and Val Sribar contributed to this article.