Low Spend under management is the most common reason for inefficiency faced by many procurement organizations. Spend under management can be defined as that part of the overall spend which is not actively managed by anyone in the procurement department including category managers and buyers. To manage actively involves:
- Tracking supplier performance and adopting all best practices for the category.
- Having valid contract in place and proactively managing it, not just renewing it year on year.
- With focus on Category Management aspect, understanding the relevant index and the associated changes on an ongoing basis.
- Keeping track of sourcing and the subsequent PO to Pay process.
- Building relationship with the user (client) group and understanding the requirement and changes in their priority with respect to the category. This is important because it helps in getting their buy-in and approval for sourcing and changing the incumbent vendor if required.
Based on our random survey the average spend under management was low even for Fortune 500 companies. The inefficiency creeps in because CPO’s are not able to include that part of Spend into their yearly targets. The Spend which is left out becomes the key reason for the leakage. So now the question arises why procurement organizations are not allowed to manage certain categories. The answer to this question may be one or all of the following:
- Perception among the user group about procurement departments ability to understand their needs and requirements.
- Perception among the user group that even if the procurement department understands the requirement, the benefits may be very marginal both in terms of savings and quality.
- In some organizations the user groups are convinced about the capabilities of their incumbent vendors and hence are unwilling to imagine a scenario without these vendors. To an extent they are not willing to explore world outside these vendors and gradually lose all their bargaining power.
- Usually the Spend which is not managed by the procurement organization starts as a very low number in absolute dollar values, and gradually ends up being a very large part of the overall Spend. This may be because of change in the external factors and change in demand for specific products of the company.
Thus to explore the idea of increasing spend under management, it is very important that the procurement organization should start with a concrete plan and target to address the challenge.Some of the steps can be as listed below:
- The first very obvious step is to leverage procurement spend analysis tools and identify categories which are not managed by them, basically measuring and listing spend which is not managed by them.
- After the spend is identified based on multiple factors the spend should be divided into four quadrants:
|High Ease of Implementation & Low Savings Potential||High Ease of Implementation & High Savings Potential|
|Low Ease of Implementation & Low Savings Potential||Low Ease of Implementation & High Savings Potential|
In the above table Ease of Implementation can depend on factors like:
- how easy would it be to convince the user department to allow sourcing to be initiated
- their willingness to change and challenge the incumbent
- finally the relationship that procurement department has with the user group.
Savings potential can depend on factors like:
- size of spend
- how and when was the category sourced by the user group
- external factors affecting the category like the index associated, availability of alternate vendors, competitive rivalry prevailing within this category among vendors.
- As is apparent to begin with the focus should be on the first quadrant (High Ease of Implementation & High Savings Potential). This will allow to shortlist the categories.
- Once the categories have been shortlisted the next step involves thorough preparation so as to convince the client group. This includes:
- Thoroughly understanding the category
- Understanding the user group requirement in terms of specification and SLA’s.
- Understanding key selection criteria
- Identifying major players and eligible alternate vendors
- Conducting thorough analysis of shortlisted vendors to understand their strengths and weaknesses.
- Identifying cost drivers for the category and the associated index.
- Understanding strength and weaknesses of the incumbent compared to other identified vendors.
- Estimating potential savings, if Strategic Sourcing process is adopting this estimation should be supported with appropriate research data.
- Understanding and reviewing the current contract.
- Preparing project plan with important milestones.
- Once the above preparation is completed it is time to sell the benefits to the user group or department.
- If required a top down approach can be adopted and the senior management should be convinced to communicate the same.
- This entire exercise is a change management challenge. Hence it is more about internal selling to achieve the desired objective.
This can result in huge savings if the above listed process is adopted and all the point are considered. On a broader note this is a very delicate process and usually takes time depending on the size of the organization and number of stake holders involved.
Leverage Our Strategic Sourcing Expertise – One of the Leading Procurement Service Company
Legal, Research & Development, Advertising among many others are some of the typical categories which are usually not managed by procurement department. EmpoweringCPO is a leading spend analysis consulting company, we were able to successfully increase share of spend under management for these big buckets.