The Savings Tracking Category

Bringing Procurement Rigor to Merger Integration

Spend Matters welcomes this guest post from Bernard Gunther, co-founder of Spendata.

Mergers are rationalized by the expectation of post-merger synergies, a major one being cost reduction. However, cost savings opportunities that are routinely exploited by procurement are rarely a focal point for “clean teams” in pre-merger scenarios, or by the merged organization in the key 100 days of post-merger integration (PMI). In fact, the majority of mergers rarely deliver all of the expected cost savings.[2] In contrast, procurement can play a crucial role in planning for and delivering cost savings typically overlooked during the pre-merger analysis.

Unlocking Deeper Value in the Procurement and Finance Relationship (Part 2): Spend Planning and Analysis [Plus+]

e-invoicing

In the first installment of this series, we discussed ways to align procurement with the finance function, starting with financial accounting and then moving into cost accounting. Although cost accounting has one foot in the financial accounting world in terms of tracking costs and having them flow to the general ledger (GL), the more important side of cost accounting is its part in managerial accounting and total cost management.

Managerial accounting is about analyzing financials to make good business decisions. It includes analyzing historical costs and spending, but only in the context of improving future spending and reduce total economic costs. One aspect of economic costs is opportunity costs, and procurement must work hard with finance to understand the procurement ROI that comes from strong management of external spending led by the procurement organization. This ROI is measured in triple digits but must be demonstrated with hard numbers.

More importantly, however, procurement’s ability to partner with finance to better influence future spending is the most practical way to influence financial and business results. This comes from procurement aligning well with finance within the financial planning and analysis (FP&A) processes that occur in finance. Hopefully, FP&A is more than just basic budgeting at your organization. Done well, it provides the critical linkage to not only financial planning but also strategic and operational planning that drive success for budget owners, broader stakeholders and shareholders.

Given the importance of FP&A, we’re going to focus on this collaboration area and how to apply it to spend management, which you can think of as “spend planning and analysis” before the spend actually occurs, as opposed to traditional “spent analysis” of spend that already happened. This focus upstream is fundamentally about transformation and changing procurement’s role in the planning and budgeting process. Luckily, this area creates much higher quality of spend influence, which drives proven levels of spend savings.

What Amazon Business Has Learned About Managing Tail Spend

“Amazon, like any other organization, is not immune to the challenges you all are having with tail spend.” That was Jeff Oar, head of customer success, enterprise, at Amazon Business, speaking on a recent webinar held by Spend Matters (and co-hosted by our own Pierre Mitchell). If one of the 800-pound gorillas has a tail spend problem — and we say that as politely as possible, given the fact that Spend Matters and Amazon Business joined forces on the indirect spend research study underpinning this report and the webinar — chances are, your organization is, too.

What’s the Cost of Having a Long Supply Tail, and How Do You Determine the ‘Right’ Supply Base?

tail

We recently put up an interactive Ask Spend Matters box so that you, our readers, can tell us about the topics you want us to investigate. One of the first questions that came in was about tail spend: “What is the cost of having a long supply tail, and how are organizations determining the ‘right’ supply base (number and percentage) as relates to spend?” As Spend Matters Chief Research Officer Pierre Mitchell put it, "This is a great question, but it’s a bit tricky to answer.” Read on to hear his reply!

Procurement Metrics: Understanding the Economic Language of Value (Part 2) — Expenditures, Expenses and Financial Reporting (CapEx, COGS and G&A) [Plus+]

finance

In the first installment of this series, we discussed the term “spend” (the noun, not verb), in the context of supplier spending, in a fair amount of detail. We discussed addressable spend, and what's included and excluded for the purposes of spend visibility/management, but also for the purposes of using spend within procurement performance measurement and benchmarking. In this installment, we dive a little deeper in terms of comparing and contrasting spend to other terms, as mentioned in the title.

Procurement Metrics: Understanding the Economic Language of Value (Part 1) — Spend [Plus+]

buzzwords

One of the challenges that procurement faces is "speaking the same language" as finance, as well as the language of its stakeholders. A marketing department, for example, may use the term “investment” for its spending. Similarly, many procurement organizations categorize some of their added value in a category called “cost avoidance,” even though the term is not taught or recognized formally by the finance function.

Even within procurement, many terms are used inconsistently. Consider the term “addressable spend.” Is all spend addressable, as represented by cash disbursements going to external parties? Or is it supplier spending that is reasonably under the influence of procurement? If you say the latter, what defines “reasonable”?

The friction and misalignment common between various functions often results from stakeholders not having a basic understanding of terms that seem similar but yet can be very different. This problem is exacerbated when the stakes are high and you start getting measured and benchmarked on these metrics. To prevent this, procurement needs to be “business multilingual” and understand the variations of terminology so that it can best speak these languages and help the organization make the best decisions to create value.

This is what we’ll address in this analysis, with a focus on procurement and finance within the enterprise. Clearly defined terminology is the foundation from which higher-level concepts, performance metrics and benchmarks can be consistently understood — and improved.

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How To Avoid Fake Spend Under Management (SUM)

Supply Chain Fraud

Savings is the primary performance measure for procurement. These key savings measures must be qualified relative to the actual spend under management to have true value. A definition that directly supports the savings KPI, however, is not always present. This leads to the illusion that spend is under management when often it is not, thereby deteriorating the overall savings results.

3 Ways For Procurement to Prove Its Value (Other Than Cost Savings!)

Spend Matters welcomes this guest post from Dustin Cochran, director of member development at Corporate United.

Most organizations are focused on three strategic pillars: increasing revenue, operational efficiency and retaining talent. I would say that procurement is already aligned to these pillars. Where they tend to be less aligned is with the strategy of internal departments. However, what I think that procurement professionals should focus on is better promoting how they align with these areas.

7 Tips for Measuring Savings

finance

Spend Matters welcomes this guest post from Paul Gurr, managing director at Provalido.

Although everyone measures savings, there are remarkably few areas of consensus around how to actually do it. Practitioners have spend countless hours debating exactly what constitutes a saving, and although different organizations will have valid reasons for wanting to measure things in a certain way, there are a few principles that can help when considering savings measurement. Here are seven you can start applying today.

Spend Analysis in 3 Lessons: Insight to Action (Lesson 3)

funding

When I last left off with this series, I hinted at some of the needs of the “power user” compared with the business user when it comes to the spend interrogation and visualization. My colleague Michael Lamoureux captured it best when he highlighted some of the requirements of the spend analyst, whose job it is not to work on the dashboard level but to hunt for the untapped opportunities.

The Zen of Spend

zen

As an old Zen Buddhist riddle goes, “If you seek it, you can not find it.” To paraphrase, you'll be miserable if you seek happiness only through specific outcomes rather than attaining happiness merely as a byproduct of living life fully. The same concept applies to cost savings. Procurement groups that only focus on finding purchased cost savings as their raison d’être will not be happy, nor will the stakeholders who own the spending where savings are generated.