A New Approach to Spend Management That Brings Together Procurement and Finance: Part 1

We came across start-up Yordex recently, a London-based firm of 11 employees (and growing) founded in 2017 with a goal to arrest the manual processes of PO approval, invoicing, spend forecasting, expense management, supplier onboarding and self-service, and supplier spend tracking. Basically to take the low added-value work out of procurement and finance tasks.

We haven’t yet seen a demo of what Yordex calls “an easy-to-use software application that offers companies a completely new approach to spend management by creating a 'single source of truth'​ between finance, employees and suppliers,” but we did speak to Erik de Kroon, who is the CEO and Co-Founder. He has produced this article for us as an introduction to what Yordex can do.

In part 1 he looks at what issues are caused by the gap between budgets and POs and how spend plans can help solve them. In part 2 he looks in more detail at how spend plans work.

The procurement and finance teams are jointly responsible for spend management (among other things), but they both look after different parts of the process. Procurement looks after suppliers and purchase orders (POs) while finance looks after budgets, invoices and payments.

In this 2-part article I will argue that this separation of duties causes (or at least doesn’t help fix) a gap between budgets and POs which in turn causes problems for both the procurement and finance teams. I will also propose “spend plans” as a new way to bridge this gap and create greater collaboration between both teams in the process.

Problems with Today’s Spend Management Processes

In many companies, compliance to the PO process is poor. When they are raised, if at all, they are often raised last-minute, when the employee and the supplier have already agreed a deal. At that point it is often already too late to say 'no' without slowing down the business.

The main reason for the poor compliance and last-minute action is that employees don't see the benefit of raising POs - viewing them as a bureaucratic overhead that slows everything down (often not without reason). A PO process is in stark contrast to users' natural purchase behaviour as consumers with negligible transaction costs. While, the threat of not paying suppliers without a PO can be used to force compliance, in reality that is often viewed as a loose threat rarely followed through on.

Even when POs are raised on time, finance can never be sure if a PO is in budget. Budgets are usually prepared just once a year and only revised quarterly at best. Things move much faster than that, which means budgets are out of date almost the minute they are submitted. A PO may still be below the headline number of the budget, but that doesn’t mean it was meant to be spent on this supplier.

Both parties also have limited visibility over planned spend. For procurement this limits their ability to steer spend towards preferred suppliers. For finance this limits their ability to control spend and manage cash flow.

All of these issue are caused by a gap between budgets and POs. Because the detail below the headline budget number is out-of-date, it is hard to link POs back to budgets. Because POs aren’t linked to budgets, it is hard to get visibility into planned spend, approve POs or remind users to raise POs on time.

Spend Plans

Spend plans bridge the gap between budgets and POs. They give procurement, finance and management visibility and control over spend while not slowing the business down.

In simple terms, a “spend plan” is planned spend with a particular supplier for which no PO has to be raised yet. They are further into the future than a PO (typically 1 to 3 months before the PO has to be raised), and they are more detailed than budgets because they are linked to a supplier. Spend plans don’t require formal approval and can change all the time, but spend plans are visible to management, procurement and finance and together they should add up to the budget. This encourages employees to keep their spend plans up-to-date or invite scrutiny over their plans. Once raised, a spend plan is used to remind employees to raise POs on time.

In Part 2 of this article I will look in more detail at how spend plans work and how they can address the issues outlined above.

 

Disclaimer: the opinions and ideas expressed in this article are those of the author and do not necessarily represent Spend Matters' official view.

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