An Essay: Is Spend Management Strategic?

A few weeks back, I was having a conversation with a former colleague who is probably deeper into the Spend Management sector than almost anyone I know. Trust me, if anyone is part of the Spend Matrix, this fellow is.

As we were talking, he asked me a question that was on his mind. "Jason," he said, "Do you think Spend Management is really strategic?"

Obviously, this is not the easiest question in the world to answer. First, does "strategic" always bring a positive connotation with it? Certainly McKinsey & Company, the venerable consultancy, is considered highly "strategic," yet they also advised the biggest Fortune 500 flop of all times, Enron, on corporate growth strategies. Hence, strategic "investments" are not always a positive thing, especially for shareholders. Also, I wonder, does strategic imply results or just executive energy and focus?

As you can tell, I wrestled with this question a bit before responding. It's not as simple as it sounds.

Certainly Spend Management is a top business imperative. It's top of mind for operations and financial executives alike. I would not be writing this blog if I did not think it was one of the most valuable business initiatives of our time. But is it really "strategic"?

I think the answer depends on each organization — and the specific initiatives it pursues. When I responded to my friend, I told him that for certain sectors, Spend Management is the most strategic activity an organization can pursue. There's no doubt that when a $50 million manufacturer saves $3 million on costs of good sold through better sourcing and supplier performance management, that Spend Management is highly strategic, especially when those savings can be redeployed to efforts to increase sales, such as new product development, customer service, etc.

This brings up an interesting point. At the highest level, you only have two levers to pull. You're either going to increase sales or decrease costs. But if you fail to create value on the customer side of the equation, even if you're world class at Spend Management, you will still lose, eventually.

Also, organizations who pursue pockets of Spend Management activity in a vacuum cannot, in good faith, call their efforts strategic. For example, is running a reverse auction to beat down suppliers — as the only goal — strategic? I would argue no.

Here's the litmus test: Will the Spend Management activity create long-term sustainable results that will have a material impact on the development and success of the future results of the company? If the answer is no, then it's not strategic. But that's not to say that individual activities, like reverse auctions, cannot be hugely beneficial. Reverse auctions have tremendous positive impact. I've personally observed billions of dollars of events over the years — I've even helped source over $100 million in direct materials myself — and I've watched purchasing managers and executives jumping up and down they were so happy at the results achieved. But given the test I've outlined above, I would still argue that stand alone reverse auctions are not necessarily strategic (unless they're combined with other Spend Management elements).

But for larger organizations, I'll be honest, I sometimes question if Spend Management alone is strategic. Why? I know first hand — anecdotally, of course — that Visteon and Delphi have collectively saved over $1 billion from Spend Management activities over the years. A huge sum, by any standards. Yet that has not saved Visteon from the scrap heap — only a bail-out from its parent organization helped to keep the Tier One auto parts maker out of the bankruptcy courts. And Delphi, as well, has had its own share of problems (e.g., cutting back on retirement benefits to cut costs).

Obviously, without Spend Management initiatives, Visteon would have rusted away that much sooner. But clearly, in the end, Spend Management could not save the organization by itself.

So I think the question to ask is not if Spend Management is strategic, but how valuable is it relative to other activities. Certainly Spend Management can help make a great company even better. And taken together, Spend Management activities are certainly strategic. But they can’t save an organization which can't get their top line act onto the stage — at least not forever.

What do you think? Post a comment or drop a line (

-Jason Busch

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