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How To Avoid Fake Spend Under Management (SUM)

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Savings is the primary performance measure for procurement. We talk about many other KPIs, but when our bosses look for updates, when the CFO needs a report or when we ourselves open supplier bids, everyone’s looking for the savings first.

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.

The amount of spend under management is not always within the control of procurement and should therefore be understood. While mapping the spend deemed to be under management is usually possible, there are many definitions of spend under management (SUM) in use:

  • Spend that passes through e-procurement
  • Spend that is covered under a contract
  • Spend that falls under a sourcing plan
  • Spend that is strategically and actively reviewed
  • Spend that is actively reviewed and managed internally by procurement to ensure that employees are using the contracted rates, terms and benefits.

None of these in isolation provides a direct connection to the savings KPI. The correct timing and coordination of the above factors, however, provide a good measure.

Using an inadequate definition for SUM can be a serious misrepresentation of the performance of procurement and should therefore be labelled as misleading and fake measures.

To define where fake SUM could appear, we’ve developed a model to demonstrate what could occur when procurement applies a limited definition. The model also helps with avoiding any pitfalls and to analyze how to achieve real SUM:

Spend Under Management vs. Unmanaged

  1. Many procurement organizations rollout category management and waves of sourcing initiatives aligned with the business. It is only a subset of these organizations that also have all of the tools and processes in place to audit compliance and track actual spend and savings in e-procurement. In many cases, procurement simply does not have the investment or the resources to establish an end-to-end process, and therefore has to work with what it has. If a SUM percentage is claimed in these circumstances, it will most likely be fake and therefore fail to deliver the real savings anticipated.
  2. Some procurement organizations manage by contracts and their renewal cycle only. This occurs when there is limited interaction with the business. All of the processes and policies may be followed, but the connection with the people who are using the services is not established. Contracts that are misaligned with business requirements become suboptimal. Again, as above, you are likely to find fake SUMs.
  3. In order to achieve real SUM, procurement must manage consistently along both axes in the model, and ensure it is interconnected and in sync.
  4. Even the procurement organization that has achieved progress along both axes will inevitably fall into the “gray zone” at some point unless it has taken mitigating steps. This means that despite all of the investments and process rigor, you can still get fake SUMs. So, what is it that lands in the “grey zone”?
    • Procurement organizations that run category management with sourcing waves will over the course of a three-year period miss out on up to a third of the total spend. By definition, in such an approach the speed of the rollout means spend is effectively unmanaged for long periods until it is addressed.
    • A portion of the spend will always be subject to recent changes in business requirements and therefore new spend that may not be strategically sourced for a while.
    • Large contracts can take time to execute — several months depending on the category. This will create a time lag on applying the optimal rates.

So, we are looking at a substantial amount of spend that can potentially land in the “gray zone” and represents a huge unidentified opportunity for companies that have been using fake SUM measures.

In conclusion, our recommendations to address this opportunity are the following:

Firstly, check how you are measuring procurement performance today. Are you looking at real SUM or do you have gaps? Use the model to assess your situation. Then look at the reasons for why you may have spend in the “gray zone”. Seek out solutions. Here are some suggestions for each of the three topics listed above:

  • If you have spend waiting to be addressed by your sourcing program (as described under point the fourth point above) then don’t wait. Set up a tactical buying program that will yield you immediate savings. Such a program would also add value to all of the spend going through that is one-off and will never form part of the sourcing program.
  • Have you got non-core spend that is geographically dispersed or non-core commodities that has not been dealt with? Look for an outsourcing partner that has the tools and capabilities to get it under management on your behalf. Every day you do not do it yourself or just simply cannot prioritise it costs your business money.
  • Could you do with extra assurance that the rates/prices you pay are optimal? Work with a procurement partner that can offer catalogs with the best market prices — don’t try and do it all yourself.

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