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Why source-to-pay technology needs to support ‘plan to pay’ for better planning in spend and supply management

01/21/2021 By

Given the current business environment, good planning has never been more important, and this certainly includes finance, operations and procurement. Finance tries to successfully engage the business to translate business planning into financial planning, while operations groups ensure that value chains are operating smoothly — and procurement supports these stakeholders to help them plan with suppliers to help ensure that risk is minimized while value is maximized (and cash preserved).

Unfortunately, planning processes are disconnected across the domains of:

  • Strategic planning and “integrated business planning” (IBP)
  • Financial planning (P&L forecasting, CapEx planning, cost center budgeting, cash forecasting)
  • Program/project planning: project portfolio management, project planning
  • Product/service planning: product portfolio planning, technology roadmapping, product development
  • Supply chain planning that translates broad IBP to sales & operations planning (S&OP), which then drives supply planning for supplier requirements and resources (and also to supply risk mitigation planning to keep supply lines flowing and suppliers healthy)
  • Functional planning, including procurement planning that in turn translates to:
    • Procurement’s own budgeting and planning
    • Savings planning that justifies the investments (i.e., budget) in procurement
    • Spend planning by category, supplier and contract (e.g., upcoming renewals)
    • Category strategy/planning that also includes “outside-in” market drivers, trends, risks, opportunities, etc.

Disconnects in the ‘plan to pay’ process

The problem, however, is that there are dozens of disconnects across these processes, especially for indirect spend.

For direct spend in the supply chain, planning processes are a little bit better defined. For example, in the SCOR supply chain reference model, the procurement process is baked into the SOURCE process that, along with MAKE and DELIVER processes, comprise the execution processes that fulfill demand, which is part of the overarching PLAN process that threads through the whole plan-source-make-deliver model. The supply-chain-planning processes drive the volumes while supplier costs are tied into COGS and product profitability with good old-fashioned product-cost accounting, variance analysis and so on.

Indirect spend however is a much messier animal.

Indirect “spend management” also requires “spend planning,” but those spending plans (and savings plans) are hard to find and formulate. Just ask any procurement professional who toils simply to generate a detailed spend cube (aka, forensic “spent” analysis) by supplier, category and cost center. Now ask that professional not just how much was spent, but how much will be spent at that same level of granularity, including the procurement-driven savings/improvement targets that should be baked into that supplier spend forecast. A forensic spend cube will not tell you that.

The underlying problem here is that there is no singular system of record for spend that explicitly plans and tracks spending in all its forms all the way through the broader spend management processes of budgeting, savings planning, category management, contract management, and then spend execution and savings execution. This problem isn’t new. I started talking about the challenge of spend planning over 15 years ago, and guided buying too, as my colleague Jason Busch pointed out back in 2006. The tricky part, and the most impactful part (from earlier/better spend influence), is in the spend planning. Guided buying helps an employee find approved supply that already exists, but “guided spending” helps the business plan it’s spending much further upstream before a requisition is created (and with a budget that hopefully exists).

It’s this upstream influence where procurement must be in lockstep with the business to improve the quality of early-stage stakeholder influence rather than just the quantity of late-stage sourcing influence. Procurement must help the business optimize the spending against broader strategy and outcomes by helping the business perform better spend planning (which obviously gives procurement more levers for demand management, make-vs-buy analysis, spec management, early supplier involvement, etc.). Procurement can’t just sit back and passively wait for requisitions and requirements flowing in from “sourcing intake” processes.

Aligning finance, operations, procurement

But how will this happen?

It’s a fragmented and problematic puzzle.

There’s some visibility into blanket POs, SOWs, recurring invoices, leases, etc. There’s also information locked in contracts (and the associated contingent liabilities), with contracts renewals in particular. And of course there are various budgets, but they’re oriented around cost centers and how the broader spend (not just supplier spend) will ultimately hit G/L accounts.

The bottom line is that if procurement organizations want to actually do spend management, especially on indirect spend, they’ll need to improve how they work with the business to plan that spend, track the spend (through the full lifecycle), and improve the spend (i.e., reduce it and/or improve business outcomes from it). Previous research that we conducted showed a spend savings potential of 15% simply by eradicating the dysfunctional “use it or lose it” budgeting process.  This is more than a technology problem, but technology does play a critical role, especially to bridge the gap from enterprise financial planning to procurement-led “spend planning”, which in turn allows procurement to enable spend owners to get more value from their limited budgets and from their suppliers.