What is Spend Culture?

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It all began with a $436 claw hammer

The year is 1985 and Ronald Reagan — the 40th President of the United States and the architect of Reaganomics, the eponymous set of free market policies that laid the groundwork for the economic renaissance of the 1980s and the tech boom during the ensuing decades — has been alerted about a sensational scandal emerging from a procurement deal undertaken by the Department of Defense (DoD).

The point of contention is the alleged purchase of a $436 claw hammer, along with a list of equally overpriced purchases comprising the DoD’s indirect expenditure. The White House is bracing itself for a major field day with the press, as reporters and cameramen crawl over each other to grill the administration.

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In his address to the nation, Reagan makes a reassurance to the American people: “Believe me, our attack on waste and fraud in procurement—like discovering that $436 hammer—is going to continue.” What followed was an onslaught of indignant op-eds, and newspaper columns over the scandal, forcing Reagan to institute a special commission to review the procurement process. 

It took a $436 claw hammer, a $7,622 coffee maker, a $640 toilet seat and a $659 ashtray for an entire nation to catch on to the perils of unplanned and uncontrolled spending. 

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Fast forward by 31 years

We are in the year 2016; technology has become elemental to our existence, like air; billions are being invested in human intelligence, enterprise and imagination; indeed, at no other time in history, has it been so easy for an idea to cross the chasm between thought and reality.

And, yet, some problems prevail. In March this year, a company with a valuation of more than $16 Billion, reportedly cut its profit forecast by 78% after realizing that it had lost control of its spending. As a corrective, the CEO advised his employees to change the company spend culture. The CEO in question, whose company is one of the most valuable start-ups in the world, offered some sage advice to achieve a better spend culture — like reminding the staff to make sure to turn the lights off when not in use, or encouraging executives to show more restraint in ordering expensive meals. 

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For a multi-billion dollar company operating on the cutting-edge of technology, provisioned with all the resources and capital that an entrepreneur can only dream of, its solution to uncontrolled spending needs to be more than paternalistic cliches about the virtues of thriftiness. And yet, companies across the board are not immune to uncontrolled spending and don’t know how to deal with it — across industries, CFOs and CPOs are being let go after financial reports throw up surprises at the end of the quarter. And as the curious case of the $436 claw hammer showed, such alarming patterns of overspending are generally reported in the company’s Indirect Spend — or in other words, the expenditure on goods that do not add to the businesses’ bottom line, such as repairing equipment, buying office supplies, and other kinds of services. And because Indirect Spend is considered only a secondary component of a company’s spend, its effects on a company’s finances tend to fly under the radar of most companies, even though it accounts for close to 80% of a company’s purchases.  

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Process-driven & Proactive

In truth, the fault lies not in uncontrolled spending — it lies in the failure to recognize that companies do not have a process to take control of their spending. And this process is not the same as laying off employees or making half-baked and ad-hoc attempts at penny pinching. No, this process is really what is Spend Culture. And Spend Culture is not knee-jerk and reactive; it is process-driven and proactive.

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In Purchasing and Procurement circles, terms such as Maverick Spending, Cash Leakage etc. abound; but these are coinages that describe the disease, not the set of conditions and behaviors enabling the disease. Spend Culture, on the other hand, is an overarching concept that encompasses every aspect of how a company spends its money, capital, resources and energies — indeed, the state of your Spend Culture can make or break your company. 

Spend Culture is a nascent concept — it does not have a vocabulary yet. But, it has always existed. And now, for the first time, it has been articulated. 

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About Author

Nitant

Nitant just completed his Masters from Simon Fraser University. He has worked as an academic researcher and a content marketer. Of late, he has busied himself in understanding and deconstructing Spend Culture across industries; he spends a great deal of his time learning how technology can help companies take control of their spending.

20 Comments

  1. It’s eye-opening that indirect spend accounts for around 80% of a company’s purchases and it’s not being managed. Companies need to change their spend culture and understanding that there is a problem is the first step.

    • Nitant

      Thanks for your comment, Nick. This is precisely the kind of problem that is ailing businesses in general. Ever since the world economy started making a recovery from the Great Recession of 2008, interest rates kept getting slashed recurrently. This created an enormous flood of capital and investment money that has been sloshing around since. It’s only in the last few years that investors and CFOs have begun asking fundamental questions about what their company is spending on, and how well and optimally.

    • Nitant

      Thanks for your comment, Robert. Yes, it is mind-boggling that companies still don’t understand how crucial spend visibility and control is to their continued success and sustainability. In the start-up world, in particular, there have been far too many cases of companies going bankrupt because the pressure to scale up quickly and sizably ended up draining their cash flow.

  2. Changing a companies Purchasing culture, is the toughest challenge for a Purchasing Manager.
    Getting employees to understand the process is a challenge. Especially, when purchasing is not their main function and the company history and process has not been enforced and trained.

    Therefore, centralizing Purchasing (separation of duties) is paramount for PO facilitation.

    • Nitant

      Thanks for the comment, Tahj. You’re absolutely right; without centralized purchasing, any company’s purchasing will be inconvenient, highly error-prone and hence pointless. We actually did another post called Why Saying No To Centralized Purchasing is Like Willfully Wearing A Blindfold: http://blog.procurify.com/2016/09/08/saying-no-centralized-purchasing-like-willfully-wearing-blindfold-heres/.

      Do you know some of the specific challenges that Purchasing Managers face? It would be nice to get your perspective on it.

      • Inputting detailed/accuracy info on POs, reducing retrospective (after the fact) POs, understanding the value of cost vs price (xyz might be a little higher in price, but easier invoice processing, payment terms, year end rebate, free Standard Shipping, etc).
        Consolidating vendors to better manage cash flow.
        Following up on orders when Services or items received.

      • Nitant

        Thanks, Tahj. These are precisely the pain points we keep hearing from purchasing managers across the board. And we, at Procurify, have succeeded in mitigating some of these problems. Most companies are otherwise compelled to either run with ERPs (which have an obvious and well documented history of making things even more difficult) or go for purchasing software that offers very limited services. But we believe in not just offering a few functions to the company, but doing our best to integrate process and culture into the company’s spending.

    • Are there things you’ve done/seen in the past that was effective to help employees understand the purchasing process and why it’s important?

      • Having a system that helps drive Purchasing policy / process helps.

        Lunch and learns

        Grass roots one on one training.

        Lastly, again centralizing who is inputting reqs, POs, centralizing /funneling requests to individuals who have the knowledge and skills to understand process. Advantages and disadvantages to everything, but at least you have better info coming into system for better output.

      • Tahj,

        Agree with your points.

        Putting in a process allows people to act as a team, while the lunch and learns and the 1-on-1s can help explain to people why processes are important.

        While there are advantages and disadvantages, capturing information on company spend becomes more and more important as a company scales.

  3. John Rugamas

    I love the part of the article where it states you need more than paternal cliches about the virtues of thriftiness, well said. Often many people in managing roles rely on trust and people trying their best, but putting a system in place ensures that you guide people to make the right choice in a way that an entire organization can trust.

    • Nitant

      Thanks, John. Yes, a very pertinent observation. I guess companies, even mega corporations invested with billions of dollars, can have the same foibles as human beings — sometimes corporations can get too obstinate and it gets very difficult for them to admit that they have little to no control over the situation.

  4. There Is Still Problem In Procurement Process In Most Of Developing Country And Private Company Do Not Follow Procurement Process In There Purchasing That Results To Waste And Fraud Cases And Decline Of Economic Development In The Nation. The Citizen Believe That Procurement Officer Are The One Who Benefit From National Case.Spending Culture Must Turned To The Use Of Electronic In Procurement Process So As To Have Value For Money In Spending

    • Nitant

      Thanks for your comment, Ignaz. I’ve studied developing economies and I know exactly what you’re talking about. In an atmosphere where kickbacks, quid pro quo and crony capitalism go unchecked, there is a general reluctance to embrace technologies built to enhance transparency in procurement, particularly in government procurement. And often, the purchasing manager is thought of as someone who is the agent of such corruption and malfeasance.

      Which is precisely why there needs to be more awareness about Spend Culture. And, ideally, procurement professionals should be the ones creating this awareness.

  5. FRANCISCO ATANASIO GOITIA on

    Slightly interesting but I don’t see the difference (or a step forward) over the cost controlling policy or regime the companies usually implement (comparison versus budget or previous years data). I’m not sure whether there is room enough for an entire culture, looks like an artificial new concept (in my view, no offence). As CFO I give more trust to the accuracy in budget construction rather than a proactive culture associate to cost optimisation. By the way, from my perspective and after reading the post I noticed part of this culture could damage staff quality in terms of work conditions, what could also have an impact over productivity.

    • Nitant

      Thanks for your honest and substantive feedback, Francisco. Cost cutting and control, in general, seem to have negative connotations in the popular imagination as you rightly imply. And that’s only because cost cutting, control, layoffs (which companies, rather euphemistically, garb under the phrase “cost optimization”) are enforced by companies only after they are jolted awake by a weak quarterly report. A culture that enables such behaviour is reactive, and thus unhealthy to the morale of the workforce.

      On the other hand, empowering the employee is at the heart of Spend Culture. When your company’s procurement team has deep and real-time visibility into the company’s spending, it can look for ways to negotiate better prices by placing larger orders with fewer vendors — the thrust of the idea is to optimize costs at the vendor’s expense, not the employee’s. Here is a clearer and detailed look at how this would pan out: http://blog.procurify.com/2016/09/08/saying-no-centralized-purchasing-like-willfully-wearing-blindfold-heres/

      Having said that, I’m very curious to know how your experience and perspective as a CFO informs your opinions. It would be great to hear your insights which would, no doubt, be instructive.

    • Interesting view point. But, I’ll just say every work environment / culture is different or unique.

      As a CFO, wouldn’t you want better spend visibility into a project, with accurate data, within budget, and have personnel follow the procurement process from start to finish?

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