2 May 2017 was CEO Chad Dickerson’s last day at Etsy. The multi-billion dollar internet marketplace is often referred to as the Amazon of the flea market. They fired Dickerson. His forced exit from the company was organized without warning, and with great haste. In fact, it was announced only a few hours after Black-and-White Capital LP, a hedge fund with a 2% stake in the company, issued a damning press release, rebuking Etsy’s leadership for failing to take account of the company’s worrying patterns of overspending.
Dickerson’s purported failure to maintain tight control over Etsy’s spending is by no means a unique case. In fact, across large companies, there are far too many examples of CEOs who have had to face their board’s ire over their inability to control company spending. Such cases have been reported so many times that there is a clear pattern in the way things unfold:
- A CEO bets big on his team, takes risks, and funds ambitious projects.
- The company delivers a modest performance and board members begin asking serious questions.
- The CEO is summoned and has to defend his choices; the board asserts control, fires the CEO, and hires a CFO — a bonafide numbers guy — to take over the CEO role.
- The CFO — hired to bring down costs — shelves passion projects, becomes fixated on the bottom line and organizes massive layoffs. He helms the position so long as the bottom line stays above the red.
Arguably, this is how many companies go to die. The issue, however, is much more complicated.
For far too long now, both companies and investors have labored under the illusion that their choices are too limited, when it comes to what kind of leader they can appoint. Most companies believe they have two choices:
- Hire a dynamic and visionary leader if you want an innovative company that pushes the envelope.
- Hire a bottom-line oriented and short-term minded person — typically a CFO — who can bring in tighter fiscal controls, and won’t think twice before cutting costs, or slashing jobs.
And yet, no one seems to have asked the question: Why can’t a company be at the cutting edge of innovation, and be fiscally disciplined at the same time?
And it’s in answering this question that the concept of Spend Visibility begins to matter so much.
Consider what happened to Fab, once the most heavily funded startup in New York City, which spent $200 Million of the $336 Million it had raised — all in less than a span of two years. What should give us a reason to pause is not the scale of Fab’s spend, but rather the fact that the company did not know that it had spent such a large chunk of its capital investment; it only realized the scale of its expenditure much later. Twelve months on, the company ran out of money and folded.
To say that Fab went under, merely because it wasn’t tracking its spend (or money going out) would be missing the point. But Spend Visibility isn’t merely an exercise in tracking spending; it’s actually much more nuanced.
What, then, is Spend Visibility?
As the term implies, Spend Visibility goes beyond tracking spending. Spend Visibility gives both a detailed and holistic picture of how money is moving through your company. To really understand Spend Visibility, let’s do a thought experiment:
You are the CEO of a mid-market company, overseeing 250 employees. Here are the myriad situations where Spend Visibility will begin to matter to you:
Real Time Visibility
The printing capacity isn’t sufficient. You need to order more printers to keep up with demand. Will you place more orders for printers when your budget for office supplies is on the verge of maxing out? You’d need to determine what portion of your budget for office supplies has already been spent. Can you spend more without exceeding budget?
That would be the ideal way in which you would go about making a decision. And yet, in such a situation, most companies wouldn’t behave reasonably. Without Spend Visibility — in this case, a realtime count of how much of their budget has already been spent — most companies would have ordered the printers anyway. That they exceeded the budget for office supplies that quarter would only be found after the fact, when the financial controller publishes a quarterly report.
The Story Behind The Spend
Spend Visibility implies a visibility into the entire purchase cycle. For example, if your company hired a contractor, which employee — specifically — selected the contractor and agreed to the contractor’s quotes? Who in your own company approved the quote? Did someone in your company recommend making any changes to the contract? Spend Visibility implies a detailed and organized system of records. It must trace the history of every order, right from its inception to the time money leaves the bank. It gives you the full story behind every dollar of spend, the knowledge of which is crucial to detect any fraud.
There are several departments within your company; naturally, each department has its own needs. If your product development department used one recruiting agency to hire software developers, and your marketing agency used another, there might be some room for your company to save money. Using the same recruitment agency for both departments would mean funneling more business towards one recruiting agency — effectively, this would allow you to obtain a better deal from this agency, and save some money. So during the next quarter or fiscal year when your company is hiring, you could choose to go with one agency.
However, any such possibility of realizing such savings would be remote if you weren’t aware of spending decisions that were made across your company. You won’t be able to draw any insights or observations, without being able to look at your company’s spending both at a granular level, and from a larger perspective.
As crucial as ascertaining the story behind the spend — or the history of decisions that preceded the spend — is the step-by-step account of the transaction history. Right from the Purchase Order to the receipt of the goods ordered, to the packing slip, to the invoice sent by the vendor — each and every document constitutes the company’s system of records; these documents become vitally important, particularly when your company is filling its taxes.
If your financial controller is unsure about some numbers, or if a third-party auditor needs to trace the audit trail behind some transaction, they need to be able to obtain such documents instantly. Spend Visibility requires that they are able to do so without having to deploy an army of resources.
It’s important not to take this lightly — according to the Aberdeen Group, under 50% of invoices aren’t tracked, lost, or forgotten.
The End of Wasted Spend
One of your employees has just told you that he needs to buy more server space to scale up operations. You ask him to get in touch with whoever is responsible for making the purchase. A month later, it turns out that your company has been billed for twice the amount you were expecting. Why did this happen? It’s hard to say. But if you spent the next few days trying to investigate the issue, you’d find that two orders were placed. It would dawn on you that the employee did get in touch with the Purchasing Manager.
However, he bought the server space himself after the Purchasing Manager ignored the urgency of his request. In the meantime, the Purchasing Manager bought the required server space, without knowledge of the placed order. Duplicate payments are one of the most acute problems in bookkeeping.
Of course, analyzing this data on hundreds of spreadsheets requires immersive work. It is a frustrating and tedious task, which is why most companies skirt it. With an agile spend management solution, however, Spend Visibility becomes not just a probability, but a fact of everyday life.