What Is Spend Management and How Is It Changing in 2021?
In the past, businesses relied on tools like spreadsheets to manage spending. But these manual methods were unreliable and cost time, effort, and money.
So businesses turned to automation, which solved a lot of cash flow problems. In short, companies could track spending better and reduce losses and mistakes.
But, introducing technology into spend management didn’t fix all the problems.
An IDC study found that 61 percent of respondents used disparate tools and processes to manage business spending. And as you can imagine, tracking data across different tools is a nightmare.
This is why as many as 87 percent of respondents in the same study planned to invest in a unified spend management platform.
In today’s distributed (and oftentimes turbulent) workplace, controlling and tracking spend is increasingly more complex, and businesses struggle to balance growth against operational efficiency. More importantly, many companies struggle to successfully retain strong culture in a post-pandemic world.
In this blog, we’ll walk you through all you need to know about spend management and how to keep up with the changes in 2021.
What exactly is spend management?
Spend management is the process businesses use to monitor, control and analyze business costs.
According to Gartner, spend management is about maximizing value from company spend while decreasing costs, mitigating financial risk, and improving supplier relationships.
Using manual methods to do all of this is near impossible. This is why more businesses are digitizing the spend management process.
“Because of the way software has helped digitize spend management strategies, there is a great impact on digital transformations that affect the way businesses control their finances today,” says Zach Reece, COO of Colony Roofers. He goes on to explain that “ERP and MRP systems have allowed for the automation and scalability of organizations through cost-efficacy solutions, and have led to more centralized and analytical forms of managing spending behaviors.
Therefore (…) spend management today has turned agile and highly systematic with its approach to procurement tasks, with a more strategic and sustainable framework when it comes to spending processes.”
This change goes beyond leveraging technology to increased emphasis on strategy.
Tony Monisse, Director at Brentnalls WA, points out that, “over the past decades, this role has gone from operational to strategic. Organizations are slowly accepting the change and moving to more thoughtful and well-researched decisions made via spend management.”
Digital transformation also plays an important role in developing strategy. New digital tools now help finance teams to come up with more accurate decisions.
But before we dive into strategic spend management, here are some spend management terms you should know.
Essential spend management approaches explained
1. Source-to-pay (S2P)
The source-to-pay process involves identifying and selecting suppliers, negotiating with and contracting suppliers, and then finally paying for the products or services.
2. Source-to-contract
Just like source to pay, source-to-contract begins with sourcing for products or services from vendors. Quotations with the best prices are selected. Then contracts are negotiated and the selected vendor is awarded a contract.
3. Invoice-to-pay
The invoice to pay process covers the accounts payable department receiving the invoice from the supplier to the payment of the supplier.
4. Procure-to-pay
Unlike source-to-pay, procure-to-pay does not include finding vendors. It only covers all activities from procuring goods and services to paying for them.
5. Procure-to-invoice
The procure to invoice process includes every step from requesting quotes to approving the invoice for payment to the supplier.
What is strategic spend management?
Spend management strategy is described as the process of planning policies and implementing spend controls when it comes to business expenditures for the purpose of having a higher profit-loss ratio.
It’s not enough to just manage business spending. To truly succeed at operationalizing cash flow for growth, finance teams and leaders have to go a step further to create a plan to help the business succeed.
5 areas to focus on when building a proactive spend management strategy
1. Requisitions
Why is it important?
Without a strong requisitions process in place, fraud and maverick spending are more likely to occur.
How can automation help?
Manually approving requisitions and filing them is repetitive and mind-numbing. It’s also impossible to do this effectively with a remote team (or during a pandemic economy).
The solution? Use a spend management tool to let team members make requests from anywhere, clarify each request, and leverage your existing vendor relationships to cut costs.
2. Approvals
Why is it important?
To avoid sunk costs, you must authorize every purchase prior to a financial commitment.
How can automation help?
Using a spend management tool will allow you to build controlled approval workflows. Determine who can approve requisitions, and ensure everyone else can request, and request only. This way every requisition will be examined before they become purchases.
3. Purchasing
Why is it important?
Poor purchasing leads to extra costs, redundant expenses, and longer purchase cycle periods.
How can automation help?
Automating this process reduces the purchase order cycle time and gives you information when you need it. You can also budget accurately as well as make forecasts based on data.
4. Receiving
Why is it important?
The receiving company needs to inspect products for quality and quantity and accept receipt.
How can automation help?
Integrating technology into this process helps you avoid slow processing, reduces the risk of paying for goods you didn’t order, and reduces overpaying for inventory.
5. Accounts payable
Why is it important?
Delayed payments or incorrect amounts can damage your relationship with suppliers.
How can automation help?
By automating AP processes, you can manage purchase orders and approve invoices without entering data manually. It also helps you stay on top of the amounts you owe vendors.
How to increase the adoption of your new spend management strategy
According to John Kotter, Harvard Business School professor, one reason 70 percent of all organizational change efforts fail is that they lack enough buy-in from enough people.
Here are some ideas on how to get team members and leaders committed to your new spend management strategy.
Get leadership buy-in
Without support from leadership teams, any strategy will fail.
So how do you get the leaders on your side?
Diana Booher, author of Communicate Like A Leader suggests you talk about how profitable the new initiative will be, rather than fixating on revenue and growth. You should also cut the excess talk and clearly define the business benefits instead of simply letting facts speak for themselves.
Offer training for team members
The biggest challenge of integrating new technology is team member buy-in. The counter this, be sure to offer ample training.
Start by identifying early-stage adopters and encourage them to advocate the use of new spend management systems.
Then, help team members understand how to use these tools effectively, why you chose them, and how it can help them work smarter.
Virtual training events are a great way to educate teams, answer questions, and address their fears.
Create and automate processes
Including step-by-step processes in your strategy helps you work smarter instead of harder. It also guarantees similar results on implementation.
More importantly, automating these repetitive processes frees up time for teams to do more meaningful work, rather than simply input data.
Finally, use the right technology
The tools you use will determine whether or not your strategy will fail.
An intelligent spend management tool like Procurify gives you visibility into and control over your business spend. It also automates repetitive processes and provides real-time insights, helping you make smarter spending decisions in 2021.
The importance of a proactive Spend Culture in 2021
Every business’ spend culture has to adapt to the reality we now live in. How, why, and when money is spent must align with the overall spend management strategy of the organization, and to do this effectively and efficiently, technology is the answer.
With the right strategy, efficient tools, a strong culture, and smart processes, your business can minimize costs, increase profits, and stay agile and flexible through both trying times and through calm waters.
To find out more about Spend Management in 2021, read our comprehensive 35-page eBook, Spend Management for Forward-Thinking Businesses.
