Spend management evolved from a technology perspective when it was realised that organisation-level purchasing required a separate and unique set of tools that could set it apart for improving efficiency and gaining deeper insight into spend.
While spend management has expanded into other areas of the supply chain, it is still focused on controlling spend related to operating costs and lacks an ability to promote procurement into a strategic role within organisations.
Consequently, an evolution of spend management is occurring – a new concept coined “spend optimisation”.
Where spend management focuses on improving the performance of the procurement function, spend optimisation seeks to expand the culture of savings to the rest of the organisation through a combination of people, process and technology.
However, transitioning traditional spend management towards spend optimisation is challenging.
From a spend management perspective procurement is focused on reducing cost and its value is based on how well an organisation can source, acquire and pay for goods and services; few organisations have bought into the idea that procurement can become strategic in its ability to identify new revenue or profit opportunities.
In fact, Aberdeen research indicates that regular achievement of savings targets is considered procurement’s primary contribution to the organisation, over the identification of new revenue opportunities.
Therefore, to be an agent of change procurement organisations need to charter a message beyond a cost-centric mindset – one that translates procurement’s contribution into a value-add to the organisation and a ‘profit centre’: procurement organisations must become agents for a frugal culture, promoting spend optimisation within the organisation and giving reasons why spend needs to be optimised.
Which begins with building the support of the executive leadership.
Given the reporting relationships found in most organisations CPOs alone cannot promote procurement’s value. Aberdeen found that the majority of procurement leadership reports directly to a C-level executive role rather than having its own seat at the proverbial table: CPOs report to either the CFO (25%) or the COO (29%), with only 17% reporting to the CEO.
As a result, spend optimisation can only become a reality if those in the executive office are willing to help promote the concept. So involve them – procurement’s view of spend optimisation must visible at the executive level before executives will buy into procurement’s vision of success or communicate procurement’s value to their teams.
However, the transformation to spend optimisation must begin within the procurement organisation itself. But while CPOs need to prepare their teams with the right tools and knowledge that help relay the value of procurement to peers such as Finance, HR, IT and the supply chain, many procurement organisations are ill-equipped to meet this challenge from the top down.
Aberdeen research found that the top barrier preventing organisations from better aligning their procurement strategies with organisational objectives is a lack of appropriate skills or knowledge: while best-in-class organisations are ahead of their peers in traditional procurement areas (understanding the importance of commodity/category and the ability to work with legal contracts), they require increased training in areas that relate to the wider business functions, such as finance, product development and sales.
This suggests that developing the right procurement team requires recruiting new talent from broader business backgrounds, with formal education (i.e. MBA, CPA), to assist the procurement team’s efforts to broaden skill sets to better understand the needs of the wider organisation and develop the right message to cater to them based on this knowledge.
Another key step in achieving spend optimisation is centralising control of policies and procedures – specifically a centre-led model, owing to the flexibility this model provides.
Structural deficits in the way procurement has traditionally been organised often impede efforts that could create a common culture for understanding its value; many procurement organisations are unable to create a consistent flow of procurement decisions or processes down to a local level necessary for achieving spend optimisation.
A centre-led approach to procurement provides an easier way to manage disparate locations while providing procurement staff the freedom and flexibility to make purchasing decisions based on local knowledge and regional requirements.
In a typical “centre-led model” areas like sourcing and buying power are managed from the top down through the establishment of centres of excellence, while executing transaction-intensive activities, such as the issuance of purchase orders and invoice processing, is done at the local levels.
Finally, while broadening the reach of procurement through the CPO, executives, and wider organisational support are all necessary steps for creating a culture of spend optimisation, translating it into process and making the message stick requires the glue to hold it all together: the right technologies.
Since most users’ interact with procurement for through technology and not through the CPO, the e-procurement platform becomes the main channel for communicating procurement’s values and culture.
Furthermore, technology needs to represent the here and now for end users to want to adopt its use. Based on global access to recognised consumer applications (i.e. Amazon) and search engines (i.e. Google) combined with the proliferation of smart phones and tablets, end-users of enterprise technology are increasingly expecting these same elements at the workplace, such as a cloud framework that promotes ease of use, anywhere-access and consistency.
In conclusion, while consolidating all e-procurement under a common platform increases the chances of user participation and sends a more concise message for improving adoption and for creating an organisation that optimises spend, using the right e-procurement tool is critical to the success of a culture that embraces procurement rather than ignores it.