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An enterprise spend management solution enables businesses to automate key steps of the spend-management process in a single closed-loop system and provide enterprise-wide visibility and operational control.

Though businesses cannot control the economic circumstances in which they operate, they can control the money they spend. One hundred percent of the money companies save goes directly to the bottom line. Effective management of spend — what is spent and with whom — enables companies to ensure that expenses fall faster than revenue in a weak economy and increase more slowly than revenue in a strong economy. This is what enterprise spend management (ESM) is all about.

By enabling businesses to automate key steps of the spend management process in a single, closed-loop system, an ESM solution provides the enterprise-wide visibility and operational control required to fully manage and leverage spend. As a result, financial, sourcing, and procurement professionals can deliver and sustain significant spend reductions that immediately improve the bottom line.

Is Your Spend Management Process Fully Integrated?

• Do you have a cohesive enterprise-wide system to manage and enhance spend savings on an ongoing basis?
• Are your sourcing and procurement initiatives linked to your contract management process?
• Are you able to quickly and accurately analyze all aspects of your spend across the organization?
• Do you have organizational and technical support for your spend management process?
• What percentage of your spend is really "managed"?

Enterprise Spend Management Challenges

Most companies today understand the need to fully manage their spend, but face significant challenges in trying to do so. Chief among these is the need to recognize ESM as a single, integrated process that must be implemented consistently across the enterprise. When spend is treated in a fragmented manner, organizations find it difficult or impossible to streamline procurement and fully manage their spend.

The failure to establish a fully integrated ESM process also results in people, or organizational, challenges. Without a well-defined and broadly understood process, organizational goals tend to be misaligned, creating conflicting objectives. This results in waste and conflict, with many people working on different parts of the problem yielding only fractional progress.

Similarly, without a unified process, technology solutions tend to be highly fragmented and misaligned. This creates individual "support silos" that facilitate various portions of the process but fail to integrate well and are difficult to implement across multiple functions and spend categories (see Figure 1).

Figure 1: Without a unified process, technology solutions tend to be highly fragmented and misaligned.

Creating an Effective ESM Process

Most companies follow certain steps in managing their spend, including identifying the opportunity; developing the strategy; sourcing negotiation; implementing the contract and execution; invoicing and payment; and monitoring and managing the process. However, without a broad commitment to managing spend enterprise-wide with well-defined best practices and technology support, companies are likely to apply these steps inconsistently between divisions, regions, and spend categories. They may also suffer significant process gaps, for example, contracts negotiated with suppliers may not be used consistently in the procurement process, invoices may not be checked against current contracts, and detailed procurement data may not be leveraged for future opportunity assessment.

To build a core competency in ESM, businesses must first develop an organizational spend management strategy that utilizes a single, integrated ESM process that works effectively across multiple spend categories. This serves as the template from which organizations can effectively align the right people and technology to meet ESM goals. Moreover, the success of any company's ESM initiative depends on using the right approach, tools, and processes within each step of the process — and adopting a solution that can support them. These components are essential to help organizations achieve the spend efficiencies and significant bottom line results that are the promise of ESM (see Figure 2).

Figure 2: These six components are essential to help an organization achieve the spend efficiencies and significant bottom line results that are the promise of ESM.

Identify Opportunity

This step involves analyzing spend within each category and identifying the areas that offer the best opportunity to realize savings. Opportunity assessment may be triggered by contract expiration, changes in business or legislation, client needs, supplier relationships, market price, and similar factors.

To accomplish this, organizations first need clear, accurate, and immediate visibility across their enterprise-wide spend, process, and resources in order to fully assess how much is being spent in each category. Then, within each spend category, companies must analyze the potential for compressible spend and identify segments that offer the best savings opportunities. This involves reviewing spend that is currently contracted, but might be further improved, as well as spend not managed under current contracts or fragmented across many different contracts and suppliers — often the area of the most "low-hanging fruit." In addition to assessing how well spend is managed today, companies should consider dollars spent by category and comparisons to external benchmarks.

Understanding areas for compressible spend also allows proper balancing of resources onto tasks that represent the greatest opportunity for savings or improvement.

Develop Strategy

This step involves determining the most effective way to handle supplier engagement and negotiation for each spend category by evaluating various criteria. These criteria are primarily related to the value of the item being purchased to the business — usually measured by dollar volume or similar metrics — as well as the item's sourcing complexity due to its uniqueness, supply-chain dependencies, price volatility, or other considerations. A simple graphic representation of this uses a 2 x 2 quadrant diagram (see Figure 3).

Figure 3 Choosing the right sourcing strategy usually depends on the value of the good or service to the organization, as well as the supply market complexity. Effective metrics and tools to support sourcing strategy selection are critical to the ESM process.

Establishing appropriate metrics to quickly assess the right sourcing strategy is a key consideration when defining the ESM process for a particular company. Similarly, adequate coverage of all possible negotiation styles is a crucial criterion in selecting technology support.

Source and Negotiate

The sourcing negotiation step comprises all the activities required to plan and negotiate agreements with suppliers who can provide the goods and services companies must utilize. This includes analyzing relevant information and effectively engaging and managing internal stakeholders before, during, and after sourcing events.

Engaging and facilitating collaboration among all key stakeholders is essential to the success of sourcing efforts. Suppliers and procurement professionals must be able to exchange information quickly and easily to ensure clear understanding of all sourcing criteria.

Establishing team-based, best practice process management by automating every step in the sourcing and approval process is also essential. This saves time and effort, ensures process consistency, and gives all users immediate access to relevant information — such as supplier information from previous sourcing events and pre-defined category best practices — at any stage throughout the process.

Implement Contract and Execute

This step involves all the processes needed to procure goods and services, negotiate and create contracts, and ensure contract compliance. This includes taking the negotiated contract and establishing it in a form that can be searched, managed, and leveraged in actual procurement with the ability to measure and sometimes mandate compliance (i.e., permitting certain goods and services to be bought only through an established contract).

To maximize realized savings, companies must work to capture as much of their spend as possible in the ESM process and leverage this spend against current contractual relationships. The more spend they capture, the more spend they can influence. Broad spend capture puts procurement departments in a more strategic position, allowing them to impact more spend decisions and increase organizational savings through setting overall policy and best practices while allowing flexibility for purchasing at local levels.

Invoice and Pay

The invoice and pay phase involves all the processes and communication required between the buyer's accounts payable team, the supplier's accounts receivable team, and the banking institution for fund transfer. This includes receiving and validating electronic invoices from suppliers based on the buyer's invoice acceptance rules. Each invoice is then matched to the original purchase order and compared against receivables as well as contract pricing and terms. Finally, invoices are reviewed and approved for payment.

An automated, easy-to-use solution is essential to allow companies to gain control over their payables process, improve supplier communication and stakeholder visibility, increase early payment discounts, and ensure contract compliance. The solution should also allow all participants to check invoice and payment status at any time. Automated audit, reclaim, and reporting processes as well as accurate payment routing and remittance information enable buyers and suppliers to better manage their cash flow and streamline payment reconciliation. Electronic alerts and notifications are also key to ensure that travel and entertainment as well as other employee expenses comply with company guidelines.

Monitor and Manage

The monitor phase of the process involves using both quantitative and qualitative measures to discern whether all spend and performance goals are being met and negotiated savings realized.

Establishing a closed-loop, continuous process to assess whether spend and performance goals are being met is critical to assure the success of any ESM initiative. Companies must consistently and accurately track their spend, processes, and resources to measure the effectiveness of their efforts and discern whether negotiated savings are actually being realized.

Monitoring supplier performance is also critical to determine which suppliers are providing the most value. Accurate assessment requires using both quantitative measures — such as accuracy, adherence to promised delivery times, and ability to meet milestones — and qualitative measures, such as service levels and perceptions of how easy it is to work with the supplier. Organizations can utilize this information to measure themselves against best practices and make course corrections for continuous improvement.

Cohesive Process

Attempting to gain ESM benefits by addressing individual components of the spend lifecycle will yield limited results. Only by treating each step as part of a single, closed-loop process can organizations manage spend well.

The Core of Successful ESM

Three key metrics are critical to ensure an effective, corporate-wide ESM implementation: participation, speed, and knowledge. Each of these areas encompasses multiple dimensions that must be considered.

Participation

If an ESM initiative doesn't fully engage users and suppliers and leverage multiple spend categories, it won't be far-reaching enough to deliver significant benefits. The ability of end users to utilize the system across the enterprise at every stage of the process is crucial. For example, the participation and input of multiple internal stakeholders is essential before, during, and after the sourcing and negotiation phase to ensure the best results. The right ESM solution can transform this formerly near-impossible task to a well-managed one that can be executed much better and faster than ever before. It also automates and streamlines end-user requisitions and approvals to all participants.

Supplier engagement — often the Achilles heel of procurement deployment — must be comprehensive and easy, allowing companies to rapidly enable myriad suppliers so they can use the system immediately. An effective way to capture supplier input during sourcing and negotiation is also essential to help companies lower costs. Additionally, organizations must select technology that empowers them to capture all the spend possible across multiple spend categories, enabling them to maximize savings. The ultimate test of participation is how much spend — both overall and by category — can be brought under effective management (see Figure 4).

Figure 4: Spend that is not managed by procurement or under the control of the ESM process is difficult to leverage. Gaps between the two bars show where the ESM process needs to be improved.

Speed

An ESM solution that can't deliver rapid adoption, shorter cycle times, and immediate benefits is inherently risky. Implementation delays waste time and money, often adding to the very problems the solution is trying to solve. Speed to benefit ensures rapid implementation, adoption, participation, and coverage. Projects with slow deployment and ramp-up are unlikely to gain approval and unable to keep pace with the rapid changes in requirements characteristic of most companies today. Speed of operation is also critical, with compressed cycle times expediting operations at every level — including faster information gathering, decision-making, message transmission, and error correction as well as improved overall productivity. The goal is to get spend under management through the ESM process as much as possible and to do so quickly. Repeatable, sustainable, and efficient spend management processes translate into speed.

Knowledge

The power of any ESM solution will be severely limited unless it can capture and provide rapid, easy access to important knowledge. Knowledge can take many forms, from documents such as supplier-market surveys and previous sourcing event suppliers to built-in best practice checklists and methodologies. To be effective, ESM systems must help companies build and leverage knowledge from one spend cycle to the next by providing simple and appropriate storage and access capabilities — a required element to build a repeatable ESM process. They must also facilitate adoption of external best practices from domain experts and especially from peer companies to ensure continuous improvement of the ESM process and better information for further opportunity assessment (see Figure 5).

Figure 5: Companies can gather and utilize many forms of knowledge to enhance the ESM process. For example, by measuring and examining supplier fragmentation across key spend categories, companies can gain valuable self-knowledge and insight from best-practice peer-company comparisons to support continuous improvement.

Business Scenario: Gaining ESM Results

Services spend represents an especially significant opportunity for achieving breakthrough savings using an integrated ESM effort. According to the Center for Advanced Purchasing Studies (CAPS Research), large enterprises spend in excess of 33 percent of total purchase spend on services. For non-manufacturing, financial institutions, this percentage can be in excess of 75 percent. Example services categories include advertising, business consulting, construction, facilities/plant maintenance, janitorial, legal, print, and travel services.

One global financial institution's experience offers an illustrative case of how to leverage an integrated ESM process for achieving savings in services. This organization was spending nearly $2 billion a year in services. Management consulting services, at $85 million per year, represented the company's seventh-largest category of services spend. In this particular area, the company believed it was significantly under-optimizing its savings efforts. The company's multinational, highly decentralized operating structure made the successful management of this category especially difficult. Specifically, the financial institution was unable to quickly view aggregated spending levels, had a highly fragmented supply base of consulting vendors, and faced large levels of maverick buying. Even when its employees selected preferred vendors, the company believed it was overpaying, as regional projects failed to leverage master contractual pricing already in place.

The financial institution initiated an ESM effort aimed at reining in excess spending within its services spend, with management consulting expenses as a prime initial target. As a start, the company conducted an opportunity assessment on its management consulting spend targeted at identifying global spend in this category, levels of supplier fragmentation, and breadth of maverick buying. The spend diagnostic identified the potential for compressible spend and established a target for savings through ongoing ESM.

Before initiating a strategic sourcing process, the financial institution evaluated multiple criteria to determine the most effective strategy for sourcing this category. Given the importance it placed on maintaining a few strategic consulting relationships, the company pursued a sourcing approach that would tighten existing agreements, introduce greater partnering elements to the relationship, and expand contract scope to more geographies.

A strategic sourcing process was then initiated to ultimately define the ideal master services agreement and select preferred vendors. Due to the highly personal nature of determining consultant capability, the company had to engage and collaborate among a very broad mix of internal stakeholders to craft vendor requirements and evaluate different consultants. The sourcing team evaluated vendor capabilities in the areas of brand image, thought leadership, global reach, and depth of people knowledge, and ultimately selected a consulting firm with the highest combined score to meet these requirements.

With the selection of a preferred vendor complete, the financial institution's next effort was to implement the contract and execute the relationship as quickly as possible so that the extended organization could realize benefits of the newly sourced agreement. These steps included engaging its legal department to negotiate detailed terms and conditions, publicizing and publishing the approved master services agreement to internal buying groups, and enabling the execution of consulting projects against this agreement. Importantly, the company could now ensure that preferred vendors and negotiated fees were being leveraged by invoice activity and related line item pricing against sourced master services agreements.

Finally, by pursuing this integrated, closed-loop process, the financial institution could more easily monitor its success in managing consulting services spend against predefined spend goals. Given the highly qualitative deliverables associated with consulting, the company also deployed this continuous process with technology that enabled the capture of end user assessments on provider performance on a project-by-project basis. These quantitative and qualitative metrics allowed the company to form a supplier knowledge repository that could be tapped into and leveraged for ongoing supplier management purposes or for supporting the start of another strategic sourcing effort.

Conclusion

The ever-increasing pressure to cut costs and improve bottom line performance makes effective ESM more crucial today than ever before. However, to achieve these goals and build a true core competence in ESM, companies need to employ the right strategy and process. ESM must be introduced and implemented as a single, integrated initiative across the enterprise — with steps in the process implemented in an appropriate, category-specific manner. Moreover, ESM solutions should deliver on the three key metrics of participation, speed, and knowledge, enabling the accurate measurement essential to ongoing improvement. Only by adhering to these critical requirements can companies fully realize the exceptional spend management efficiency and deep, sustainable savings that are the promise of ESM.