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Spend management is the way in which companies control and optimize the money they spend. It involves cutting operating and other costs associated with doing business. These costs typically show up as "operating costs" or SG&A (Selling, General and Administrative) costs, but can also be found in other areas and in other members of the supply chain.

Whether it is the money spent on goods or services for direct inputs (raw goods and materials used in the manufacture of products), indirect material (office supplies and other expenses that do not go into a finished product), or services (temporary and contract labor, print services, etc.), a company needs a mechanism by which they are not only able to save money but control costs.

Spend Management is meant to represent a holistic view of the activities involved in the "source-to-settle" process. This process includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts.

In an enterprise, spend management is managing how to spend money to best effect in order to build products and services. The term is intended to encompass such processes as outsourcing, procurement, e-procurement, and supply chain management. Since the "spend manager" could have a significant impact on a company's results, it has been advocated that this manager have a senior voice in running the company.

Contents 1 Cost reduction vs revenue generation 2 Spend management systems 3 How spend management saves money 4 Spend management in context 5 See also 6 Further reading 7 References

Cost reduction vs revenue generation

Companies divide money into two major buckets - revenue and cost. In hard economic times, when revenue is harder to come by, companies often turn to cost cutting initiatives. Cost cutting will increase net income. An increase in net income leads to a greater earnings per share and ultimately a higher market value (higher market capitalization).

Because cost cutting affects a company's bottom line directly, certain types of cost cutting can be the quickest way companies can increase their market value. The typical consensus is that the revenue to cost ratio is about 3 to 1; for instance, increasing revenue by $300 has about the same effect as cutting costs by $100.

This is why, in hard times, companies typically turn to cost cutting measures such as layoffs and product quality reductions. However, most analysts agree that this short term tactic creates little long term value, nor any long term sustainable savings. This is why "Spend Management" has become a key long term strategy for companies seeking to maintain long term and sustainable value.

Spend management systems

Most recently, companies have been utilizing new tools such as e-sourcing (for bidding and reverse auction), e-procurement (to control and monitor purchasing activities and contracts), and e-spend analytics (to gain insight into how much money is being spent on what types of services or products). Some tools are also addressing the entire spending chain, or purchase-to-pay cycle ^[1]

These tools promise, not only to automate paper intensive and manual processes, but also to help monitor and control spending activity and to create an integrated process in which each activity feeds into another.

How spend management saves money

• Decreasing "maverick" spend -- "Maverick" spend is the process whereby requestors (those who are creating a request for an item or service that will be turned into an order to a supplier) buy items or services that are outside the preferred process or system. This often means that a "maverick" purchase typically results in an individual or department buying an item in an ad-hoc fashion that results in paying a 20% premium for that item. Instead of buying from a preferred supplier with which the company has negotiated a contract with discount pricing, an individual goes outside the normal process and purchases that same item at retail.

• Increase of spend economies of scale -- By directing more spend toward a particular supplier, a company can negotiate more favorable pricing based on how much money it spends with that supplier in a given year. Many companies may purchase like items from many suppliers at different prices. By consolidating this "spend", and directing it toward one or a few suppliers, companies are able to get bigger discounts.

• Increase process efficiencies-- Automating sourcing, procurement and payment processes can greatly improve the efficiency of paper based and manual processes. However, different companies have had varying degrees of success in this area. The general idea is not to just automate, but also use the technology to improve upon these processes.

• Increase procurement efficiency -- This involves using e-sourcing tools for the bidding and contract award process (similar to eBay, in which you may have one buyer and many suppliers, or one supplier and many buyers). These supply chain management tools also help to develop product requirements that can be sent to suppliers (typically called an "RFP" or Request For Proposal).

Spend management in context

Spend Management is a subset of Total Cost Management, which takes into consideration financial management aspects such as tax/VAT, exchange rates, the impact of demand (i.e. sales), manufacturing, and other factors.

When considered from a holistic viewpoint, Spend Management can start to feed into supply management, as it also affects how assets (capital and otherwise) and inventory are procured and managed. Spend Management (and in a bigger view Total Cost Management) starts to inform a company of Total Cost of Ownership, and is often used to understand the total cost of items such as assets (from their acquisition, to their use and depreciation, and finally to the assets' retirement).

In the end, however, Spend Management is about creating long-term and sustainable savings. True Spend Management (and by extension Total Cost Management) is considered by many to be an ongoing cyclical processing

See also

• reverse auction

The main purpose of Spend Management is

 Aggregate information from disparate clinical, contracting, purchasing and accounts payable systems.  Accelerate standardization efforts to identify savings opportunities.  Identify contract savings opportunities and maximize tier-level savings. • Prevent contact pricing errors due to expired or invalid contracts.  Access an on-line repository of digitized contract data, including pricing synchronization.

Further reading

Pandit, Kirit; Marmanis, H. (2008), Spend Analysis: The Window into Strategic Sourcing, J. Ross Publishing, ISBN 1-932159-93-6  1. The individual reports for each company are downloaded as stated above and are clubbed into a single report. The clubbed report should include an additional column ID_COMPANY which refers to the company id.

References

1. ^ P2P vendors in the US