One of the goals of a business is to have as much spend (with a capital “S” for all expenditures: CapEx, OpEx and COGS) under management as possible. And that goal should be extended out to supplier spend, where procurement wants to have as much supplier spend influence as possible.
That way you know what you’re spending on suppliers (and the pricing component of that, of course), what you’re getting from those suppliers (i.e., supplier performance), and how well you’re spending in terms of applying best practices and tools/intelligence to the process (e.g., proactively guiding stakeholders and minimizing maverick spend).
The metric of spend under management (SUM) is actually determined by a set of indicators that we’ll explore in this latest Spend Matters installment of our series on KPIs that all procurement leaders should know. In the first two parts of this KPI series, we highlighted some of the foundational measurements for procurement pros and the problems of traditional procurement key performance indicators in terms of how they can be incomplete, misleading and even damaging to a value chain transformation. We also delved into the “keys” that unlock the value of spend and supply management.
For spend under management, we’ll explore the true spirit of how this metric is used, what role technology plays and how to get a balanced scorecard for different segments of supply base management.
KPI Spotlight: Spend Under Management
Spend under management (SUM) is an important and vexing set of KPIs. It is an underestimated and misunderstood metric. One challenge it brings is that the addressable spend and spend under management concepts are interpreted in quite different ways in organizations. But, based on our experience, and the experience of practitioners who use the metric, here is the basic definition. Spend under management, most simply defined, is “the percentage of annual addressable supplier spending utilizing preferred supplier contracts.”
The definition contains 11 simple words, but it’s important to unpack it a bit. First, let’s examine “addressable.” True addressable spending means all cash disbursed to commercial suppliers (i.e., cash flowing out the door net of tax payments, charitable contributions, internal transfer payments, etc.) — not just the spend that has been deemed touchable/influenceable by procurement and has had “sacred cow” spending areas already removed.
As a practical matter, we’re also talking about measuring supplier spend that can be pegged to a contract (and any type of PO with T’s and C’s that effectively serves as a contract) via spend analytics that tracks all spend by supplier, cost center, contract and spend category at a line item level. This is how you get visibility of maverick spending happening for whatever reason and then use that data for continuous improvement. If you can’t track your spending at this level, you’ll have a hard time managing it. This is an ancient procurement proverb, but it still holds true, and it’s still a challenge for many.
Most importantly, the term “preferred” suppliers is deliberate. It signifies the result of a procurement-led (i.e., designed by procurement and the business stakeholders even though many steps can be fully deployed to local stakeholders) sourcing and contracting process. This is different from having approved suppliers established properly within AP in terms of transactional payment controls, but not appropriately set in terms of procurement controls. This is why most firms make their CPOs the global process owners for procure-to-pay (P2P) and why procurement must approve every new supplier added to the supplier master. And some organizations have even used internal audit groups to establish and monitor policies regarding procurement approvals.
Finally, it could have added the term “correctly disbursed” within the definition because spend is only under management if the execution systems in P2P can buy and pay the preferred vendors using preferred/designed transactional “pathways” (i.e., 3-way match, ERS, recurring invoices, etc.). In other words, you’re managing the spend beyond sourcing and all the way until, well, spending (i.e., disbursing cash)!
SUM is not a perfect metric, though. It measures the quantity of spend influenced/managed by procurement, not the quality of spend influenced/managed (i.e., earlier, more deeply and on an ongoing basis). For example, you can have 100% SUM through rigorous policy enforcement that procurement must be involved in for contract negotiations. But if procurement is brought in too late to exert meaningful influence, that spend is not getting managed properly (e.g., getting brought in at the last minute to negotiate a deal with a supplier that basically knows the contract is already won).
There are different ways to measure quality-of-influence and it goes beyond the scope of this piece. But we do recommend that you base it more on the adoption of best practices (e.g., involvement during planning and budgeting) than the percent of effort reporting up to procurement or the exact RACI model you’re using. For example, Deloitte’s 2019 Global CPO Survey (that we helped co-author) showed this “quality of influence” in terms of procurement’s influence on strategic decision-making processes where procurement is not just at the table, but at multiple tables:
Finally, although SUM tends to be very sourcing centric, SUM has also been implicitly extended to supplier management. And while there is no real metric for “spend under supplier management,” the benefits of strategic supplier management programs/processes are no less real. They become even more important to drive value within ongoing relationships — especially strategic ones (including third party governance for IT/BPO providers). Supplier management is also an area that lights up many metrics because it’s multi-faceted, including risk management, regulatory compliance and performance management. It also highlights the complexity of “supply base management” that involves measuring supply base segments like these shown in the spend/supply management framework below:
- Supply base demographics show the attributes of your supply base overall (e.g., measuring strategic supply base concentration via the metric of percentage of suppliers representing 80% of spend) or specific criteria such as diversity criteria (e.g., percentage of U.S. suppliers or spend that is “diverse” per the array of descriptions for diversity certifications).
- Spend categories from low-level subcategories/commodities up to “super categories” like contingent labor & services spend (temp staffing, independent contractors, SOW, etc.), direct vs. indirect, and others. The power of good supplier information (which itself is part of supplier management) and a common category taxonomy helps to enable scorecarding at any of these levels.
- SRM segmentation such as strategic, critical, A/B/C, preferred, under-performing, etc. and risk segmentation based on risk values of various risk types (e.g., financial risk ratings, environmental risk, country-level risk, compliance risk, contract-level risk based on obligation data, etc.) or scoring by NGOs (e.g., CSR ratings). Of course, this all assumes that you have the data here to report, and if you don’t, that’s also a key driver to getting such insights so that you’re not driving blind!
- Any metric type from the 18 metrics that we spelled out earlier will foster improvements. For example, the reporting of various capability metrics for suppliers (e.g., average process capability score for direct suppliers), or your management of suppliers (% of critical suppliers enrolled in SRM program) can help drive continuous improvements.
Tier 2 supplier metrics can also be added to the list for those firms that have critical tier 2 suppliers to measure and manage (directly or via the tier 1 supplier). Another example is that some companies measure supplier diversity at the tier 2 level.
Another finding from more advanced practitioners is to standardize the “palette” of KPIs (including their definitions and calculation methods) so that these types of metrics can scale up from a supplier level (and even down to a contract level where the KPIs become performance SLAs) to the end-to-end supply chain level.
A ‘Balanced Scorecard’ of Supply
I developed this “balanced scorecard of supply” concept when I led procurement research at The Hackett Group, and it allows tuning of the KPIs and KPI targets/actual to the scorecards and related roles across the firm (e.g., supplier scorecard for a supplier manager; category scorecard for the category manager; supply base scorecard for the CPO; supply chain scorecard for the EVP-SCM).
As you can see, the topic of procurement performance management is a bigger story of measuring and improving spend and supply to create enterprise value as part of a multi-year transformation. It’s also complex and fraught with organizational land mines, but it’s also critical to continually incentivize the right behaviors.
Finally, it’s also an area that can benefit significantly from technology beyond just simple scorecarding tools. It includes large swaths of analytics, master data management, dynamic dashboards, process mining, robotic process automation (RPA) and S2P applications that are increasingly delivering more of this technology natively within their applications.
In fact, with over 600 requirements that we use to evaluate S2P and contingent workforce/service solutions in our SolutionMap benchmarking database, we know that providers’ solutions are quite divergent in their ability to implement these metrics and support the broader closed loop spend/supply management process.
If you need any more insight on this topic or any others discussed in this series, please do not hesitate to reach out directly or through SIG.
Pierre leads procurement research and IP development at Spend Matters and is the chief architect of the firm's industry-leading SolutionMapSM framework. He has 30 years of industry, advisory, and research experience and is a recognized digital procurement transformation expert specializing in advanced supply processes, practices, metrics, and enabling digital tools and services. Previously, Pierre led procurement research at The Hackett Group, and also coined the term "guided buying" in his role as the industry's first procurement technology market analyst at AMR Research (now part of Gartner Group).