Spend Under Management: All You Need To Know
Spend under management (SUM) is a crucial measure for any company aiming to optimize its procurement process. It’s about taking charge of your organization’s spend, aligning it with your goals, and unlocking its full potential. The results can be transformative.
By mastering SUM, organizations can adopt best practices that not only enhance cost efficiency but also position them for strategic advantages in procurement. Businesses that adopt strong category management practices for indirect spend, for example, are more likely to achieve what the Hackett Group calls “World Class” procurement status. These organizations control an average of 93% of their total company spend, compared to just 64% in others.
In this blog, we’ll explore what SUM means, why it’s vital for effective procurement, and how it can position your business for success. Whether you’re looking to control costs, gain strategic insights, or align spending with your company’s goals, this guide will give you a clear roadmap. Let’s get started.
What is Spend Under Management?
Spend Under Management (SUM) is a way to measure how much of your organization’s spending is actively managed by your procurement team.
Think of SUM as covering everything your company spends on, from raw materials for production to software subscriptions for daily operations. It includes:
- Direct Procurement: These are expenses directly tied to making your product, like raw materials and components.
- Indirect Procurement: These cover costs that support your business, such as utilities, office supplies, and services like IT.
The goal of SUM is to ensure most of this spend is monitored and optimized through structured procurement processes. Doing so can save costs, improve efficiency, and ensure every dollar spent supports your organization’s objectives.
Relationship to Total Organizational Spend
SUM is always a percentage of your total organizational spend. It’s calculated using a simple formula:
Let’s say your company spends $1 million annually, and your procurement team actively manages $800,000 of that. Your SUM is 80%. This number tells you how much of your spending is under control and optimized for efficiency.
Key Metrics and Calculations
To truly understand your SUM, you should break it down further:
- Addressable Spend: This is all the spending that can potentially be managed through contracts or procurement strategies.
- Unmanaged Spend: These are purchases made outside your standard procurement process. They can lead to inefficiencies and missed opportunities.
- Impactable Spend: This is the portion of your addressable spend where procurement can negotiate better terms or manage suppliers for better results.
Tracking these metrics helps you spot areas where you can improve and increase your SUM.
Distinction Between Related Terms
When talking about SUM, it’s easy to confuse it with similar terms. Here’s how they’re different:
- Spend Under Procurement: This is another term often used for SUM, but it focuses specifically on spend that follows formal procurement policies.
- Spend Under Contract: This is spending tied to agreements with suppliers. It ensures compliance with terms like pricing and delivery schedules.
- Spend Under Influence: This is spending that procurement doesn’t manage directly but can guide. For instance, setting preferred suppliers or recommending policies that teams follow.
By understanding these terms, you can figure out where your procurement team stands and what steps you need to take to improve.
The Importance of Spend Under Management
Spend Under Management (SUM) isn’t just a metric—it’s a game-changer for how your organization handles spending. By focusing on managing your spend effectively, you can save costs, work better with suppliers, and reduce risks. Here’s why SUM matters and what happens when it’s not in place.
Benefits and Challenges of Spend Under Management (SUM)
Benefits | Challenges Without Effective SUM |
Cost Control and Savings: You can analyze spending patterns, eliminate waste, and ensure money is spent efficiently. | High Levels of Maverick Spending: Uncontrolled purchases outside procurement processes inflate costs and reduce savings opportunities. |
Enhanced Supplier Relationships: Stronger supplier collaboration leads to better terms, exclusive deals, and improved service quality. | Lack of Visibility into Spending Patterns: Limited insights into spending trends make it hard to identify areas for cost-saving or improvement. |
Improved Negotiation Power: A comprehensive view of spend equips you with the data to secure better pricing and contracts. | Inefficient Procurement Processes: A reactive approach results in delays, increased administrative work, and higher costs. |
Risk Mitigation Through Compliance: Ensures adherence to policies and regulations, reducing legal risks and supply chain disruptions. | Missed Compliance Opportunities: Failure to monitor and control spend increases the likelihood of non-compliance and penalties. |
You need effective Spend Under Management if you want to save money, work better with suppliers, and avoid risks. Without it, you face wasted money, hidden spending, and chaotic processes. By actively managing your spend, you set your organization up for better control, efficiency, and success.
Components of Spend Under Management
To manage Spend Under Management (SUM) effectively, you need to understand its key components. This includes the different types of spend and the critical role of strategic sourcing and contract management.
Addressable Spend: Definition and Examples
Addressable Spend is all the spending within your organization that can be managed through procurement strategies. It doesn’t include costs you can’t influence, like salaries, taxes, or unavoidable operational expenses.
- Examples of Addressable Spend:
- Direct Spend: This includes costs directly tied to your products or services, like raw materials, packaging, or components.
- Indirect Spend: These are costs related to your operations, such as IT software, office supplies, or employee travel.
Addressable spend is the starting point for strategic procurement. It’s where you can focus efforts to find savings, negotiate contracts, and improve efficiency.
Impactable Spend: What It Includes and Excludes
Impactable Spend is a more refined category. You can actively influence or control the portion of addressable spend through procurement activities.
- What It Includes:
- Spend where you’ve already negotiated contracts or agreements.
- Purchases where procurement can work with suppliers to reduce costs or improve terms.
- What It Excludes:
- Fixed costs, like government fees or locked-in expenses under long-term contracts.
- Maverick spending is when purchases happen outside your procurement policies.
By focusing on impactable spend, you can pinpoint areas where procurement strategies will have the most effect.
The Role of Strategic Sourcing and Contract Management in SUM
To boost SUM, you need to focus on strategic sourcing and contract management. These processes ensure that you don’t just identify opportunities but also follow through to capture real value.
- Strategic Sourcing:
You can analyze your spend data, find trends, and consolidate suppliers. By categorizing similar products or services, you can negotiate better prices and stronger agreements. This helps you manage a larger portion of your addressable spend effectively. - Contract Management:
It’s not just about signing a deal with a supplier. You need to ensure the supplier sticks to agreed terms. This includes monitoring performance, keeping track of renewal deadlines, and making sure every purchase aligns with the contract. Good contract management reduces risks and makes sure your organization gets the best results from supplier relationships.
By understanding addressable and impactable spend, and focusing on sourcing and contract strategies, you can take control of your spending. This approach helps you streamline procurement, save costs, and get better value from every dollar spent.
Strategies to Increase Spend Under Management
If you want to increase Spend Under Management (SUM), you need to focus on actionable steps and consistent practices. By improving how you analyze spending, set goals, and manage sourcing, you can take control of your procurement process and achieve meaningful results.
Steps to Enhance SUM
- Conduct a Comprehensive Spend Analysis
Start by diving into your organization’s spending data. Look at historical records to pinpoint inefficiencies, identify maverick spending, and find areas where procurement can take control. Use spend analysis tools to organize expenses, evaluate supplier performance, and uncover trends. This gives you a clear picture of where your money is going and where you can make improvements.
- Set Clear Goals for Procurement Teams
Define specific and measurable goals based on your spend analysis. These could include reducing off-policy purchases, increasing savings, or improving compliance. Share these goals with your procurement team and other stakeholders so everyone understands what you’re working towards. When your team knows the targets, they can align their efforts more effectively.
- Implement Effective Sourcing Strategies
Strengthen your sourcing efforts by consolidating suppliers and negotiating better terms. Work with suppliers that match your organization’s needs and goals. Focus on supplier performance and regularly assess their capabilities to ensure you’re partnering with the right vendors. Strategic sourcing helps you make the most of your addressable and impactable spend.
Best Practices for Maintaining High SUM Levels
- Monitor and Report Regularly
Keep a close eye on your spending. Set up regular reviews to check progress against your SUM goals. Use reporting tools and dashboards to track key metrics and spending patterns. This keeps your procurement process transparent and helps you identify problem areas before they grow. - Train and Empower Your Team
Invest in training for your procurement staff. Equip them with skills in negotiation, spend management, and supplier relationships. Give them clear boundaries and the authority to make decisions. This builds confidence and encourages proactive spending management. - Use Technology to Stay Organized
Adopt tools like e-procurement platforms to centralize and track spending. These systems help you automate approvals, improve visibility, and ensure purchases follow established policies. Advanced analytics and AI tools can help you find patterns and make smarter decisions about where to focus your efforts. - Strengthen Supplier Relationships
Build strong, collaborative relationships with your key suppliers. Regular communication helps establish trust, leading to better pricing and improved service. Assess supplier performance regularly to ensure they meet your expectations. Strong supplier partnerships can result in long-term benefits for your organization. - Standardize Procurement Policies
Create clear and consistent procurement policies that outline purchasing procedures, supplier selection criteria, and contract management guidelines. Standardizing these processes helps reduce maverick spending and keeps all departments aligned. Involve different teams in developing these policies to ensure they meet your organization’s needs.
By following these strategies, you can take a proactive approach to increase SUM. This improves cost control, strengthens supplier relationships, and boosts overall efficiency in your procurement process.
akirolabs: Transforming Spend Under Management with Technology and Strategy
At akirolabs, we empower organizations to elevate their Spend Under Management (SUM) by combining cutting-edge technology with a strategic framework. Our platform enables procurement teams to focus on creating robust category strategies, driving higher spend coverage, and achieving management efficiency.At akirolabs, we aim to transform procurement into a strategic driver of value, sustainability, and resilience. Through our AI-powered category management platform, we empower procurement teams to make data-driven decisions, streamline processes, and achieve measurable outcomes.
How akirolabs Enhances Spend Under Management
- Empowering Strategy Creation
akirolabs shifts procurement teams’ focus from operational inefficiencies to strategic initiatives. By streamlining workflows, our platform enables the creation of comprehensive category strategies that extend spend coverage across all categories, significantly increasing SUM. - Comprehensive Visibility
Our CPO Cockpit and dynamic dashboards provide real-time insights into organizational spend. This ensures that all managed spend is effectively monitored, enabling data-driven decisions, improved compliance, and greater alignment with business objectives. - Boosting Productivity and Efficiency
Leveraging AI-powered tools and collaborative workflows, akirolabs enhances the productivity of category managers. By automating insights and simplifying processes, our intuitive interface ensures faster execution of strategic procurement workflows and better control over spend. - Closing Capability Gaps
akirolabs addresses skills and process gaps within procurement teams with features like AI collaboration and Strategic Scenario Modeling. These tools support the development of strategies aligned with organizational goals, ensuring a higher percentage of spend is effectively managed. - Improved Monitoring and Accountability
akirolabs equips procurement leaders with tools to seamlessly monitor and track spend across categories. By aligning spend strategies with broader business objectives and optimizing them continuously, we ensure accountability and measurable performance improvements.
The akirolabs Advantage
With akirolabs, organizations don’t just increase their Spend Under Management—they improve the quality of management. By enhancing the efficiency, strategic focus, and alignment of procurement teams, akirolabs transforms SUM into a driver of organizational growth and competitive advantage.
Schlussfolgerung
Managing spend effectively is no longer just a metric—it’s a strategic necessity for driving cost efficiency, improving supplier relationships, and building resilient procurement processes. Increasing Spend Under Management (SUM) empowers businesses to take control of their spending, align procurement with organizational goals, and unlock untapped value.
At akirolabs, we enable you to achieve these results through AI-driven analytics, collaborative workflows, and advanced sourcing strategies. By turning procurement into a strategic function, we help organizations thrive.
Take the first step toward transforming your procurement processes. Visit akirolabs and schedule a demo today!
