A Brief History of Spend Management, in 4 Acts
There’s never been a better time to be in corporate procurement. Over the last three decades, the profession has moved from the back office to the executive suite as our focus has evolved from transactional buying to strategic sourcing and proactive spend management. While the low-hanging fruit is gone in most organizations, the business imperative to extract value out of indirect spending has not gone away. If anything, it has intensified with new competitive pressures.
Fortunately, the tools and technology that we have available to manage spending has evolved in tandem. We are now entering what I consider the fourth and final act in the history of spend management. The curtain has risen on a technology enabled, end-to-end approach to providing procurement and business stakeholders greater transparency and control over how third party spend is allocated.
Finally, the stage is set to take the profession to where it’s always needed to be: To make spend management more strategic, and to partner with business stakeholders in new ways to deliver more value than ever before. Here’s where we’ve been, and where we’re going.
Act one: The rise of strategic sourcing
This is a narrative that has paralleled my own career trajectory from management consultant to Chief Procurement Officer of Staples. In the early 1990’s, I was a consultant with A.T. Kearney (ATK), where we helped to create the notion of strategic sourcing – applying real discipline and a rigorous seven-step approach to analyzing supply markets and engaging with suppliers. Perhaps it is a stretch to say that we “invented” strategic sourcing at ATK, but we like to think we did.
A lot of what we did in our projects back then started with and was predicated on rigorous spend analysis. Companies at that time were just not able to effectively look at purchasing spend or analyze it in a strategic way. There weren't any sort of P2P systems out there addressing indirect spend, so there was a complete lack of transparency around how much was being spent, with what suppliers and on what contract terms. And without any purchasing systems, companies certainly didn't have the ability to manage spend ahead of time.
It was a good time to be a consultant, because we were able to work with organizations to quickly find tremendous opportunities for savings – such as identifying areas of spend that had previously never been touched, consolidating sources of supply, challenging long-standing relationships and surfacing specification change and demand control opportunities. Fortunately for us, procurement was only beginning to be professionalized, with not a lot of professional sourcing techniques being applied and with the best talent focused on companies’ direct material categories.
At that time, the process of spend analysis was highly manual. We would ask accounts payable for a data dump of all payments to every supplier in the last year or two. Once we had completed the laborious task of cleansing, sorting and analyzing the data, then the search for contracts would begin. If they existed, they were most likely paper copies in desk drawers and filing cabinets. Only then could we identify the opportunities and start the strategic sourcing process.
Act 2: From point solutions to spend analytics
Because this type of effort involved so much manual work, many of the consultants and service providers who did it recognized that as an opportunity. Some of them became quite good at taking mounds of historical data and running them through a process to cleanse the data, categorize spending and conduct the analysis.
For an extra fee, these companies would take your data on some recurring basis and give you the same kind of reporting on where you spent your money. Then it was up to either some smart procurement people or enterprising consultants to carve off some categories and do something with them. Several providers automated this process to create a spend analytics engine. Even today, some of these point solutions for stand-alone spend analysis still exist.
What did we get from that exercise at the time? We went after some big categories. We did some sourcing. We put some new contracts in place. We saved a lot of money. But we had no mechanism to encourage people to buy from these new contracts, or to measure compliance to preferred suppliers. The major downfall is that there was no mechanism to easily channel employees to the right suppliers at the point in time that they wanted to purchase something. People were still going out and buying things wherever they wanted to.
So what did we do? It was a classic case of trying to drive forward by looking in the rear view mirror. We would collect historical data. We would conduct the analysis. We would source new categories. We would identify non-compliant spend. Then the next reporting period, we’d look and see how we did.
Act 3: The genesis of spend management
Obviously that’s less than satisfactory, and the need for a more proactive way for business stakeholders to decide how to spend their money gave rise to the first generation of procure-to-pay systems. These brought some degree of automated requisitioning and authorization workflow, along with simple buying channels such as catalogs. This was the genesis of thinking about how best to encourage people to buy from preferred suppliers.
Unfortunately, the technology took a long time to implement, it was cumbersome to use, hard to configure and the catalog focus was not broad or flexible enough to address all the buying channels or the more strategic categories. Additionally, the processes really did not mirror the way people in the organization buy, and getting the full supply base to sign up to the systems proved challenging. As a consequence, user adoption was slow and many companies realized they had spent millions of dollars to automate the purchase of office supplies and a few other non-strategic categories.
I exaggerate, but only slightly. The value realized from these early P2P systems was far less than what was promised; however, it was the beginning of the thinking and striving for a more connected, strategic process of spend management.
Act 4: Proactive spend optimization
Modern day flexible SaaS solutions that truly link the sourcing, contracting, buying and invoicing processes, that support multiple buying channels, that allow for easy supplier registration and which give real time spend visibility have vaulted us to the opening of the fourth and I believe final act: proactive spend optimization. This act is going to be a long one, as we are only just starting to exploit the potential of these tools.
When I look back at acts 1-3, I think we got some decent value out of each, but nothing like what we’re going to see in act 4. In the first three acts, purchasing had the leading role. As we get into act four, the spotlight has turned on the supporting cast. Act 4 is about putting the tools in the hands of business stakeholders to make it easy for them to manage their own spend and make their own decisions and that is what is going to drive more value than ever before.
Business stakeholders don't want to waste money and they don’t want to waste time either. They just need some help to understand what their people are spending money on. They need to get procurement’s help to put value added deals together and then encourage people to buy appropriately through easy processes.
We're still at the beginning stages of this fourth act. We have the visibility. We have the appropriate buying channels identified. We have educated the business users on how to use the systems in order to encourage the right sort of behavior. I imagine that we will go through many degrees of implementation in this fourth and final act.
In my own organization, there are some areas where I think we can do a full implementation across 100% of the spending. We've got tight contracts. We already have a buying process in place. We have catalogs and rate cards. We should be 100 percent “no PO, no pay”. I can see the vision to do all of this and give the business owners real time visibility and approval rights.
Then there are other areas where we’re not well penetrated from a procurement perspective, so we still need to build some influence. We'll put the tool in and get a few deals and put some catalogs in place to make it easier for people to buy from the preferred deals. Over the next year or two, we'll get to the full implementation.
Along the way, we can do exciting new things such as managing tail spend, which is the 20-30 percent of spending which we’ve never really had the ability to go after before.
This is a great time to be a CPO. The business imperative to extract value from the supply base has never been stronger; however, at the end of three decades of evolution, this requires new spend management tools and approaches and a different interaction model with business stakeholders, where procurement is viewed as that supporting actor to enable businesses to more proactively manage their spend.
If I were still a management consultant, I would long for the days when it was easy for me to sell a big project and save the client so much money just by leveraging the client’s own spend data. Today’s consultants now have to be fairly sophisticated and niche-focused in order to deliver that kind of value. But within corporate procurement, there is a lot of fun ahead learning how to our new spend management tools to drive value.