Insights on Improving Business Spend Management
How can companies improve business spend management? How do such improvements contribute to operational excellence? Those were the topics of discussion during a recent Coupa-sponsored Argyle Forum webinar moderated by Joe Fleischer.
The jumping off point for the discussion was the Coupa Benchmark, which provides 12 metrics for business spend management excellence. How many organizations are actually benchmarking their performance in this area? In polling of 147 webinar attendees, 62 percent indicated that they use benchmarking KPIs to ensure operational excellence. However, just 26 percent said they had currently had benchmarks in place for benchmarking business spend management specifically, with about 28 percent reporting they had plans to put such measures in place in the next two years.
This corroborates a recent study by the Economist Intelligence Unit which found that just 39 percent of CFOs have visibility into spending transactions within the organization. In this webinar, panelists Chris Sawchuck, principal at the Hackett Group, Mark Dotinga, CFO of Lagunitas Brewing Company and Todd Ford, CFO of Coupa discuss the value of business spend management benchmarks, and strategies for putting them in place.
Joe: Why is benchmarking essential to improving business spend management?
Chris: The best companies are always looking to get better. If you’re not looking at external measures, there’s always that risk of believing that you’re better than you really are. If you’re improving 10% a year, but the outside world is improving by 20%, you’re actually falling behind. Benchmarking opens your eyes not only to potential improvement opportunities, but also to prioritizing your efforts.
Todd: Every company’s in a different stage of maturation, and at every stage you should always be striving to drive more shareholder value. Benchmarking provides a framework for companies to identify gaps in their systems and processes.
Joe: What is your top benchmark for operational excellence in business spend management?
Mark: Preapproved spend. Before we started with Coupa, invoices were approved when they came in. Having the opportunity to approve spend ahead of time helps you avoid surprises. When you don’t have a PO process, people tend to continue the same spending patterns they may have been following for years. By actually asking for approval, people become more aware and they think harder about it. They question the business.
Todd: Preapproved spend, also called spend under management. What we see with customers that when they start with us is that they are well under 50 percent preapproved spend. When they move to a modern, SaaS-based architecture, we see that they quickly get to 80 percent, and then they start really chipping away at the tail of that spend. The very best in class will get to the 97.6 percent that you see here.
Joe: What does success in business spend management look like?
Mark: Beyond benchmarks that are relevant to control, compliance and cost savings, I think you also need to consider who in your organization you need to involve. For instance, from a legal perspective, I think you need to have delegation of authority in place. Then everyone knows what they are allowed to spend. For contract expenses, you want to make sure that your in-house counsel signs off so you’re not open to long term liabilities.
From a finance team perspective, financials need to be accurate and complete. At Lagunitas, we have a three-day closing process, so we need to make sure we have the right accruals in place for the month, which you can only do if you have spend on P.O.s.
On the procurement side, having them involved in negotiating cost savings is critical. For the long tail of suppliers that you cannot impact because it would take too much time, Coupa is very helpful because they have pre-negotiated rates for so many suppliers.
Todd: What success looks like at the highest level is having the ability to measure what you’re doing, report on it and have a process for which you can continually strive for excellence.
If you look at it from a savings perspective, at pure hard costs, if a company goes from 30 percent spend under management, which is what we often see, to over 80 percent, they’ll save about nine percent. This is where you can have almost an immediate impact on the organization.
Joe: How could finance leadership best use analytics generated by business spend management solutions?
Todd: First, people need to wake up to the value in analytics, and benchmarking their processes against other companies. Then, take that to the next level when you’re buying things.
What are people spending at companies of similar size spending on a Dell laptop, for example? Start really dissecting your spend and figuring out the big categories where you could potentially drive a lot of savings for the company through strategic sourcing. It’s a continual journey.
Chris: I think today we’re spending a lot of time in the first tier of analytics. The ability to drill down and do what-if modeling is the next level of insight. Not all spend areas are impacted by revenue. Some are impacted by the number of employees as well as other drivers. If the CFO were to go to the procurement organization and ask, “If revenue increased by 10%, what would happen to our spend,” does procurement leadership have the ability to provide answers to those kinds of questions? Do CFOs use this to the degree they can be using it? From my perspective, no.
Joe: How do employees who purchase goods and services typically react to the influence of business spend management solutions?
Mark: When introducing a new system, I think there’s always hesitation. It’s about how you explain the benefits. For example, if employees can see a purchase requisition as it is going through the approval chain, they don’t have to ask questions. So it will save them a lot of time. If suppliers are paid on time and they can see their payment moving through the portal, then they don’t have to call our AP desk and that also saves time. There are a lot of benefits, but the key thing is explaining them, until they can really experience them.
Chris: It depends on the breadth of the solution. When you think about spend management solutions, they enable many different types of activities. For example, if the solution is enabling buying and end users have been properly onboarded to the new solution, they’re going to gravitate to it especially if it is more user friendly than the previous solution. When you get into areas that are driven by analytics, it’s a bit trickier if users don’t understand how the insights are derived and where they’re coming from.
Joe: What have you observed to be the change management in implementing business spend management solutions? And how does an organization overcome them?
Mark: You have to start with the basics. A lot of people don’t understand what a P.O. is, to put it bluntly. The finance team has to go around and explain what it is, why we do we do it, and how it helps us. As a second step, you need to take people through the various processes. The process for ordering trucks is very different than the process for ordering glass, for example. Mapping out each specific process helps the team understand it. It’s a huge project and I think you need some outside expertise to help you.
Chris: I look at the change a little bit more simplistically. The simple fact is if the new way is better and faster, it will be adopted. It’s when there are issues that you have to have a way to overcome them.
Key to success is active sponsorship and support of senior executive management of the organization. To begin, you have to establish some rules, or in other words policies. Once you have established policies, you must create organizational awareness of those policies. You have to let everyone know this is the way we’re going to be doing things going forward. Lastly, you have to be willing to enforce the established policies especially if there are individuals that are not willing to participate and engage with the new spend management solution.
Mark Dotinga is CFO of Lagunitas Brewing Company, purveyor of the number one IPA in the USA. Before he joined Lagunitas, he was finance director with a Heineken brewery and Coke bottling company in France where professionalized the accounting, controlling, and IT departments.
Chris Sawchuk leads the global procurement advisory practice at The Hackett Group. He has more than 20 years of experience in supply management, working directly with the Global 2000 as well as midsize firms around the world to improve all aspects of supply management.
Todd Ford, CFO of Coupa, oversees Coupa’s financial operations. He previously served as chief financial officer with MobileIron where he led the company through a successful IPO in 2014 and was responsible for financial planning and analysis, accounting, treasury and investor relations.