Spend management: Importance and strategies for better ROI

“Spend management is not about being cheap, it's about being smart with resources," says Neil Patel, co-founder of Crazy Egg. Controlling excess spends and wastage is every business leader’s top priority. Yet, 79% of IT leaders report their organizations waste money on unused SaaS subscriptions.  

To curb this, monitoring and visibility is the first step. Finance leaders need a comprehensive approach to help them understand where the budget is being spent and what value they are receiving in return. Spend management is a strategic approach for managing, optimizing and reducing an organization's expenses.

This blog post will explore spend management and its significance for businesses along with the strategies for achieving better ROI. We will also provide evidence-based statistics and real-world examples. 

What is spend management?

Spend management is a strategic approach to procurement and finance that seeks to optimize costs and reduce vendor risk. It involves analyzing supplier transaction data and spend categories, vetting suppliers, negotiating discounts, setting spending limits, managing the supply chain and analyzing results. 

The goal of spend management is to manage company purchases holistically, maximize value, mitigate risks and optimize total cost of ownership. It is essential for high-performing procurement organizations and requires a coordinated effort across the business to align with broader priorities. By implementing a spend management program, businesses can gain significant cost savings and better manage their procurement processes to increase efficiency and performance.

Importance of spend management

Inefficient spend management can be disastrous for a business as external spending can comprise 40-80% of a company's total cost. Effective spend management can fix this and deliver the following benefits.

• Efficient sourcing and procurement
• Regulated expenses and processes
• Strengthen the financial health of an organization
• Prevent unnecessary spending and minimize costs and financial risks
• Maintain data accuracy throughout the entire billing lifecycle
• Maximize value and control total cost of ownership
• Enable transparency and control over spend, leading to optimized spending and driving business growth

Different types of spending

An organization's spending types can be broadly classified into five categories:

1. Direct spend: This is the cost of acquiring raw materials and goods directly related to production, such as cloud or customer success tools. This is a significant contributor to the cost of goods sold (COGS).
2. Indirect spend: It includes expenses not directly related to production, such as experimental project tools, marketing platforms etc. This is non-COGS.
3. Maverick spend: This kind of spend refers to purchases made outside of the company's established procurement process. It can include purchases made by individual employees without proper approval or outside of the company's preferred suppliers. In other words, decentralized SaaS buying.
4. Tail spend: It refers to the long tail of small, low-value purchases that can add up over time and significantly impact the company's bottom line. This could be additional resources provisioned for test environments, a tool for cleaning data etc.
5. Rogue spend: This spend refers to unauthorized or fraudulent purchases made by employees or third-party vendors. Unlike other types of spending, rogue spending is intentionally deceptive and can involve duplicate invoices, inflated pricing and personal expenses charged to company accounts. 

Irrespective of the kind of spend, there can be wastage. For instance, unused licenses can be part of direct spend. Auto-renewals can incur on tail spends without the knowledge of the finance teams etc. Therefore, it is important to have an efficient spend management program for every spend the organization incurs.

Effective spend management process 

Here are some spend management best practices to gain full transparency and control over all expenses incurred:

1. Expense recognition and tracking

Identify and account for all costs associated with purchases, invoices and payments. By capturing this data accurately, companies can monitor their expenditures and gain visibility into their budgetary situation.

2. Categorization and sorting

This process involves classifying expenses according to predefined categories, such as COGS, non-COGS, temporary, long-term and so on. This categorization allows companies to track spending trends and identify potential areas for cost savings.

3. Real-time data validation

This step involves checking that expenses are correctly classified, accurately entered into the system and adhere to internal policies and standards. Real-time data validation helps companies avoid costly errors and ensures they operate on accurate information.

4. Advanced analytics and benchmarking

By analyzing data over time, companies can identify patterns and make more informed decisions based on historical performance. They can also benchmark their performance against industry peers to identify areas they need to improve.

5. Supplier risk assessment and profiling

Suppliers are assessed for their financial health, track record and adherence to regulations. It also involves creating and maintaining supplier profiles that provide detailed information on each supplier to facilitate more informed decision-making.

6. End-to-end supply chain visibility and control

Managed spending is also about achieving end-to-end visibility and control. By clearly understanding procurement activities, companies can make better decisions regarding the sourcing, purchasing and delivery of SaaS services. This visibility allows companies to optimize their processes, reduce costs and increase efficiency.

7. Continuous process optimization 

Companies can reduce costs, increase productivity and improve overall performance by optimizing processes. Spend management best practices are critical for any organization and the software procurement process can significantly optimize and streamline it. Traditionally, this process has been time-consuming and prone to errors, which results in inadequate cost control. 

However, with Spendflo, businesses can automate and streamline their SaaS spend management processes to save time while reducing cost and improving visibility.

Common spend management challenges

Optimizing financial performance requires the knowledge of what is spend management and how to apply it. However, several common challenges may limit the effectiveness of such initiatives.

1. Incomplete data sources and lack of data integration

Data is central to management processes, but incomplete data sources and the lack of integration make it challenging to obtain a complete and accurate picture of the company's expenditures. Different data sources, such as enterprise resource planning (ERP) systems, contract management systems and vendor management systems create data silos. These silos make it difficult to have a unified view of all expenses, create redundancies, increase errors and create inaccuracies.

2. Manual and time-consuming expense classification

Companies often tackle expense classification through manual methods without much automation. This process is prone to inaccuracies and takes up excessive time. Additionally, the manual method makes identifying and managing maverick spends challenging.

3. Difficulties in controlling tail spend

Though done individually, the number of these purchases is significant and accumulates a considerable amount that can be difficult to manage.

4. Poor tracking of cash flow and payment terms

Efficient spending management relies heavily on meticulously tracking cash flow and payment terms. Poor tracking of these factors makes prioritizing expenses challenging, thus leading to an inadequate allocation of resources. This, in turn, results in delayed payments, overdraft fees and other avoidable expenses.

5. Inadequate spend visibility and reporting capabilities

Inadequate spend visibility and reporting make drawing insights into the spend data challenging, thus making it difficult to identify areas to control costs. Companies may miss potential savings and opportunities to improve their bottom line.

While these challenges are common, they also lead to major consequences for finance and procurement teams of fast-growing organizations.

Consequences of poor spend management strategies

A poor spend management strategy can severely affect an organization's financial health in the following ways:

1. Uncontrolled budget overruns and wasted resources: When businesses lack effective cost-control strategies, they are more likely to experience budget overruns. 

2. Decreased visibility and transparency of financial operations: A lack of transparency can have significant consequences for the business, including falling short on financial targets, crippling audits and tarnished reputations.

3. Opportunity cost of missed cost savings: With tighter budgets becoming the norm across industries, cost savings are critical to keeping businesses competitive. As Stephen Newland argues in SaaS spend control, many opportunities are lost without a well-developed and executed spend management strategy, leading to lower overall financial performance.

7 steps to develop an efficient spend management strategy for your business

A company must develop a spend management strategy to maintain financial stability and growth. It requires a systematic approach that includes seven key steps:

1. Expense identification: laying the foundation for strategic spend management

Strategic management of spend begins with a comprehensive assessment of all expenses. This requires careful consideration of all cost centers within a company, including direct and indirect expenditures. The goal is to identify all expenses, from large purchases to small, seemingly insignificant internal costs.

2. Centralizing expense data: getting organized

With all financial data in one place, organizations can analyze company-wide expenses, identify trends and make informed decisions regarding future expenditures. A robust SaaS management platform like Spendflo leverages automations and integrations to accelerate this process.

3. Data verification: ensuring accuracy and precision

Data accuracy and precision are key components of strategic spend management. Cross-reference all collected data with records such as invoices and receipts and seek input from various departments to ensure all expenses are accounted for. 

4. Defining spend categories: clarity through classification

Spend categories should be relevant to the company's specific needs such as engineering, product development, marketing, customer success etc. By doing so, the organization can avoid overlooking expenses and obtain a comprehensive view of company-wide spending.

5. Analyzing spend data: sorting through financial information

This involves reviewing expense patterns, identifying areas of overspending and looking for potential savings opportunities. Analysis often involves financial tools and software, which can help companies to effectively sift through large amounts of data and generate insights that inform decision-making. Don’t just look at spends and usage; also include user sentiment for a more holistic understanding. 

6. Crafting a strategic vision: from analysis to action

Once analyzed, the resulting insights inform the development of a strategic vision. This vision should incorporate goals for driving down costs, ensuring supplier compliance and optimizing expenditure across various departments. Key stakeholders should collaborate to ensure the strategic vision aligns with the organization's business objectives. Watch how Airmeet optimizes their SaaS spends for practical insights into optimizing spending.

7. Forecasting and planning: anticipating future needs to manage spend effectively

Finally, a successful strategic spend management plan requires forecasting and planning, which includes anticipating future needs and identifying potential risks that may impact costs. A complete guide to SaaS spend management provides insights on how to efficiently cut costs and bring transparency to the SaaS procurement process. 

Benefits of spend management for procurement and finance leaders 

Procurement teams that lack control over their spending often face inefficiencies, hidden risks, inaccurate data and unnecessary costs. Effective spend management practices help procurement departments in the following ways:

1. Improved sourcing opportunities

By analyzing data and trends across categories, procurement managers can identify areas of improvement and create new sourcing strategies. Robust management tools provide visibility into market trends, competitor pricing and supplier performance, so managers can prioritize their focus on the most valuable opportunities.

Crownpeak leverages spend management to identify better ways to procure SaaS. They’ve got complete visibility into the procurement process and quickly identify areas of inefficiency. This streamlines their operations, saving them valuable time and resources.

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2. Achieving higher efficiency

Managing spending enables procurement teams to save time and resources by automating manual and time-consuming processes. One example is the use of artificial intelligence (AI) for invoice processing, which reduces the time and effort required for manual invoice reviews.

3. Increased spend visibility for strategic sourcing decisions

An effective management of spending provides procurement departments with visibility into all aspects of company spend, enabling teams to make data-driven decisions. By analyzing spend data, they can create a comprehensive view of the company's purchasing trends and make critical decisions based on this information.

Drip Capital employs spend management to boost spend visibility and make informed sourcing decisions. Their management system streamlines the procurement process and enhances its effectiveness in driving cost-optimization strategies.

4. Identification and mitigation of hidden spend related risks

A lack of visibility into company spend can hinder risk management, leaving procurement departments vulnerable to compliance violations and other financial risks. One of the spend management benefits for procurement teams is that they can identify hidden risks, such as maverick spend and overcommitted budgets to mitigate them before they become a problem.

5. Complete financial data

Robust spend management platforms provide real-time, comprehensive spend data, which can be used to generate accurate financial reports and forecasting. This enables procurement departments to allocate resources better, analyze supplier performance and make informed decisions.

6. Instant insights into company-wide spend 

With an effective management process, procurement departments can monitor their spending in real time. This provides instant insights into company-wide spending, which can be used to identify cost-saving opportunities, negotiate better contracts and improve supplier performance.

7. Achieving cost savings and risk reduction

With spend management best practices, procurement departments can reduce SaaS costs, negotiate better contracts and improve supplier performance. This drives down costs and increases profitability and helps the business reduce risks and operate in compliance with applicable regulations.

Managing your spending is vital in ensuring sustainable business growth and profitability. By implementing effective strategies for spending, organizations can optimize their resources and improve their ROI. From gaining control over expenses to minimizing financial risks, spend management enables organizations to stay competitive and agile. 

With Spendflo, businesses can access a comprehensive suite of tools to manage their SaaS spending efficiently for significant savings and higher ROI. Get a free saving analysis and manage your spends intelligently.

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