It isn’t uncommon to meet with a client only to hear just how well they have spend under control. Telecom and IT spend? Got it covered. Marketing agencies? Just taken care of. These are three common examples, but not the only ones. It sometimes doesn't matter which category gets mentioned – the answer often boils down to one case-closing assessment: Our team has done due diligence and that spend is under management, nice and clean and tidy.

Only it isn’t. Not always.

That cover on our telecom spend gets blown right off when we ask the follow-up question, “when was the last time you went to market?” Most common answer? Somewhere between three years and never. The same holds true for Marketing agencies. Enough time may have lapsed that multiple brand-wide strategies have come and gone without even searching for the agency best suited to see them through (perhaps that’s why those strategies keep coming and going). I've written before about elevating suppliers to strategic partners, something Procurement pros sometimes ignore to our detriment.

Don’t get me wrong, I’m OK with all this. If all that spend really was well under management, then I’d be out of a job. However, considering what an important metric spend under management is (or at least is touted as), I think we should take some time to step back and consider: How well are we really managing our spend?

Spend Under Management Defined
To figure out what’s going wrong, we need to put a definition behind the term. This need, in and of itself, should start to clue us into the problem we collectively face – a lot of definitions are a bit ambiguous. A general definition is “any spend under active control by Procurement.” This sounds nice and simple. The term “active control” has a nice ring to it, too. The problem is the vague notion of what it means to actively control something. How consistent and ubiquitous does activity need to be to constantly be considered active? How deeply involved in a process must Procurement be before we’re in control?

These terms are incredibly open to interpretation. Yet we all too often take these subjective characteristics and tie them to highly specific, objective sounding goals – “You aren’t a top performing team without at least 85% of spend under management. If you have less than 25% of spend under management, you’re in trouble!” Toss me out to sea if you wish, but throw me a flotation device!

Worry not, for that’s exactly what I intend to do.

An Actionable Definition to Spend Under Management
I prefer definitions that include a call to action. In this case, there are four calls to action that I think define when spend really is under management. To that end, let’s consider spend to be under management when:

  • It has been properly sourced. Procurement has gone to market recently to review the supplier landscape.
  • It is covered by the terms of a contract. Once sourced, all pricing, terms, and SLAs are codified in an agreement.
  • It is regularly audited. Procurement actively tracks purchases against pricing and SLA agreements.
  • It is analyzed. Within the context of our organization, suppliers are reviewed to ensure they support and advance our goals.

These are the elements of our life-saving flotation device.

To begin with, I don’t believe any spend can be considered “under management” if we haven’t recently gone to market to test our suppliers against their competitors. We simply don’t know what we don’t know, minimally in terms of competitive pricing. Again, price is only one key element. The solution we have in place today may not be the best possible solution. Certainly the solution from several years back won’t be as good as a more recent one… especially true in the IT and telecom world. You should consider at least some of your suppliers as partners who can bring fresh solutions to you in order to build and improve your organization beyond simple cost reduction.

After we’ve confirmed our supplier is best-in-class and price competitive, we want to get that in writing. I’ve seen companies grow frustrated and resentful of supplier relationships held together through years of unwritten agreements. They’re often surprised when these suppliers start missing time lines or delivering a lower quality product than at the beginning of the relationship. If there are service level terms that are important to us, they need to be codified in an SLA. Otherwise, there may be no clear foundation for improving a supplier who is slipping. What is the minimum level of service you should expect? If a supplier drops below that level, what recourse do you have? What penalties does the supplier face, and how long do they have to fix an issue before those penalties are incurred? You aren’t likely to find clear cut answers unless you have them in an agreement.

The third point ties in with the establishment of these SLAs. It’s one thing to know you have an established, executed agreement. It is another to claim with any certainty that your agreement is being followed. I’ve seen organizations burned on both sides of this one – externally, suppliers will slip and start missing service level goals if not held to task while, internally, buyers may ignore competitively priced on-contract items in favor of pricier purchases from a second, unmanaged supplier. The best written agreement counts for nothing if either or both sides don’t abide by it.

We’ve reached a point by now where we’re keeping the trains running efficiently. That said, we need to keep in mind that our point of origin (our sourcing events and resulting mix of pricing and SLAs) are based on a single snapshot in time. What was “right” for our organizations yesterday may not fit where our organizations will be tomorrow. As a simple example, if our spend with a supplier increases dramatically year over year, then we may command more leverage to lower pricing than we had when we first went to market. I see this with acquisitions – an organization’s spend doubles or more and moves into big fish territory, yet they haven’t negotiated with an incumbent vendor since the early days of being small fry. This issue goes beyond costs. Simply put, your organization and its goals may outgrow an incumbent relationship or, on the other side, that incumbent’s business may shift away from the offerings that you rely on them for. In either case, we need to evaluate how a supplier fits into our overarching strategy months or years after the ink dries on our contract.

Rinse and Repeat
The final mistake is to misinterpret these activities as occurring in a straight line. Make no mistake, this needs to be a cyclical process. Although the length of time will vary from category to category and product to product, Procurement is never done with these phases.

We need to cap any review of our supplier relationships with a single question: Kill switch style, “can we think of any reasons not to go back out to market… right now?” At the end of the day, if we can’t identify valid reasons the cycle shouldn’t start again, odds are good that it is time to go back out and reevaluate how our incumbents stack up against any new, hungry competitors in the market.

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Brian Seipel

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