A line in the Spend – Where it makes sense to outsource.

We are playing off the commonly used idiom “to draw a line in the sand” which implies a both a boundary and a set of consequences for crossing it. All organizations have limits on their procurement resources. As a consequence, some portion of their spend will go unmanaged or fall under ineffective management. The “line in the spend” represents the point at which this happens. The consequences for crossing this line include an inability to aggregate volume for better pricing or even situations where aggregation isn’t possible to bid these items and services more competitively.

The placement of this line is going to be different for each organization and each individual set of circumstances. Many large companies have robust processes, teams, and solutions to manage their direct materials and large indirect categories. For them, the line typically identifies what is called tail spend. This “tail” is typically comprised of small purchases (think 10s of thousands of POs) with close to as many one-time suppliers. It can make up 60-80% of their suppliers and represent 15-20% of their total spend. After all, a large multinational organization may have millions of purchase orders and invoices a month.

For mid-sized companies the line may shift to the left in the spend to supplier count graph. There may be categories that they consider tail spend that actually have enough volume to aggregate for discounts. However, they may lack the resources to even comb through the spend data and identify consolidation opportunities let alone the resources and expertise to source complex or heavily vested stakeholder categories like Telecom or Marketing.  

A small company or start-up may lack a formalized procurement organization entirely. Their line designating unmanaged spend is all the way to the left in the graph. The dollar value of that spend may only be $10’s or $100’s of millions of dollars, if not lower. They would benefit from the efficiencies and automation of technology as well, but would fail trying to implement them on their own.

Regardless of where that line is for your organization, one option for managing that portion of your spend is to simply outsource it.  There are a variety of offerings from leveragingGPO contacts, a managed P2P provider or a buying desk. Holistic managed service providers can offer an end to end process from strategic sourcing, PO and invoice processing and payment aggregation enabled by technology to provide automation and visibility.

It may makes sense to get some guidance on where that line is for your organization and which of these options make sense for you. The right Service provider can bring you the technology, the process, and the expertise to cross the line in the sand safely and get all of your spend under management.