Using Technology to Resolve – Not Locate – Unnecessary Spend Fragmentation
Direct & Indirect Spend
This is the classic example of intentional procurement spend fragmentation. Depending on your industry and the philosophy of your executive team, direct spend is either so important that procurement needs to address it first (e.g. manufacturing) or it is too important for procurement to touch at all (e.g. retail). Indirect spend is either procurement’s whole territory or not worth our time. We’ve even heard the phrase ‘procurement spend’ used to describe indirect spend. Regardless of whether procurement is moving away from indirect spend or towards direct spend, this first level ‘break’ is so accepted that it sometimes even serves as the top level of custom a spend analysis taxonomy.
Indirect spend may not directly touch the customer, but it empowers (or hinders) the people and products that do. In fact, a change in indirect spending may be a critical predictor of increased demand or operational disruption. Unfortunately, if procurement is set on looking at indirect spend alone, that predictive value is lost – as is the opportunity for the business to respond and prepare. Allowing spend fragmentation to continue for the sake of tradition or convention comes at a very high price.
External Workforce & Services Procurement Spend
Perhaps it makes sense to combine direct and indirect spend, but surely services spend must be handled alone. After all, the product / service divide marks the line between ‘safe and familiar’ product categories, with their nice, neat quantities and specifications, and services categories, which (since they are made up of human workers) present a complex and less standardized challenge for procurement.
Procurement objectives notwithstanding, services spend has been on the rise, not just in terms of dollars, but in the enterprise objectives satisfied through third party service providers, contingent workers, and as-a-service contract models. As a result, third party services are far more critical to top line health and competitive advantage than they were in the past. As a recent global SAP Fieldglass study reveals, the external workforce accounts for 42% of total enterprise workforce spend.
Executives highlighted the vital role the external workforce plays in helping them compete in a digital world and access new IT and digital skills. In fact, 59% assert that their external workforce helps them compete in a digital world. More than half of executives believe that the external workforce helps them achieve a broad range of business goals, such as operating at full capacity (74%), improving the customer experience (67%), boosting agility (63%) and managing risk (61%).
This spend is not increasing in amount because labor now costs more, although low unemployment may be driving up wages in some specialty areas and locations. Services spend is increasing because a larger share of work is being done by people who do not work for the enterprise. Looking at changes in the demand and cost for these types of services is no longer about straight efficiency maximization. It goes straight to the heart of why the enterprise exists: to effectively satisfy customer demand at scale.
Procurement has to stop thinking of such a large opportunity as ‘other’ if we are going to extract as much value from services dollars as we do from products. With a focus on business objectives taking a larger role in contracts, even products are being looked at in more of a ‘services’ capacity, and many product contracts have a services component. Continuing to manage them in isolation from each other leaves value and innovation opportunities on the table, hurting the top line as well as the bottom.
Travel & Expense Spend
Airline, hotel, and rental car contracts have historically been overseen by a dedicated travel manager, someone that may or may not have any procurement training or experience. The travel manager may not even be a member of the procurement organization. But in a world where people regularly book their personal travel online, and where duty of care objectives provide an additional incentive to centralize corporate travel details, this traditionally segmented category of spend presents a huge opportunity. By integrating travel and expense management technology with established procurement platforms and spend management objectives, travelers are given greater control, the enterprise gains more visibility, and costs are reduced.
In addition, enterprise decisions need to reflect the reasons behind travel and expense spend. Seeing that sales team travel is up while revenue is down either reflects desperation or a stronger quarter to come. The same is true of account support staff. Are they traveling to innovate with strategic partners or to troubleshoot on behalf of frustrated customers? Knowing the answer to these questions, and realizing it is time to ask them, is an opportunity for enterprise intelligence that will likely slip by if travel and expense spend is managed in isolation.
For procurement organizations that are driven by a clear cost efficiency mandate, spend is spend. No spend should be ‘other’, ‘different’, or ‘theirs’, whether the issue is oversight, technology, or value. At the same time, procurement’s strategies and management approaches have to reflect the overall direction and priorities of the enterprise. Declaring that ‘spend is spend’ doesn’t mean that we should treat it all the same.
Procurement must work to unite all spend, regardless of how and where it has been addressed in the past. We must also use the full potential of our technology, using it to consolidate and analyze spend rather than just showing us where the cracks are and hoping we make the right choice in response to that information.