In procurement, spend under management (SUM) and category management are two closely interrelated concepts focused on optimizing organizational spending.

Understanding how these concepts work together is crucial for enhancing control over spending, streamlining procurement processes, and driving value.

In this article, we’ll first explore what spend under management and category management are and what methodologies and tools can help you enhance these processes. 

Then, we’ll discuss how category management plays a pivotal role in increasing spend under management.

So, spend some time with us to improve your organization’s spend control.

What Is Spend Under Management 

Spend under management (SUM) is one of the key metrics in procurement.

This metric, usually expressed as a percentage, indicates how much of your company’s total spend is actively managed or influenced by the procurement department.

Why is this important?

Because the more spend you have under management, the better your organization can control costs, drive savings, and align spending with its strategic goals.

In fact, many analyst firms consider the percentage of spend under management to be a general indicator of how well a company is performing, as shown below.

Illustration: Veridion / Data: LinkedIn

So, how can you determine your company’s spend under management?

Calculating it is simple—if you have all the relevant spending data:

Total Spend Managed by Procurement / Total Spend x 100 = % of SUM

It’s important to note that, in this formula, “Total Spend” typically excludes operational expenditures (OpEx) such as payroll, rent, utilities, taxes, and depreciation.

Additionally, it may exclude other categories where price negotiations are not feasible for various reasons.

For the remainder of your company’s spend, known as addressable spend, it’s generally considered that these costs could be brought under the management of procurement.

The other part of the formula, “Total Spend Managed by Procurement”, refers to the portion of addressable spend that your procurement function is already managing.

To avoid possible misinterpretations, Amit Duvedi, former Vice President of Business Strategy at Coupa, proposes that SUM should be defined as the “spend for which savings have been optimized.”

He explains what this definition would mean:

Illustration: Veridion / Data: CPO Rising

He continues to explain that, therefore, it’s not correct to assume that “spend under management” is equal to “spend under contract.”

More precisely, even if a contract with one or more suppliers exists, that’s not a guarantee that employees are actually using those suppliers or the negotiated contract rates when purchasing.

This “unmanaged spend under contract” happens for a number of reasons, such as

• too complex approval procedures, 
• lack of spend visibility, and 
• decentralized procurement policies.

In other words, if your spend data is dispersed across various departments and locations that do not timely exchange information or apply the same policies, determining what spend is actually under management is much harder to do.

On that note, a SpendHQ survey found that almost half of companies consider separate, non-integrated data sources and data silos as the primary barriers to spend visibility.

Illustration: Veridion / Data: SpendHQ

That’s why establishing a single, reliable source of spend data is the first step to getting your spend management under control.

More precisely, you’ll need some type of procurement management software where all purchasing transactions will be recorded and easily available to relevant stakeholders.

If such a software system has spend analysis capabilities, you can use it to analyze your company’s expenditures and determine which of them are controlled by procurement and which are not.

Alternatively, you can leverage a separate spend analysis tool.

Once spend data is consolidated and centralized, key aspects of spend under management include:

• tracking/monitoring where money is spent across your organization,
• controlling/reviewing compliance with established procurement policies,
• optimizing spend, i.e., achieving the best value for money through category management, strategic sourcing, and supplier relationship management.

Additionally, this allows you to prevent various risks, such as maverick spending and fraud.

Ultimately, the goal of effective spend under management is to reduce the percentage of unmanaged spend by bringing more of your company’s expenses under the control of your procurement department.

What Is Category Management

Category management, on the other hand, is a strategic approach that organizes procurement activities around specific product or service categories.

This practice is particularly beneficial for large companies with diverse and complex procurement needs.

By grouping similar products and services based on criteria such as type, location, value, or other business-relevant factors, companies can more effectively identify cost-saving opportunities and consolidate their spend.

Although determining specific categories is up to each organization, there is one top-level classification that most companies use.

Namely, your company’s addressable spend can be broadly divided into two main categories: direct and indirect spend.

Direct spend refers to the expenses directly tied to the production of goods or services that your company sells.

Conversely, indirect spend encompasses expenses that are not directly related to the production process but are necessary for the overall functioning of your company.

To illustrate, here are some typical examples of both these general categories:

Source: Veridion

Expectedly, categories classified as direct spend typically have a high percentage of spend under management.

In other words, the sourcing of raw materials, components, manufacturing equipment, and other inputs essential to creating your final product is usually managed by the procurement department.

On the other hand, categories considered to be indirect spend are generally less controlled by procurement.

As such, they hold greater potential for consolidating suppliers and generating savings.

Naturally, what one company considers direct spend can be very different from another, even with very similar companies.

This means that there is no single spend taxonomy you can apply.

Instead, you need to establish one that best fits your company’s business categories and other factors.

You can see the definition and typical breakdown of a spend taxonomy, courtesy of Aavenir, in the image below.

Illustration: Veridion / Data: Aavenir

And to illustrate a potential spend taxonomy breakdown, here’s a top-down example:

Group	Manufacturing materials
Family/Class	Metals
Category	Steel products
Commodity	Cold-rolled steel sheets

So, when is the best time to establish or review your spend taxonomy?

In short, when doing a spend analysis, after you’ve collected all spend data from various sources and before you’ve analyzed them.

More specifically, to extract valuable insights, spend data needs to be cleaned, enriched with additional data (when applicable), and classified.

While this has, in the past, involved a lot of manual work on spend data collection, consolidation, and classification, that’s no longer the case.

Nowadays, there are various—general or specialized—procurement software solutions that can automate and streamline many of the above processes.

For instance, here’s one solution focused on enabling organizations to make their category management strategies actionable.

Source: Cirtuo

As you can see in the screenshot above, this category management tool uses a proven methodology, interview-style user guidance, and AI capabilities that enable your team to identify the right categories for your business.

From there, your team can evaluate these categories based on factors like pricing, supplier performance, and demand forecasts to uncover cost-saving and supplier consolidation opportunities.

Essentially, this gives you actionable strategies for each category that you can implement, monitor their progress, and review their outcomes.

To recap, classifying your organization’s addressable spend into suitable categories allows you to negotiate better prices, improve supplier performance, and increase spend under management.

How Category Management Increases Spend Under Management

Now that we have a better grasp of what spend under management and category management are, let’s see how they interact.

For starters, it’s important to note that one of the main goals of category management is to increase SUM, i.e. prevent off-contract spending, also known as maverick, rogue, or dark purchasing.

While some direct spend categories may also profit from enhanced category management, it’s primarily indirect spend categories that are typically neither controlled nor influenced by the procurement function.

In fact, a 2023 survey revealed that more than 82% of procurement leaders consider that their indirect spend could be managed better.

Illustration: Veridion / Data: Globality

A typical example of such poorly managed spend is office supplies.

When this category is not managed by procurement, this usually means that different company departments or locations can choose their own office supplies vendors.

This has a number of negative consequences, such as:

• numerous suppliers used for purchasing identical or similar items,
• multiple contracts with varying pricing structures, and
• inconsistent service levels across departments/locations.

By joining all office supplies under one group and categorizing them, you can eliminate or minimize these issues while also negotiating better prices, including volume discounts. 

In other words, such category management enables you to recognize which categories of office supplies include the same or very similar products sourced from different suppliers.

From there, you can analyze the pricing and performance of existing suppliers and benchmark them against current market prices to come up with a shortlist of eligible candidates for supplier consolidation.

For your market research to be fast and up to date, consider using big data-enabled platforms like our own Veridion.

Source: Veridion

In a nutshell, Veridion is a sourcing enhancement tool that consists of a global, weekly updated database of over 80 million suppliers offering more than 200 million products and services.

In addition to database access, you get an advanced search API, enabling you to use Veridion with your other procurement software solutions.

That way, you can check not only the market prices but also a range of other supplier criteria.

The best thing about Veridion is that it saves your procurement a lot of time otherwise spent on searching for new suppliers or benchmarking them against others for performance review purposes.

Below, you can see a comparison between a manual and a Veridion-powered supplier search.

Source: Veridion

When Veridion is coupled with other automated solutions that allow you to centralize spend data and perform effective category management, you’re fully equipped to analyze company expenses and increase the percentage of your spend under management.

More precisely, these tools allow you to:

• analyze your organization’s spend,
• group procurement items into relevant categories,
• identify procurement-managed and unmanaged activities, and
• bring more spend under procurement control.

This enables you to develop efficient category strategies that can be used to achieve cost savings, reduce the number of engaged suppliers, and select the best ones for the job.

Therefore, the more refined your category management is, the more spend you can bring under the management of your procurement team.

Conclusion 

So, it is clear that the relationship between spend under management and category management is a complementary one. 

More specifically, effective category management helps companies in bringing more spend under procurement control, negotiating better deals, and selecting the best suppliers.

By understanding these concepts and leveraging the right tools, your organization can optimize its spending, drive cost savings, and improve overall procurement efficiency.