The percentage of unmanaged spend can be quite high, even among organizations with a well-established procurement function, and the risks go way beyond drops in your bottom line.

On the other hand, the greater the spend under the procurement department’s control, the greater the benefits. 

Improving SUM is a must, and in this article, we’ll outline exactly what you can gain from it.

Let’s jump right in.

Reduces Financial Risks

Ensuring that the procurement team actively monitors and manages spending is the best way to reduce your company’s financial risks.

More spend under management takes you beyond savings and straight into proactive risk management, which is one of the activities with the highest value. 

Unfortunately, not all companies have a lot of spend under management. 

In fact, according to the analyst firm Ardent Partners’s 2023 CPO Rising report, the average percentage of spend under management decreased slightly from 2022, reaching 64.9% of managed spend in 2023. 

Illustration: Veridion / Data: Ardent Partners

Even though this drop isn’t very large, it shows that there might be a careless attitude toward controlling spend. And that leaves the door open for various risks. 

Simply, the more control and visibility you have overspending, the more bad things you can prevent. 

Risks can include everything from overspending, and purchasing from unapproved suppliers to falling victim to vendor fraud.   

A lax attitude to spend management leaves you vulnerable to vendor fraud, which can result in overbilling, bid rigging, or even purchases from ghost vendors.

If this ever happened to you, you are not alone. 

The Treasury and Risk’s 2023 survey indicates that over half of respondents fell victim to vendor fraud in 2022, with nearly a quarter experiencing two or three separate incidents.

With these numbers in mind, it’s not surprising that procurement fraud is one of the top three economic crimes experienced by companies globally, together with cybercrime and corruption. 

Illustration: Veridion / Data: PWC

Vigilant spend management helps you close many gaps in your system and counter various deceptive practices.

Even if something happens, careful monitoring will allow it to happen only once. On the other hand, unmonitored spending will allow things to keep happening without your knowledge.  

Increased spend visibility also helps reduce maverick or unauthorized spending. 

For starters, it can help you establish preferred suppliers and create guidelines for purchases. 

Source: Veridion

Additionally, when employees know that spend is being monitored, it usually deterres maverick behavior and makes them follow established purchasing protocols. 

This in turn helps in building a culture of accountability and compliance within the company.  

And lastly, should unauthorized spending occur, increased visibility means you can quickly catch and address that before it becomes a larger issue.

The bottom line, increased visibility into the company’s spending minimizes many financial risks, benefiting both the company and its suppliers.

Enables Better Decision-Making

Gaining control over your procurement activities makes it easier to identify spending patterns and improve your processes.

And that way, you’re setting the stage for better decision-making overall.

If your organization manages around 50% of its total spend, you’re missing out on opportunities that go beyond tackling unauthorized purchases.

Among those urging for this paradigm shift is the Founder and Director of spend management software company Expenzing, Shabbir Imani.

Illustration: Veridion / Quote: LinkedIn

If you don’t have enough insights and control over your spend, it’s tough to save money, let alone map key areas for improvement.  

High SUM enables you to tackle numerous obstacles to improved decision-making, such as zombie spend.

Have you ever paid for a service or subscription you no longer need? 

It’s happened to all of us at some point, but for companies, it happens on a much larger scale and often for months on end.

Auto-renewing subscriptions that flew under the radar are just one symptom of poor spend management, and outdated insights and processes.

Source: Veridion

Zombie spend may look like a small trickle in the vast ocean of funds, but it adds up quickly, leaving you to handle the consequences.

The solution? 

Implementing processes that give you sufficient oversight and control over all areas of company spending.

Once you do that, you can step up your procurement game and move toward more strategic decision-making.

There are many notable examples of top players excelling in strategic procurement, but one thing they have in common is their pioneering mindset.

Omid Ghamami, one of the leading voices in procurement and the CEO of the PSCM, explains that it’s about refining whole procurement processes, rather than merely looking to purchase goods and services at the lowest possible price.

Illustration: Veridion / Quote: ProcureScape

Ghamami concludes that this results in 18% savings on average, even before negotiating with suppliers.  

In a nutshell, having spend under management enables you to stop wondering where you will cut costs next, and start planning what to invest in instead.

And making good decisions usually leads to more efficient operations. Let’s explore how. 

Increases Operational Efficiency

Bringing spend under management is done by automating the procurement process and standardizing purchasing procedures.

This, in turn, boosts operational efficiency.

But to begin optimizing your procurement processes, you need to go back to the source and take a long, hard look at your current system and its blind spots.

Two of these blind spots are often human error and inefficient processes. 

A survey of over 100 US and UK companies, conducted by IFP in collaboration with Payhawk, concludes so. 

The research outlines top spend management challenges that lead to unwanted outcomes.

And these two aspects are basically two sides of the same coin because slow and clunky manual processes are the breeding ground for costly human errors. 

Illustration: Veridion / Data: IFP

So if you see mistakes multiplying, examine the root causes and rethink your processes.

Complex approval procedures, ineffective category management, and overreliance on manual systems are common situations, but what’s the solution?

It’s automation. 

Businesses that prioritize increasing spend under management base their efforts on automation, ensuring real-time visibility, and faster, more error-free results.

And a lot of companies recognize the power of automation. 

While discussing the future of sourcing and procurement, Dawn Tiura, the President and CEO of Sourcing Industry Group (SIG) highlighted the potential of new technologies. 

Illustration: Veridion / Quote: Allegis Global Solutions

The gears of automation have been turning for a while now, with companies increasingly relying on different procurement tools.

One of these tools that can make your processes more efficient and aid in bringing more spend under management is sourcing automation software. 

Our Veridion is a perfect example. We developed an AI-driven supplier discovery and sourcing solution that drastically speeds up your search for ideal suppliers. 

Thanks to its intuitive Complex Search API, Veridion easily pinpoints the perfect candidates based on different criteria, such as product specifications or ESG characteristics.

Source: Veridion

Despite scouring a vast database of over 80 million companies worldwide, the system delivers results in the blink of an eye, especially when compared with manual search efforts.

Source: Veridion

This directly improves your operational efficiency in supplier search and management context but also helps you better manage spend. 

Therefore, you’re simultaneously enhancing operational efficiency, bringing more spend under management, and freeing up time and resources that can be invested in more value-added activities for company growth.

Ensures Compliance

With your spend under management, compliance with both internal policies and external regulations comes naturally. 

Matters of financial and ethical integrity, operational efficiency, and risk management make compliance critical for procurement, with best-in-class procurement teams displaying high spend under management and contract compliance.

But maintaining compliance can be quite challenging without effective internal spend control.

The previously mentioned IFP and Payhawk report identifies internal spend control as one of the main reasons why US and UK companies invest in new tools and initiatives.

Illustration: Veridion / Data: Data: IFP

Can you think of a particular situation that prompted your company to tighten its grip on spending?

For example, someone bypassing procurement procedures? Ordering goods from the wrong suppliers? 

Switching to a different supplier on a whim can make you fall short of the agreed-upon purchase quantities, allowing your contracted supplier to terminate the contract.

Your non-compliance and breaking your end of the agreement can snowball and create a lot of consequences, from rising costs to reputational damage. 

And what about when suppliers suddenly become non-compliant and unreliable? 

Companies have procurement processes to ensure suppliers are carefully vetted and comply with the regulatory and industry requirements, as well as the business’s internal policies.

For example, BMW’s policies on sustainable practices mean that their suppliers have to pass a series of checks that ensure compliance with all regulations and standards.

Illustration: Veridion / Quote: BMW Group

With new emissions reporting rules and regulations worldwide, non-compliance is no longer an option. 

Luckily, you can avoid all that through vigilant monitoring and keeping your spend under management. 

Helps Gain Competitive Advantage

Better management of a company’s spending is an innovation enabler. 

And innovation is what gives your company an advantage in their industry. 

The truth is that procurement leaders who become complacent and stop pursuing excellence risk losing their competitive edge and may soon find themselves struggling to meet market demands.

As indicated by the Hackett Group’s influential report, world-class procurement teams have 93% of their spend under management, a much higher rating than the 64% recorded among their peers.

Illustration: Veridion / Data: The Hackett Group

Another crucial percentage to focus on here is the 75% more savings that these companies generate through cost reduction and cost avoidance.

Lower costs are a direct result of bringing spend under management.

And what does that have with innovation?

The positive effect created by proactive procurement teams enables these companies to offer more and invest in innovative practices, which solidifies their leading positions.

There is no better example than the retail giant Walmart. 

They are the leader because they keep optimizing their supply chains. They are using advanced technology and data analytics to combine a vendor-managed inventory system with robust demand forecasting.

Walmart also piloted an AI chatbot program in 2021 to automate supplier negotiations. 

After a three-month pilot which involved close to 100 stakeholders, the AI solution was refined further and put into practice.

By the end of 2022, the AI chatbot had closed deals with 68% of the suppliers it approached.

Illustration: Veridion / Source: Harvard Business Review 

This innovative approach also generated an average savings of 3%.

Nowadays, Walmart keeps innovating. 

The company is gradually introducing GenAI to enhance its other operations, looking to enhance product placement and customer experience.

As the Operations Director at Xoomworks Procurement, Martin Denham puts it, procurement has moved beyond its traditional role to become a powerful source of competitive advantage.

Illustration: Veridion / Quote: Jaggaer

By fulfilling its key role of reducing or keeping costs in check, procurement opens the door to new possibilities, helping the organization achieve its strategic goals.

Walmart’s example shows us that success depends on the standardization of processes and daring innovation, but the foundations go back to improved spend management.

Conclusion 

The key takeaway?

Bringing spend under management is much more than a metric to improve.

It’s an essential aspect of your day-to-day operations that can unlock a range of benefits, ensuring stability and propelling your company’s growth.

So start taking the necessary steps toward putting more spend under your direct management. 

Rethink and standardize processes to gain visibility into your spending, and use the technology at your disposal to automate things.

Do that, and watch your company reap the benefits and race past the competition!