Understanding addressable spend makes the difference between efficient and wasteful use of an organization’s money.

To put it simply, you can’t afford to ignore it because it’s the basis of high-impact procurement.

In this guide, we’ll break down everything you need to know about addressable spend, from how it differs from other spending categories and where it intersects, to the challenges in managing it effectively.

This is an essential read for all procurement professionals, so let’s jump right in!

What Is Addressable Spend

Addressable spend represents a portion of a company’s overall spending that’s potentially, but not necessarily, controlled by the procurement.

And that’s the main catch.

Not all addressable spend goes through established procurement processes, which results in poor spend visibility and missed cost-saving opportunities. 

Source: Veridion

This is why identifying and analyzing addressable spend is key to understanding how the organization spends money. 

To fully understand addressable spend it’s essential to explore two closely related, yet very different terms.  

Addressable Spend vs Non-Addressable Spend

Not all spend can be under procurement’s influence and control, and non-addressable spend is the category that falls squarely outside of its domain. 

Examples of such spending categories are payroll, taxes, or legal counsel.

Those areas are usually managed by HR or legal departments, not procurement. 

Source: Veridion 

Nevertheless, procurement teams still have a role to play in optimizing or reducing non-addressable spend.

By collaborating with other departments, procurement can share their best practices and help improve efficiency.  

Addressable Spend vs Spend Under Management

While addressable spend refers to all expenditures that could be controlled by procurement, spend under management (SUM) is the money you’re already actively controlling.   

“Could” is the key word illustrating this difference, because the potential to do something doesn’t make it a reality.

In other words, spend under management is part of addressable spend, but not all addressable spend is necessarily managed by procurement.

The following image illustrates that perfectly. 

Source: Veridion

One of the procurement function’s main objectives is to bring more addressable spend under management, thereby maximizing cost savings and optimizing spending patterns.

That’s what makes SUM a subject of interest for the entire organization.

And what you get from actively managing more of the addressable spend is precisely what we’ll be looking at next.

Benefits of Improving Addressable Spend

Improving addressable spend means enhancing visibility and ensuring more control over where the money’s going. As such, it opens a lot of opportunities for improvement. Here are some notable ones.

Creates Opportunities for Cost Reduction

Reduced costs of products and services are probably the number one benefit of optimizing addressable spend. 

These opportunities arise when more spend categories come under procurement’s purview. Then, it’s easier for procurement teams to align purchasing with strategic procurement initiatives. 

For example, when more spend is addressable, procurement can consolidate purchases with fewer suppliers.

Since this leads to more orders for preferred suppliers, it helps secure more favorable pricing, terms, conditions, and even priority status.

The correlation between consolidating suppliers and reduction in purchase costs is one of the findings outlined in The Hackett Group’s research. 

As the number of suppliers (shown per billion dollars in spend) dwindles, the cost reduction increases.

Source: The Hackett Group

Reduced costs translate to more buying power, allowing you to reinvest in different, more profitable areas of the business, enabling future growth.

And it all starts by having more insight and control over addressable spend.

Helps Develop Stronger Supplier Relationships

Improving addressable spend also paves the way for stronger supplier relationships.

For starters, controlling more spend enables procurement teams to keep close tabs on each supplier’s performance.

Measuring crucial supplier performance KPIs such as delivery times, quality, or compliance paints a realistic picture of their overall impact and uncovers potential inefficiencies. 

Such a data-driven approach gives you the foundation to engage in constructive dialogue, whether to strengthen the partnership or discontinue it altogether. 

Eduardo Piña, Tenneco Inc.’s Commodity Manager, makes this exact point while highlighting the objective nature of data. 

Illustration: Veridion / Quote: LinkedIn

Developing strong ties with suppliers is vital for success today, and it’s not just about getting better deals and spending less money. Strong supplier relationships lead to better overall performance and service levels. 

Close collaboration usually means better communication, which helps ensure faster resolution of issues and higher quality service. 

Moreover, suppliers are more likely to share new ideas, technologies, or process improvements when there is a trusted relationship. And this lays the ground for mutual growth benefiting both parties. 

Reduces Risks

Of course, putting more expenditures under the tight control of procurement reduces all kinds of potential risks companies are exposed to, from internal to external ones.

When it comes to internal risks, higher visibility over where the money is going allows for early detection of potential issues like fraud, non-compliance, or overspending. 

For instance, enforcing procurement policies counter the use of unapproved vendors and cases of maverick spending.

As for the external ones, they can be mitigated by supplier supervision and performance monitoring. 

In addition, when it comes to supply chain disruptions, diversifying suppliers and closely managing relationships with the most critical ones can help ensure continuity, even when external factors affect certain suppliers. 

Simply, control over more resources makes you more agile and better equipped to tackle any unexpected disruptions to the supply chain. 

Then, you can avoid many of the consequences that ridden those that are unprepared. 

Those are revealed in the Business Continuity Institute’s (BCI) research. 

Illustration: Veridion / Data: Business Continuity Institute

This research spanned across different industries and over a ten-year period, showing many of the negative consequences of not being ready.

Fortunately, even external risks can be mitigated through effective management of addressable spend and the strategic actions that follow.

Challenges of Managing Addressable Spend

For all the benefits of identifying addressable spend, managing it isn’t without its pitfalls.

Procurement teams must learn to navigate these challenges to ensure efficient operations and compliance, so we’ve outlined two issues that are most likely to impact organizations, regardless of their size or industry.

Working with Poor Data

Incomplete or inaccurate spend data directly impacts your ability to analyze spending and identify addressable spend.

It results in misinformation and it’s likely to keep you away from any potential cost savings and other benefits. 

Poor data can be a result of many things, from outdated to wrongly classified information. It can even stem from disconnected systems. 

Companies that have spend data coming in from multiple, non-integrated systems, as well as those relying on paper-based systems, risk acting on misleading or inaccurate information. 

And that’s a bigger problem for increasing addressable spend than expected. 

According to the poll survey conducted by spend analytics providers Mithra-AI Solutions, non-integrated data sources are the main obstacle to increasing addressable spend.

Illustration: Veridion / Data: Mithra-AI

Mithra’s poll was conducted in person, during the 2024 World Digital Procurement Summit, which confirms just how widespread the problem is.

So make sure your data sources are connected, and that your data is accurate. 

Data accuracy matters in all aspects of procurement, but it is especially important when sourcing suppliers. 

For example, what if your data says there are 15 available suppliers for an item, but the information is outdated and there are actually only two? 

It’s impossible to source strategically, negotiate better terms or make any plans if you cannot trust your data. 

In this situation, a reliable company data provider like Veridion saved the day. 

Veridion gives you access to over 60 data points for 80+ million company profiles globally.

The best part? Our data is updated weekly, ensuring unprecedented accuracy.

Source: Veridion

With fresh and complete data at your fingertips and robust data enrichment capabilities, you can get total visibility into your supplier base, find new suppliers quickly, and update the information on existing ones.

Your data will be standardized, there will be no duplicate entries, and you will be able to validate records to ensure accuracy.   

Source: Veridion

Ultimately, these insights support strategic decision-making, and lead to more informed and data-driven procurement strategies.

Therefore, improving your data quality and relevance is a surefire way of avoiding a lot of problems. 

Dealing with Resistance from Internal Stakeholders

Not everyone is happy with procurement’s involvement in certain spend categories, which is why these efforts are often met with resistance from internal stakeholders. 

Change is rarely welcomed with open arms, but when it comes to procurement taking control over addressable spend, the reasons for internal resistance are fairly simple.

Source: Veridion

Different departments may view procurement procedures as unnecessarily complicated or without obvious benefits.

However, the trickiest thing to navigate is the stakeholders’ perception of losing control over purchasing decisions within their department.

This potential lack of autonomy also creates worries over budget cuts or potential delays.

For instance, an IT department that enjoys a great degree of liberty is likely to worry about procurement procedures slowing down acquisition or limiting them to vendors that don’t meet specific technical requirements.  

After all, they are the ones who understand best what they need. 

It’s clear that the internal stakeholder’s reluctance comes from fear of potential disruptions to their operations, but also from desire to maintain decision-making power.

Convincing other departments that procurement needs to manage addressable spend won’t be easy, but the starting point is to engage in dialogue to understand their concerns, as pointed out by Lambo Zou, Founder of a company supplying furniture parts.

Illustration: Veridion / Quote: LinkedIn

After resolving potential misconceptions, it’s time to explain the long-term benefits of redefined processes and the procurement’s involvement. 

If both sides have a lot to gain, it will be easier to reach a compromise and pave the way for a more profitable future. 

Conclusion

Addressable spend holds the key to future cost savings and strategic sourcing decisions.

This is why managing and increasing it should be a priority for procurement teams.

Whether it’s achieving cost reductions, mitigating risks, or building stronger supplier relationships, the benefits build on one another, yielding more than immediate savings.

Influencing and managing more of your addressable spend means laying the groundwork for long-term success.

And if you haven’t started doing that already, now’s the time!