Three strategies for controlling indirect spend to boost working capital.
A recent whitepaper from Corcentric and CFO.com, The Impact of Indirect Spend on Working Capital, delved into the bottom-line consequences of uncontrolled company spend — what Corcentric terms dark purchasing, and is alternately called rogue, maverick and tail spend. The most startling fact, besides the enormous cost, is just how unprepared most companies are to deal with it on a strategic level. You need an enterprise approach, instead of just whacking those rogues when – and if – they pop up.
According to Spend Matters, rogue spend falls under what procurement organizations refer to as “tail spend, the portion of total spend that is not actively managed…and which typically consists of the 85% to 90% of suppliers that constitute only 5% to 10% of spend.” Reggie Petersen, Director of Supply Programs at Corcentric, talked about that in another blog series shared on this site. (As Spend Matters noted, this problem is exacerbated by the rise of the contingent workforce, but that’s a topic for another day.)
That loaded phrase, “not actively managed,” is where the trouble starts.
As the CFO.com/Corcentric whitepaper makes clear, a lot of procurement activities (indirect spend, specifically) are conducted independently, outside of compliance, budget controls and maybe even contracts. Besides cost, what kind of risk does that create? The following strategies for bringing company spend into a controlled environment will arm you with the tools you need to improve process efficiency, increase visibility into spend, practice budget centric purchasing and ultimately bolster working capital for your organization.
Here’s how to stop whacking those rogues and bring them into the compliant spend fold:
Strategy #1: To manage spend, you have to see it.
If the root cause of shadow spending is the shadow itself, then the remedy is to throw a spotlight on all your spend. The whitepaper suggests examining a year’s worth of spend in order to identify the roughly 20% of that is your non-compliant culprit, what they call “one-off or under-the-radar expenses.”
This is often the result of too many suppliers handling small amounts of spend, which your mavericks may consider inconsequential, or buying off-catalog if your system is inadequate. Having too many suppliers might mean you need a tighter sourcing strategy. Whether or not that’s the issue, non-compliant spend can also be significantly curtailed with stricter enforcement, something a majority of companies don’t do.
A billion-dollar company will waste about $15 million annually due to a lack of control over its procurement processes.”
— Getting a Grip on Tail Spend, Accenture
Strategy #2: Automation feeds optimization.
Being outside the established purchasing / invoice / payment processes, rogue spend takes much more time to manage (if it even can be). Conversely, procurement process automation streamlines every stage of the buying journey, increases visibility and enhances efficiency. Without visibility, there is little control, and without control there is adverse impacts to working capital.
Through automation, manual inputs are minimized or eliminated, reducing the potential for errors. It also results in increasing the integrity of usable data the procurement organization can use to achieve a range of goals: negotiate better deals with suppliers, speed up processes, tighten the grip on spend — all things which improve capital management.
Strategy #3: Collaborate to influence.
Not surprisingly, open, continuous communication with suppliers, stakeholders and partners in a collaborative approach creates the process transparency that can lead to indirect spend streamlining, budget-centric purchasing and improved cash flow. This openness, while not covered in the Corcentric whitepaper, can subvert maverick spend by making it harder to hide. It’s also a key strategy for procurement to broaden its scope of influence among business units and firm management.
Synchronization among departments, especially procurement, finance and AP, can be a challenge to establish, but the results are often exponential. As we’ve seen at Determine, this is especially true in the most complex verticals, like financial services and healthcare. But it’s a strategy that works regardless of the industry to help bring more spend under management which will have a positive effect on working capital. But it means stop focusing on whacking individual rogues and take an enterprise-wide perspective instead.
If you’d like to stop whacking rogues and implement an enterprise-wide strategy for controlling more spend, schedule a no-obligation demonstration of our integrated, modular Procurement Solution on the Determine Cloud Platform.