Spend management systems look like a great way to save money. Using these systems, companies can analyze their expenditures in a number of ways – by commodity, supplier, business unit, and so on. They then summarize this information for centralized procurement negotiations with suppliers, thereby reducing costs. Spend management suppliers, such as Ariba, Emptoris, and Ketera Technologies, add contract management capabilities and even set up electronic supplier catalogs, so that users can conduct on-line ordering with a predefined set of suppliers. They also impose better controls over spending, since their systems require access passwords, approval cycles, contract compliance alerts, and supplier performance measurements.
Sounds great. The problem is that these systems are extremely expensive to install and maintain – costs start at $1 million and rapid head north from there. So, what can a smaller business do to emulate a spend management system? Here are some suggestions:
- Identify unauthorized purchases with exception reports. The reason for centralizing procurement contracts is to negotiate lower prices in exchange for higher purchasing volumes, so anyone purchasing from an unauthorized supplier is reducing a company’s ability to reduce its costs. To identify these people, create a table of approved suppliers and match it against the vendor ledger for each period, yielding a report that lists how much was spent with various unauthorized suppliers. It is also useful to record in an empty purchasing or payables field the name of the requisitioning person, who can then be tracked down and admonished for incorrect purchasing practices.
- Impose a penalty system. People resist centralization, especially when it involves eliminating their favorite suppliers. Though penalties may be considered a coercive approach to solving the problem, the imposition of a graduated penalty scale will rapidly eliminate unauthorized spending. For example, a department may incur a $100 penalty for one unauthorized expenditure, $1,000 for the next, and $10,000 for the next.
- Restrict procurement cards to specific suppliers. If there is a procurement card system in place, it may be possible to restrict purchases to specific suppliers, thereby achieving centralized purchasing without any central oversight of the process. If there is no procurement card system, then consider obtaining a credit card from each designated supplier, and restrict purchases to those cards.
- Require officer-level approval of all contracts. Department and division managers love to retain control over supplier relationships by negotiating their own deals with local suppliers. By enforcing a corporate-wide policy that all purchasing contracts be countersigned by a corporate officer, contract copies can be collected in one place for easier examination by a central purchasing staff.
- Add granularity to the chart of accounts. To gain a better knowledge of costs, consider altering the chart of accounts to subdivide expenses by individual department, and then go a step further by adding sub-codes that track costs at an additional level of detail. For example, if the existing account code is 5020 for the travel expense account, and the revised code is 5020-01 to track travel costs for just the engineering department, then consider adding a set of sub-codes, such as 5020-01-XX, to track more detailed expenditures within the travel category, such as airfare (code 5020-01-01), hotels (code 5020-01-02), and rental cars (code 5020-01-03). This approach requires careful definition of spending categories and can result in data entry errors if there are too many sub-categories of expenses. Also, it will not be of much use if reports cannot be created to properly interpret and present this extra level of expense information.
These suggestions will not result in a seamless in-house spend management system. However, they will yield somewhat greater control over expenses and more visibility into the nature of a company’s expenditures.