Supply Excellence
← Top 5 Categories to Source Now: #4 Travel Management Supply Risks to Defuse 4th of July Celebrations →

Making the Case for Spend Management

July 1st, 2008 · by Mark Clouse · 1 Comment · best practices, sourcing, spend analysis, supply management

A reader left a great Comment last week on my WSJ Pushes Spend Management as a Recession Remedy post. He was looking for an effective way to make the case for Spend Management initiatives - with ROI projections - at a time when it’s difficult to free up budget for new programs. Rather than give the blogosphere’s longest Comment response, I thought the subject was worthy of it’s own post.

The question of ROI (or business case or payback period) is a common one in these times of tight budgets and cutbacks. Your ROI calculations have a greater chance of gaining broader understand, traction and ultimately, influence, if you keep it simple:

(Total Savings - Total Investment) / Total Investment = ROI

But I should warn you that ROI is not where most companies fall down. Instead the definition of “savings” is often their big challenge. Recognize that savings can be defined in multiple ways, and thus use metrics tracked and respected by your finance organization. For instance, you may not use “identified savings” (i.e. the maximum savings available, from the lowest bidder), but will you use “awarded savings”, “contracted savings”, “implemented savings” or “realized savings”? Will it be “annual realized savings”, “annual run-rate savings”, or “full contract value savings”? All are legitimate, so one thing is for sure … Finance must be your friend.

The good news is, that unlike many other investment options, Spend Management can return visible, near-term, hard-dollar savings. In fact Hackett’s findings suggest a 2.8 ROI on spend management investments for typical organizations and staggering return over 7.2 for world-class organizations. With results like that, Spend Management initiatives not only fund themselves, they free up funds to pay for other investment needs, like branding, acquisition integration, product development, internal expansion, etc. How’s that for a business case?

Typically, the steps we’ve seen successful companies (of all sizes, situations and sectors) follow to justify, launch and ultimately embed Spend Management are:

  • Start at the Top - Create an executive-level platform for change.
  • Do & then Sell Your Homework - Make the case for Spend Management to the right people, with credible proof points. A formal assessment of their spend and potential savings goes a long way towards earning buy in.
  • Think Holistically - Plan to improve the access to critical spend data, sourcing execution, compliance and demand management.
  • Focus on Program and Change Management - Proper execution here is critical for turning good plans into real results.
  • Keep Your Momentum Going - Move towards long-term enablement and sustainability of the process. Repeatable, trackable results are the path to extending coverage to more and more spend areas.

Mark Clouse is Vice President of Ariba’s Spend Management Services Group.

Email Forward & Bookmarks
[del.icio.us] [Digg] [Facebook] [Google] [Reddit] [StumbleUpon] [Technorati] [Email] More »

Tags: ·

1 response so far ↓

  • 1 Christian Verstraete // Jul 1, 2008 at 10:41 am

    I can only agree with you when you say that finance must be your friend. I have been involved over the years in many initiatives and investment proposals. One thing I learned was that the best investment of time was in creating a detailed, professional looking, ROI model. In most situation this was a detailed spreadsheet with costs and projected savings by quarter (we are a US listed company), with our best estimates. Have a separate page where the assumptions are listed, sothat, when you go through the model with your beloved finance person and he/she disagrees with one of your assumptions, you can quickly change the number and view the implications. Beside making sure they agree with your model, it also gives them a good feel of the sensitivity of the ROI, in other words, how much does the ROI changes if some of the assumptions prove too optimistic.

Leave a Comment