Top 5 spend management KPIs and metrics you need to track
Globally, business leaders are rethinking their strategies in the volatile market scenarios caused by the looming recession, rising inflation, and geopolitical tensions. Every dollar spent comes under intense scrutiny. Hence, the Chief Financial Officers (CFOs) have their backs against the wall. They must generate cash flow and ensure profitability while balancing growth and innovation, even as they find ways to tighten their company’s purse strings.
According to a recent Deloitte press release on their CFO Signals survey, 52% of CFOs surveyed indicated cost management as their top priority for 2023, followed by financial performance (50%) and growth (38%). The CFOs depend on their Chief Purchase Officers (CPOs) to achieve these goals. Whether postponing purchases, evaluating suppliers, or renegotiating contracts, spend visibility is imperative for decision-making. Spend management has always been a key focus area for organisations. However, in the present scenario, it moves beyond being a mere practice to control business spends, to become a tactical weapon. It can help achieve business goals by improving cash, controlling costs, and building resilience for the long term.
Many organisations set up spend control towers for centralised spend monitoring to sail through the pandemic uncertainty. Insights generated by spend analytic tools played a vital role in the success of these centres. In the new normal, the success of these centres depends a lot on the clarity of the Key Performance Indicators (KPIs) to track. The KPIs may vary depending on the industry, size, geography, and business goals. Here are five spend management KPIs based on general best practices that can help business leaders make better decisions.
Also called rogue spending, maverick spending indicates purchases outside the ratified organisational purchase policies without involving the purchase department. These purchases may be from unapproved suppliers at higher rates than the negotiated ones. A maverick spend report by Hackett group states that some organisations report up to 16% losses in negotiated savings due to this factor. It happens due to a lack of guided buying tools, a non-compliant mentality of employees, or the complexity and ineffectiveness of the existing processes.
While there is a significant hit on the planned savings, it also leads to other issues. For example, the unapproved supplier can provide low-quality services or goods, leading to customer dissatisfaction. If it’s a software purchase, there could be security concerns and even audit non-compliances. Tracking this metric can help streamline organisational purchases to control costs significantly as well as mitigate other negative impacts.
This KPI helps identify, categorise, and monitor suppliers and as a result, streamline purchases through better deals. Ideally, it is not advisable to have many suppliers. However, disruptions caused by the pandemic emphasised the need for building resilience in supply chains through backups. The key is determining an optimum number of suppliers for purchases under agreed terms. Classify the suppliers based on quality, pricing, response time, etc., with metrics to monitor each aspect.
Ideally, every organisation should track this KPI to ensure that maximum spending happens only through approved suppliers. For organisations that have undergone mergers or acquired other companies, this KPI can help consolidate suppliers to streamline purchases.
To increase savings, organisations need to identify and eliminate unnecessary expenditures. For best results from this KPI, the CPOs must dive into the spend history to track and compare expenses to see if lowering and removing certain expenses helped reduce the spend. It might also be possible to take a proven cost-reduction strategy from a project or department and replicate it in other spaces in an organisation for an across-the-board impact in savings.
Cost avoidance is when organisations avoid the need for a cost altogether. This KPI tracks the savings achieved because of cost avoidance techniques, such as preventive maintenance measures, timely allocation of resources, legal fees, accounting costs, etc. While cost reduction is quantifiable, the cost avoidance KPI tracks soft savings. Hence, it is not easily quantifiable, but it highlights the importance of avoiding short-term setbacks to achieve long-term efficiency.
Spend under management (SUM)
SUM is a management or organisational KPI with immense potential to realise organisational savings goals. It tracks the managed spend of the organisation to know what percentage of it complies with the approved purchase policy. When organisations map this KPI to an identified metric value, it helps find many leakages (maverick spending) to uncover the full potential for unrealised savings. This KPI helps finetune purchase strategies by implementing best practices and creating awareness among all stakeholders to follow purchase guidelines. More importantly, the purchases follow all regulatory compliances.
While there are many more spend management KPIs, those mentioned here are common across many sectors. Most organisations with mature purchase processes rely on automated spend analysis solutions to easily track their spend management KPIs. Stakeholders can identify the required KPIs and set the metric values based on the industry, size, focus areas, etc. AI-powered spend intelligence insights help generate system auto alerts to take corrective actions when a metric crosses a set threshold. By tracking the appropriate KPIs, business leaders gain vital spend visibility to make data-driven decisions that reduce risks, streamline operations, and identify more savings opportunities to achieve the set goals.
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