What is spend under management (SUM)?

For any company to run smoothly, it’s essential to know where your money is going. Poor money management from issues like inconsistent suppliers and overspending can lead to financial instability. This is where spend under management (SUM) comes in. SUM is basically a financial business rating that shows how well the procurement team manages spending.

This procurement metric shows your team’s effectiveness in managing the company’s money. In this post, we'll go over how to track and calculate SUM and some effective ways to increase it.

What is spend under management?

Spend under management is a procurement metric that refers to the percentage of an organization's total spend that is actively managed, monitored, and optimized by procurement professionals. 

A higher SUM percentage indicates a more efficient procurement process, as it demonstrates the organization's ability to control costs, mitigate risks, and drive value through better supplier relationships and improved negotiation power.

SUM encompasses: 

• Strategic sourcing
• Contract management
• Supplier relationship management
• Spend analysis

You may hear a lot of jargon when discussing SUM. Some companies use terms interchangeably, and others use them improperly, adding confusion to procurement processes.

Interchangeable terms:

• Spend under procurement
• Spend under contract (typically limited to spending managed under a contract with a supplier)

Additional terms: 

• Spend under influence: Encompasses broader spending than SUM
• Spend under control: The degree of control over the spending process‍
• Spend visibility: Part of the foundation for effective SUM

What is unmanaged spend?

Unmanaged spend is the portion of a company’s spending that isn’t actively managed or optimized by the procurement team. This may include spending that occurs outside of regular procurement activities like small-value and emergency purchases. For example, office supplies like pens, paper, and ink cartridges may be part of unmanaged spend.

However, there are some risks associated with unmanaged spend, including: 

• Increased costs due to a lack of volume discounts and price negotiation
• Reduced visibility since it isn’t monitored by a procurement team
• Potential compliance risks with company policies or regulatory requirements
• Less control over spending
  

Why should you track spend under management?

Businesses need to know where money is going and how well the procurement team is optimizing how the money is spent. SUM gives your business control and visibility into its spending to help improve the company’s financial performance. Some of the key benefits of SUM include: 

• Improved accuracy: Multi-layered spending control systems provide accurate checks and balances, which can be tailored to fit different business needs. This ensures properly managed expenses, allowing a business to drastically reduce costs while increasing the likelihood of success.
• Full spend visibility: Optimal SUM involves using procurement tools that provide a centralized location for the procurement team to monitor cash inflows and outflows. This allows companies to identify areas plagued by maverick spend or make more intelligent investments.
• Better business decisions: Tracking key performance metrics leads to better business decisions. And when employees have accurate spending monitors, it encourages more responsible spending.
• Enhanced compliance: SUM leads to effective resource management while adhering to compliance regulations such as Sarbanes-Oxley (SOX) requirements and IRS guidelines in a more productive way.‍
• Reduced manual labor: Procure-to-pay automation can prove invaluable for increasing productivity, not only in cost savings but time savings as well. It reduces mundane tasks like physically crunching numbers until all hours of the night. 

How to calculate spend under management

To calculate SUM, divide the total amount of the company’s direct and indirect spend managed by the procurement team by the total organizational spend, also known as addressable spending. The organizational spend shouldn’t include employee salaries or tax payments. 

First, gather your organization's direct and indirect spending from a specific period, such as by month, quarter, or year. Next, identify all of the managed spend, like negotiated contracts and purchases from suppliers.

For example, if your company spent a total of $1 million last year and $800,000 was managed spend, your SUM is 80%.

6 ways to increase spend under management

Increasing your company’s SUM with procurement best practices can lead to cost savings, improved efficiency, enhanced risk management, and ensured compliance. When you have a high SUM percentage, it means your procurement team is able to identify and eliminate unnecessary costs and negotiate deals with vendors. 

Procurement teams with a high SUM mitigate risk by having better visibility into spending and maintaining solid supplier relationships, helping to avoid supply chain disruptions, quality issues, and potential fraud. 

Ideally, your SUM percentage should be between 70% and 90%. This indicates that a significant portion of your company’s spend is being actively managed and optimized.

1. Budget aggressively

First and foremost, companies should develop a strategic plan for their budget. This plan should be based on the company's overall objectives and goals, as well as its forecasted financial performance.

Cutting costs and finding savings opportunities can significantly improve your SUM. Having a lower spending target for different categories, like office supplies, promotional materials, and utilities, forces you to take a closer look at all of your expenses. This type of scrutiny helps uncover hidden costs and opportunities for consolidation.

By aggressively targeting nonessential spending, your company frees up resources that it can then allocate toward optimizing key purchases and negotiating better deals with suppliers. This focus on strategic spend management directly translates to a higher SUM percentage, leading to greater cost savings and overall financial control.

2. Track all expenses

One of the biggest mistakes companies make is limited oversight over spending habits. A common misconception is that it’s too time-consuming to track all of the smaller purchases. While it does require more tracking, it also gives you more visibility and control in the long run. The most efficient way to do this is with procurement automation software.

In addition, categorizing expenditures into buckets such as fixed and variable costs can help businesses get a better understanding of budget allocation with greater detail and accuracy. Fixed costs are those necessary for operations such as rent or utilities, while variable costs arise when decisions are made, such as marketing activities or office supplies.

3. Establish clear policies and procedures

Any successful endeavor needs a strong foundation, and that’s why clear policies and procedures are the bedrock for effective SUM. The policies outline the “how” of your procurement process, guiding the team on everything from approved suppliers to purchase approval limits and the proper requisition process. 

Having clear guidelines helps eliminate maverick spending in the procurement cycle. It also empowers your team to make better spending decisions, leading to a more efficient and cost-effective procurement process.

4. Analyze spending patterns

Data analysis is a powerful tool for gaining valuable insights into your procurement process. The data can reveal trends, like purchases from non-preferred vendors or departments exceeding budget allocations. Analyzing these patterns equips you with the knowledge to negotiate better deals and eliminate unnecessary spending. 

Modern procurement software uses artificial intelligence to give you spend insights and help you easily find patterns to make strategic decisions with your funds.

5. Automate processes

Automation streamlines the entire procurement process. The benefits of procurement automation are far-reaching. With the right platform, you have everything to improve your SUM, including:

• More visibility: Procurement automation software lets you see spending patterns, supplier performance, contract compliance, and much more. 
• Centralized database: All procurement-related information is in one place, reducing the need to track down information.
• Error reduction: Manually entering data can lead to errors, causing delays. Automation can perform data validation to ensure accuracy.
• Fewer bottlenecks: Streamline the approval process with predefined workflows, minimizing potential bottlenecks.

The biggest benefit of automation is the time it can save your procurement team. By removing many of the manual tasks from their plate, they can focus on negotiating contracts, finding cost-saving opportunities, and making better decisions to maximize SUM.

6. Monitor supplier performance

Regularly assessing supplier performance provides an effective way for companies to evaluate who they're working with and determine if there are potential savings from switching suppliers or attaining better deals through renegotiations. It's important for businesses to keep track of changes in supplier services, price ranges, customer service experiences, customer feedback, etc., which should then factor into their choice when it comes time for a renewed contract period. 

It's also beneficial for companies to establish a relationship with suppliers who share their commitment toward sustainability initiatives, as doing so will often result in mutual benefit over time.

Optimize spend under management with Zip

Taking control of your managed spend is the key to improving your company’s financial health. By implementing the strategies above, you can optimize your spend under management, leading to a more robust and efficient procurement process. A powerful intake and spend orchestration software like Zip makes this a lot easier.

Here at Zip, we understand the challenges of managing complex procurement tasks. That’s why we offer a comprehensive suite of procurement software solutions designed to streamline your operations, automate procurement tasks, and empower your team to optimize SUM. To find out more about how Zip can take your procurement to the next level, book a demo today.