ConvergentIS Blog

What is Business Spend Management?

Written by ConvergentIS | Feb 14, 2024 7:32:50 PM

Business spend management is the strategic process of managing all the actions in an organization related to purchasing and vendor relationships. It covers everything from finding the best deals and negotiating contracts to making purchase orders, handling invoices, and dealing with other money-related activities. BSM is all about watching, analyzing, and automating a company's spending habits from start to finish. The goal? To lower risks, make more money, and make operations run smoother. BSM is essentially about making every dollar a business spends count.  

People often confuse business spend management with expense management, however, expense management refers to just a part of BSM. When discussing expense management, we focus on the money employees spend for work, which the company later repays. On the other hand, business spend management covers everything, including expense management and all other spending by the company—whether it's directly related to making a product or service or not. 

BSM has an impact on all aspects of business spending. When you get a thorough understanding of how and why they use resources, it empowers you to make more intelligent business decisions. 

The Importance of Business Spend Management 

As businesses grow, they often find themselves blending old and new systems to handle various processes. This can lead to a complex network of accounting tools that don't work well together. BSM steps in by collecting spending data from different sources in that network and using it to benefit the business in various ways over time. 

These benefits extend beyond just saving money. BSM provides insightful reports on spending, helping a company become more efficient with its expenses. The money saved can then be redirected towards more productive activities. Well-organized expense data brings transparency, enabling the identification and reduction of costs, which becomes crucial as the business expands. Looking ahead, during tax season, BSM proves valuable by aiding in the tracking and documentation of expenses, helping to avoid penalties and maximize tax benefits or prepare for audits. Additionally, when suppliers are paid on time and in full, they become satisfied partners, leading to favourable pricing, discounts, and other long-term savings. 

The rise of unexpected supply chain disruptions, soaring inflation rates, and more stringent global environmental, social, and governance (ESG) standards has resulted in companies facing tighter profit margins. While some businesses have managed to pass on the increased costs to customers amidst rising prices, this approach is not a sustainable long-term strategy. A Gartner survey conducted in May 2022, involving 199 chief financial officers (CFOs), revealed that 78% of them are prioritizing digital investments as a key strategy to combat the challenges posed by inflation. 

The top 3 strategies that CFOs are taking to increase profitability are increasing efficiency, further digitization and employee retention. 

This is because those sticking to traditional spend management systems, often reliant on a variety of individual solutions, face significant drawbacks. Their processes become increasingly intricate, time-consuming, and isolated. This leads to: 

  • Poor employee adoption, resulting in limited visibility into spending. 
  • High labor and technology costs, as transactions are processed across different or redundant systems. 
  • Elevated error rates due to manual processes and insufficient supplier adoption. 
  • Absence of governance and oversight, causing spending leaks. 
  • Inability to accurately track Key Performance Indicators (KPIs). 

It's no surprise that 46% of chief financial officers lack complete visibility into transactions within their organizations. Without understanding where or why money is being spent, making informed decisions for company growth and strategically reducing costs becomes a challenging task. 

Benefits of Business Spend Management 

Business spend management provides organizations with a competitive advantage by eliminating manual tasks, enhancing collaboration across functions, and establishing a singular, reliable source for company expenditure. The proof is evident: those adopting BSM practices achieve savings of 6.6% on addressable spend, a notable contrast to the 2%–3% achieved by those relying on traditional spend management approaches. Nevertheless, the comprehensive advantages of business spend management extend far beyond mere cost reduction. 

Business spend management (BSM) also brings valuable advantages to companies by centralizing spending data for analysis and generating savings. Beyond this, BSM streamlines procurement processes by aggregating and digitizing anonymous cross-company data from the supply chain, making organizations more agile, intelligent, and accountable in their spending practices. Here are some key benefits: 

  • Enhanced Productivity and Efficiency: BSM saves teams significant time by automating procurement processes, speeding up workflows, and reducing errors. This allows employees to move off of busy work and onto strategic work. As an example, new product features often include an Action Centre that allows people to focus on what requires their attention rather than navigating through countless apps or emails trying to determine what needs to be done next.
  • Improved Negotiations with Suppliers: BSM systems leverage large datasets to provide insights into supplier behaviour, enabling procurement teams to negotiate better deals. The system can alert teams to issues experienced by industry peers with a specific vendor, or highlight opportunities to reduce costs based on community intelligence, ultimately guiding decision-making toward more favourable options. 
  • Cost Savings Opportunities: By capturing and categorizing spending data, BSM software reveals how different departments and individuals manage company spending responsibly. This unlocks new areas for cost savings, such as identifying opportunities to consolidate vendors, helping employees stay within budget, and detecting fraudulent invoices before payment. Centralized spending data tracking enables AI to identify additional savings opportunities, such as renegotiating contracts to address overspending compared to industry peers. 
  • Risk Reduction: BSM software actively monitors transactions, keeping tabs on vendors' financial performance and credibility. By providing up-to-date visibility into suppliers, BSM helps mitigate potential threats to the organization. It ensures compliance with internal control policies and external audit requirements, maintaining the business's good standing with regulatory bodies. 
  • Improved Sustainability: Companies can achieve both cost reduction and sustainability goals with Business Spend Management (BSM). Prioritizing sustainability in operational strategy enhances profitability growth. BSM integrates ESG data into spending processes, facilitating the discovery of diverse suppliers at competitive prices, reducing carbon emissions, and improving transparency through AI monitoring.  
  • Employee Productivity: Digitizing and automating manual processes, like invoice automation, minimizes errors and allows employees to focus on analytical tasks. Best-in-class companies achieve a 96.5% first-time invoice match rate and a 10.6-hour approval time, freeing up AP teams to enhance profitability. Quicker invoicing reduces bottlenecks for procurement, strengthening supplier relationships. CFOs benefit from improved cash flow predictions. Modernizing these processes positively impacts the entire organization. 

 

Business Spend Management in Use 

Utilizing Business Spend Management involves adhering to a set of predefined processes, where requests, purchases, and the monitoring of company spending ideally occur within a centralized system. Companies typically acquire specific BSM capabilities as they grow, leading to the recognition of distinct maturity stages in the BSM implementation process: 

Stage 1 - Manual Processes → Operations are labor-intensive and compartmentalized, relying on paper, spreadsheets, emails, or disparate point solutions to monitor, manage, and analyze spending. 

Stage 2 - Digitization and Automation → The transformation of manual processes in procurement, invoicing, payments, cash management, and expenses through digitization and automation. This results in enhanced spend visibility and increased employee productivity. 

Stage 3 - Unification of Digital Processes → Integration of these digitized processes into a singular workspace or system, fostering improved collaboration across departments, faster approvals, more precise reporting, and reduced risk. 

Stage 4 - Optimization with AI → Utilizing AI for industry benchmarks, fraud detection, and identifying areas for improvement. This leads to optimized business performance. 

Stage 5 - Innovation → Continuous refinement across all stages, fostering innovation, strategic decision-making, and the adaptability to navigate market disruptions. 

 

Let's look deeper into the first four distinct functions involved in the first four stages of business spend management maturity. 

 

Stage 1 - Manual Processes 

Finance: 

In the absence of a formal procurement process, all purchase requests flow through finance, termed "finance-heavy procurement." This leads to a slow approval process, utilizing spreadsheets and short-term point solutions for spending and payment tracking, complicating cash forecasting. 

Procurement: 

Employees often resort to ad-hoc methods due to limited technology or formal processes. If a dedicated procurement team exists, its primary role is as a buyer and contract administrator for the entire company. 

Sourcing: 

Frequently, spreadsheets or an enterprise resource planning (ERP) system are the sole methods for sourcing, resulting in low adoption rates outside finance and procurement. This contributes to non-contract purchases, saving leakages, poor supplier performance monitoring, and bidding errors. 

Supply Chain: 

Lacking clear organizational structure, manual processes prevail in the supply chain. Teams seldom revisit their supply chain design, relying on limited-capability point solutions, resulting in reactionary decision-making. 

Stage 2 - Digitization and Automation 

Finance: 

Advancement on the maturity model begins with tackling Accounts Payable (AP) automation, although not end-to-end. Companies focus on paper-based invoicing, automating purchase order (PO) and invoice matching, and reconciliation. 

Procurement: 

Core procurement functions are automated, enhancing category management and segmenting suppliers. While a basic, streamlined procurement process emerges with a focus on cost savings, holistic spend tracking remains limited. 

Sourcing: 

Tasks are automated, leveraging templates to streamline the bidding process. Automated alerts facilitate collaboration between buyers and suppliers, working towards key milestones. 

Supply Chain: 

Supply chain leaders adopt some digital tools, including a digital twin of their supply chain. However, integration into core business decisions may still be lacking. 

Stage 3 - Unification of Digital Processes 

Finance: 

Companies achieve 100% touchless invoicing with PO matching, preventing duplicate invoices and expediting approvals. Enhanced cash visibility through the adoption of a Business Spend Management (BSM) platform leads to on-time and smooth payments. As companies scale, considerations for adding a treasury management system arise for managing cross-border payments and international tax compliance. 

Procurement: 

The new BSM platform enables streamlined purchasing processes with self-service options and automated workflows for all employees. This results in improved spend categorization and fewer off-contract purchases, and collaboration tools enhance supplier relationships. 

Sourcing: 

Advanced mathematical optimization techniques come into play as companies scale, allowing for multiple bidding scenarios across categories. Supplier risk scores are implemented, ensuring the selection of the best option. Automated connections between contracts and the entire Procure-to-Pay (P2P) process reduce risk and improve value capture. 

Supply Chain: 

Data flows seamlessly across the business into supply chain design tools, enhancing inventory control. Reporting dashboards facilitate sharing critical information with stakeholders for more informed business decisions. 

Stage 4 - Optimization with AI 

Finance: 

Teams incorporate AI to detect internal fraud on purchases and external issues in vendor screenings and payments. With 100% spend visibility, finance balances short-term resource allocation with funding for long-term growth projects. 

Procurement: 

AI leverages global community spending data to classify purchases into primary and sub-categories. This leads to community-driven opportunities, including vetted supplier recommendations, pricing insights, group sourcing events, and comprehensive risk and fraud mitigation. 

Sourcing: 

Improved spend classification empowers sourcing in negotiations and across multiple categories. AI continuously monitors supplier risk and performance using external data sources. 

Supply Chain: 

AI identifies the highest cost drivers in the supply chain, allowing targeted scenarios in the digital twin for maximum payoff. Financial decision-makers gain more control over cost levers. 

As companies advance to Stage 5, the focus shifts from processes to strategic, forward-thinking initiatives, providing a competitive edge over peers. 

Challenges in Spend Management 

Effectively managing spending demands time and attention. Without a Business Spend Management system for centralized expense monitoring, organizations risk overlooking inefficiencies and exposing themselves to potential issues. Here are key challenges faced by businesses seeking improved spending management — challenges that BSM software aims to tackle. 

Disorganization: Spending oversight across divisions often falls under different leadership, leading to difficulties in collecting diverse divisional data. Varied interests, attitudes, and cooperation levels make navigating this information challenging. Disparate representations of spending data in different formats create further disorganization, making it incompatible and challenging to understand. This can result in departments unknowingly purchasing the same item without realizing the potential for better pricing through collaboration. 

Data Silos: In the absence of BSM, different spending categories, such as supplier payments, employee expenses, and IT services, are typically tracked by separate information systems. This leads to the creation of data silos, where important information is scattered across multiple tracking systems that lack interoperability. 

Lack of Transparency: Some team members resist oversight of their spending practices, and certain departments may document expenses on paper, making them challenging to track and categorize. Reluctance to adopt new, transparent systems can hinder overall organizational efficiency.  

Manual Processes: Increased reliance on manual processes heightens the potential for human error. Data entry mistakes by employees and inaccuracies in information copied by finance teams accumulate over time, leading to misguided decision-making, higher costs, and missed opportunities for operational efficiencies. 

Insufficient Resources: Effective collection and analysis of spending data demand analytical skills, which can be expensive to hire and time-consuming to acquire. AI-powered analytical tools prove valuable in interpreting and making sense of data efficiently. 

Approaches to Spend Management 

The essence of Business Spend Management's value lies in its highly systematic approach to procurement. Depending on a company's industry and its existing core competencies, optimal benefits may be derived from automating specific subprocesses within procurement or the entire spectrum, encompassing strategic sourcing to payment processing, commonly referred to as "source to pay" (S2P). In the realm of procurement, BSM encompasses the following processes and subprocesses: 

Source to Pay (S2P): 

Source to Pay, often denoted as S2P, represents the comprehensive procurement process. It commences with the identification, vetting, and selection of suppliers. Purchasers within an organization seek products that align with their quality requirements, proper pricing structures, and vendors capable of meeting expectations regarding timeliness and adaptability. Subsequent steps involve negotiation, contract establishment, order placement, receipt of deliveries, invoice acceptance, and payment settlement. S2P offers business leaders a holistic view of the entire procurement process, enhancing organizational process, regulatory and contractual compliance, fostering collaboration and trust among supply chain participants, and facilitating better pricing for the organization. 

Source to Contract: 

Similar to S2P, Source to Contract begins with the sourcing of products or services from a competitive pool of vendors. Business requirements are analyzed, documented, and shared with potential vendors, who provide quotes. The contract is awarded to the vendor aligning best with the business's requirements and presenting the most promising quote. Negotiation is carried out, and upon signing the contract, the Source-to-Contract subprocess concludes. 

Invoice to Pay: 

While paying an invoice may initially appear to be a straightforward process, accurately assessing and settling invoices involves critical steps. These include matching invoices to contracts, orders, accepted or rejected deliverables, and subsequent approvals. Automating this subprocess becomes increasingly valuable as a business expands, delivering crucial efficiencies for the accounts payable team.  

Procure to Pay (Procure to Invoice): 

The Procure-to-Pay subprocess integrates the purchasing department with the accounts payable department to enhance overall efficiencies. In contrast to S2P, it does not encompass the vendor-sourcing function. Procure to Pay includes requisitioning, purchasing, receiving, payment, and accounting for goods and services. 

Business Spend Management Users 

The utilization of Business Spend Management extends beyond traditional procurement teams, differentiating it from conventional spend management functions. BSM involves every department at various stages throughout the complete spend cycle. Below, we explore how leaders in each department leverage BSM technology: 

Chief Finance Officers (CFOs) 

CFOs are focused on enhancing the company's bottom line. Achieving this goal requires a comprehensive understanding of spending data to identify cost-cutting opportunities without impeding the company's growth. Traditional spend management practices often leave CFOs grappling with fragmented data scattered across multiple systems. Business spend management tools play a crucial role in centralizing and analyzing this data, providing CFOs with complete visibility and enhanced control over spending across the entire organization. Additionally, these tools assist in enforcing compliance and mitigating risks. 

 

Chief Procurement Officers (CPOs) 

In the face of unpredictable market conditions, strategic purchasing strategies are paramount for procurement leaders, particularly in controlling costs, managing risk, and promoting supplier diversity. CPOs leverage business spend management tools to gain comprehensive visibility into spending categories. These tools automate compliance monitoring and enforce spending best practices, simplifying the purchasing process for all employees. Collaborating closely with sourcing, supply chain, and finance, CPOs seek BSM software that facilitates the integration of key procurement processes, including contracting, purchasing, invoicing validation, and supplier payments. 

 

Head of Strategic Sourcing (HSS) 

Head of Strategic Sourcing (HSS), also known as Head of Sourcing, relies on BSM tools to precisely track and analyze the company's sourcing needs. They develop category and demand plans, negotiating supplier contracts to secure goods and services at optimal value. Ensuring that savings achieved during contract negotiation (source-to-contract) are not lost during employee purchases (requisition-to-purchase) is crucial. Sourcing leaders efficiently onboard suppliers, operationalize contracts, and monitor risk and performance continuously to prevent disruptions in downstream activities like procure-to-pay. 

 

Chief Supply Chain Officers (CSCOs) 

Chief Supply Chain Officers (CSCOs) oversee demand management, product availability, inventory balance, and ESG standards. Collaborating with CFOs to enhance profitability, CSCOs utilize BSM tools to gain an end-to-end view of the supply chain. A pivotal tool in their arsenal is the digital twin—a digital replica of the organization's supply chain. This allows CSCOs to plan for unforeseen disruptions by running various cost-analysis scenarios in a risk-free testing environment. 

 

Chief Information Officers (CIOs) 

Chief Information Officers (CIOs) focus on improving core operating processes and workflows within a company. They seek business spend management software that offers easy configuration to support faster and more efficient operations, including optimized data analytics. BSM tools aid CIOs in connecting data across business processes, organizing it in a user-friendly manner, and supporting technology choices that seamlessly integrate with the company's existing tech stack and ERP. 

How to Implement a Business Spend Management Strategy 

A well-executed business spend management (BSM) strategy enhances financial visibility and facilitates improved decision-making by employees. However, garnering employee buy-in for new spending policies can be challenging. Here are four steps to help overcome this challenge and successfully implement a BSM strategy. 

  1. Assess current spending practices: 
  • Evaluate the existing awareness among employees about the company's preferred suppliers and analyze the steps involved in purchasing items. Identify areas in the buying and expense process that can be improved. A smoother experience increases the likelihood of employees adhering to approved spending practices. 
  1. Form a dedicated BSM team: 
  • Successful BSM strategies hinge on collaboration across various business functions. Establish a dedicated team comprising members from finance, procurement, sourcing, supply chain, and IT. Clearly define the team's goals to ensure alignment with best practices and track progress toward the overarching BSM strategy. 
  1. Select the right BSM tools: 
  • User-friendly tools with a high adoption rate are essential for effective BSM. Look for tools that facilitate a seamless buying and expense process. Features like a guided buying experience, pre-set admin controls, and visual reporting dashboards contribute to the effectiveness of the selected BSM software. 
  1. Offer employee training: 
  • Regularly provide comprehensive training on new tools and spending policies. Opt for software that includes tutorials and a robust resource hub to support training efforts. Additionally, leverage the expertise of the dedicated BSM team as a resource for employees requiring additional support during the transition. 

Business Spend Management Tools and Solutions 

Integral to Business Spend Management (BSM) software, spend management tools play a vital role in monitoring and controlling non-payroll business expenditures. These encompass costs associated with raw materials, marketing services, and even industry-specific magazine subscriptions. Designed to provide a comprehensive overview of spending throughout the entire organization, this software collects and analyzes expense data. By doing so, it aids in preventing overspending and ensures accurate accounting of business-related expenses in financial statements. 

 

BSM software proves invaluable to procurement departments for planning and overseeing business expenses. Simultaneously, accountants leverage this software for financial reporting purposes. Distinguished from expense management software, which primarily addresses employee expenditures such as taxi rides, meals, or business travel, spend management software seamlessly integrates with procurement and supply chain solutions. In collaboration with ConvergentIS SAP tools and software for intake management, procurement, reporting and operations planning software, among others, you can effectively manage your spend and expected spending while keeping track of important metrics and streamlining processes. Using software such as those from ConvergentIS will improve your company’s analytical capabilities and help to identify trends and offer recommendations for cost savings. 

 

 

How Business Spend Management Aligns with Other Business Processes 

Business spend management, when integrated with Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), and Human Capital Management (HCM), collectively addresses the fundamental operational processes within an organization. This integration empowers businesses to enhance decision-making, optimize operational efficiency, and foster growth in a competitive market. Embracing this collaborative approach marks a crucial step toward achieving financial control and ensuring long-term sustainability. 

 

Enterprise Resource Planning (ERP): 

ERP serves as a comprehensive system that unifies various business processes and functions into a centralized platform. It streamlines core operations in areas such as accounting, finance, human resources, supply chain management, and inventory control. While ERP acts as a central database for overall business operations, it may not fully cover every aspect of human resource or spend management workflows. To address this, businesses often invest in specialized systems that cater to specific functions and seamlessly integrate them with their ERP. This integration extends the value of ERP by providing businesses with a holistic view of their financial health. BSM software, when added to the mix, facilitates deeper insights into spending patterns, supplier performance, and budget allocation. 

 

Customer Relationship Management (CRM): 

CRM tools enable businesses to effectively manage interactions with current and potential customers by storing customer data, tracking sales leads, and streamlining marketing efforts to enhance satisfaction and loyalty. When integrated with a BSM system, CRM synergizes with spend management processes. For instance, a purchase request for a marketing campaign initiated in the CRM system seamlessly flows into the BSM system. This integration streamlines financial approvals and facilitates the tracking of budget milestones throughout the campaign. The collaboration between CRM and BSM ensures effective and well-coordinated marketing endeavours. 

 

Human Capital Management (HCM): 

HCM encompasses the practices and processes for managing a company’s workforce, including talent acquisition, employee onboarding, payroll processing, performance management, and employee development. Integration with a BSM system reduces administrative burdens, enhances data consistency, and ensures compliance by accurately transferring workers and their pertinent HCM data and activities. This collaborative integration results in a more cohesive and efficient management of human capital, contributing to overall organizational effectiveness. 

 

Revolutionize Your Business Spend Management With ConvergentIS Solutions 

 

Through effective and innovative business spend management, you can gain significant savings, enhance productivity, and embrace sustainable practices in your company. Staying ahead in the industry requires the adoption of cutting-edge SAP solutions to streamline your processes, and ConvergentIS offers a plethora of solutions tailored to meet these needs.  

 

Explore the full range of our solutions by clicking here. Connect with our team of experts by filling out our contact form, and we'll reach out to you promptly.