Controlling Unmanaged Procurement Spend at Midsize Companies

January 16, 2024
By Sudhir Bhojwani

While there’s much advice for controlling unmanaged spend, too often that guidance fails to consider how spend differs depending on the size, age and growth trajectory of a business. Why and how a larger, established enterprise wrestles with spend will vary significantly from a fast-growing midsize company’s approach — and the solutions they employ should differ as a result.

It’s imperative to take a closer look before implementing changes, and, for midsize companies especially, to ensure opportunities are maximized.

At a macro level, spend categories can seem similar between mid-market and enterprise businesses — these companies are fundamentally buying and spending on many of the same types of things. But delve deeper, and you’ll see the exact nature of this spend differs across midsize and enterprise businesses, as does the maturity and focus of the procurement function.

For instance, larger enterprises often have a significantly higher percentage of spend on IT infrastructure. Once companies cross the 1,000-employee threshold, they typically also have a formalized procurement function, including dedicated staff and established policies. Their primary focus is not only spend management, but also compliance, risk management and strategic orchestration of complex procurement workflows.

Alternatively, IT spend at midsize companies is often geared toward subscriptions and services, which can include everything from cloud-based applications and infrastructure to services like an external workforce that includes non-payroll workers and service providers. These types of services can account for a massive amount of indirect spend and present unique challenges that many traditional systems are unqualified to handle in areas like contracting, quality assurance, and data integrity. These challenges are then compounded by varying requirements across departments. The result: spend tends to be ad hoc and managed at the individual, team or department level, and therefore lacks effective governance, compliance verification and controls.

Therein lies the key differences and challenges for midsize companies.

The Middle Challenge

Midsize companies are in a precarious position: They’ve realized they need procurement but don’t have it. Implementing this function is like building a bicycle while trying to ride it: Procurement leadership must start from scratch in assessing current spend across existing contracts, renewals, services, budgets and forecasts. Then, they must develop the necessary procurement policies and procedures and assert some level of rudimentary controls.

Yet, in building a procurement function, leaders typically face significant internal resistance. Procurement is often seen as directly opposed to the nimble nature of small, fast-growing companies. “We’ve always done it this way and it’s worked fine” is a common refrain.

But as companies mature, so do their spend requests, compliance requirements and risk exposure. The free-wheeling habits that might have gotten a company to a certain growth stage can now put that same company at substantial risk.

The Danger of Unmanaged Spend

Much of the resistance to a new procurement function starts from the assumption that the old way of doing things is fine. But a truism in finance is that unmanaged spend is at risk: of overpaying, being cut, failing to abide by a regulatory or legal requirement, or fraud.

All of this drives the need to tighten control of spending and improve spend visibility, a critical component of management. A company can’t control spending if it doesn’t know where money is going, but this visibility can be difficult to achieve. For instance, spend might be traced through user-entered account codes — which are notoriously inaccurate — or grouped into larger categories that don’t provide the granular detail needed to make informed decisions.

However, once a company can improve its spend visibility and ensure compliance with policies and procedures, classic spend management techniques can be employed to manage that spend. And hard-dollar savings often bring increased opportunity and willingness to increase investment into such areas as contract management and performance tracking.

The upside is clear, but it’s a daunting task for leaders working to establish a new procurement function. They generally lack tools and other resources and must simultaneously address (1) a non-existent purchasing process, (2) lack of spend under management and (3) the urgent need for increased compliance and governance.

The immediate priority is usually implementing a baseline level of process and controls, but this can put procurement at an uncomfortable crossroads. Without the ability to enforce compliance, those new processes and controls are largely worthless.

Yet forcing compliance — especially if the process is seen by employees as cumbersome and difficult to follow — can cause low adoption. Procurement then becomes a major friction-point in getting business done. Left unchecked, procurement’s real strategic importance and organizational benefit are lost.

Making Procurement Awesome

Low Net Promoter Score results and high user resistance are flip sides to the coin of unmanaged spend and limited spend visibility. They are byproducts of procurement tools designed for a different era that didn’t have subscriptions, services and artificial intelligence (AI).

The historical procurement focus was on indirect spend management, including forcing enterprise-wide usage of catalogs to achieve negotiated cost savings. However, catalogs don’t address a significant percentage of spend in today’s modern, decentralized organizations and this is only one issue in a long list of new complexities facing procurement leaders. Clunky supplier management tools or add-ons and lack of integration with other enterprise systems compound these problems.

Newer tools address these issues in two ways. First, they are designed with a modern business user in mind, guiding users through the maze of best-practice procurement procedures in a flexible, humanized manner. This improves user experience and decreases friction, resulting in increased accuracy and visibility into the spend and supplier pipelines for the procurement team.

Secondly, newer tools are designed for integration. They not only guide the procurement process for companies that don’t have other tools in place, but can also integrate with, and complement, other enterprise systems — including other procurement solutions. This helps improve overall orchestration without needing to disrupt existing systems or processes. It facilitates fast deployment, quick adoption and agile improvement, which are essential considerations for smaller fast-growing companies.

Moreover, through integration and orchestration, these tools can more intelligently facilitate things like compliance, security, governance and reporting, connecting with procurement-adjacent systems like third-party risk management, ERP, sourcing and security tools to ensure holistic enterprise management.

The latest tools also embrace AI in an interesting way. Consider the issue about a lack of granularity and accuracy of account codes and spend categories. Modern tools can use AI to automatically determine the correct granular categorization. Visibility and analysis of spend improves, and as an organization grows, it forms a system of record for past spending and supplier relationships. That, in turn, helps remove friction and increase the overall value and strategic impact of procurement.

While larger enterprises with existing procurement tools and processes are benefiting from this new generation of tools, it’s the smaller fast-growing companies that arguably have the most to gain — leapfrogging legacy systems and policies to reap the benefits of a nimbler approach, right from the start. That’s good news for organizations that prefer to meet users where they are, rather than fighting through resistance to implement archaic procedures.

(Image credit: Getty Images/Sutthirat Sutthisumdang)

About the Author

Sudhir Bhojwani

About the Author

Sudhir Bhojwani is co-founder and CEO of ORO Labs. He previously served as chief product officer at SAP Ariba.