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Spend Management is a business function in which businesses gain visibility, establish controls - consisting of system controls and organisation policies, in order to manage their business spend. The function involves managing the full lifecycle - from Sourcing and selecting the suppliers, establishing contracts, purchasing and managing payments to suppliers. The objective of this business function is to ultimately reduce operating and other costs associated with doing business. These costs typically show up as "operating costs" or SG&A (Selling, General and Administrative) costs, but can also be found in other areas and in other members of the supply chain.
Whether it is the money spent on goods or services for direct inputs (raw goods and materials used in the manufacture of products), indirect material (office supplies and other expenses that do not go into a finished product), or services (temporary and contract labor, print services, etc.), a company needs a mechanism by which they are not only able to save money but also control costs.
Spend Management is meant to represent a holistic view of the activities involved in the "source-to-settle" process. This process includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts.
In an enterprise, spend management is managing how to spend money to best effect in order to build products and services. The term is intended to encompass such processes as outsourcing, procurement, e-procurement, and supply chain management. Since the "spend manager" could have a significant impact on a company's results, it has been advocated that this manager have a senior voice in running the company.
Companies divide money into two major buckets - revenue and cost. In hard economic times, when revenue is harder to come by, companies often turn to cost reduction initiatives. Cost cutting will increase net income. An increase in net income leads to a greater earnings per share and ultimately a higher market value (higher market capitalization).
Because cost cutting affects a company's bottom line directly, certain types of cost cutting can be the quickest way companies can increase their market value. The typical consensus is that the revenue to cost ratio is about 3 to 1; for instance, increasing revenue by $300 has about the same effect as cutting costs by $100.
This is why, in hard times, companies typically turn to cost-cutting measures such as layoffs and product quality reductions. However, most analysts agree that this short-term tactic creates little long-term value, nor any long-term sustainable savings. This is why "Spend Management" has become a key long-term strategy for companies seeking to maintain long-term and sustainable value.
Most recently, companies have been utilizing new tools such as e-sourcing (for bidding and reverse auction), e-procurement (to control and monitor purchasing activities and contracts), and e-spend analytics (to gain insight into how much money is being spent on what types of services or products). Some tools are also addressing the entire spending chain, or purchase-to-pay cycle.
These tools promise, not only to automate paper intensive and manual processes, but also to help monitor and control spending activity and to create an integrated process in which each activity feeds into another.
Spend Management is a subset of Total Cost Management, which takes into consideration financial management aspects such as tax/VAT, exchange rates, the impact of demand (i.e. sales), manufacturing, and other factors.
When considered from a holistic viewpoint, Spend Management can start to feed into supply management, as it also affects how assets (capital and otherwise) and inventory are procured and managed. Spend Management (and in a bigger view Total Cost Management) starts to inform a company of Total Cost of Ownership, and is often used to understand the total cost of items such as assets (from their acquisition, to their use and depreciation, and finally to the assets' retirement).
In the end, however, Spend Management is about creating long-term and sustainable savings. True Spend Management (and by extension Total Cost Management) is considered by many to be an ongoing cyclical process.