Managed vs Unmanaged Spend

Managed spend refers to any expenditure that falls under contractual agreements and involves the procurement team’s direct oversight. This category of spend is also known as “spend under management” or “strategically managed spend”.

Characteristics of Managed Spend:

• Involves procurement team in sourcing and negotiation
• Falls under contractual agreements
• Follows defined procurement processes
• Allows for strategic optimization of vendor relationships
• Enables monitoring of the procurement cycle for inefficiencies

Unmanaged spend encompasses all expenditures that occur outside the company’s established procurement cycle. This category includes several subtypes of spending that can potentially impact an organization’s financial health.

Types of Unmanaged Spend:

• Rogue or Maverick Spend: Occurs when employees deliberately ignore procurement processes or when there is misalignment between procurement policies and everyday purchasing practices.
• Tail Spend: Typically accounts for approximately 80% of total transactions but only 20% of the company’s spend by volume. The definition may vary across different businesses.
• Indirect Spend: Includes purchases of goods and services that are incidental to the company’s primary offerings, such as office supplies or janitical services.

Impact of Unmanaged Spend. Unmanaged spend can significantly affect a company’s productivity and profitability. Research indicates that by addressing unmanaged spend, organizations can achieve immediate savings of 10-15%, with an additional 2-5% savings annually thereafter.

Risks Associated with Unmanaged Spend:

• Price Risk: Purchases made without considering optimal pricing can lead to budget overruns and missed savings opportunities.
• Time Risk: Lack of tracking makes it difficult to monitor price fluctuations for different products over time.
• Operational Risk: Purchases completed without proper oversight may not undergo necessary vetting processes.
• Competitive Disadvantage: Failing to address unmanaged spend while competitors do so can put a business at a significant disadvantage.

Effective spend management is essential for both managed and unmanaged spend. It involves comprehensively managing all supplier relationships and company purchasing to identify and optimize every dollar spent.

Key Strategies:

• Implement spend management software for improved visibility and control
• Plan spend throughout the year and integrate it into various business aspects
• Take a holistic view of spending to enhance efficiency and manage risk
• Foster collaboration between departments to improve productivity
• Consistently seek to optimize managed spend and vendor relationships
• Bring unmanaged spend under procurement team oversight

By deploying digital tools to manage tail spend, companies can potentially reduce overall annual expenditures by 5% to 10%.

Effective spend management requires a comprehensive approach that addresses both managed and unmanaged spend. By implementing these best practices and utilizing appropriate software solutions, organizations can optimize their financial resources, reduce risks, and gain a competitive edge in the marketplace.

At Levelpath, we don’t just provide a software solution; we provide a customer commitment in the form of a partnership. Our success team is dedicated to empowering procurement with the knowledge, tools and support they need to stay curious and continually drive procurement transformation. From initial workspace setup to advanced customization and beyond, the Levelpath community is there every step of the way.

To learn more about how Levelpath can help your organization move faster, uncover risks earlier, and keep people focused on the more strategic work, request a demo today.