Addressable spend: key challenges and enabling technology
Let’s quickly refresh on the key definitions.
Spend for procurement can be simplified as:
- Total spend: This is the total spend, both internal and external purchases, relevant to the procurement organization including salaries, taxes, etcetera.
- Addressable spend: This is the portion of spend that the procurement teams can influence and have control over for example direct and indirect spend with third party suppliers.
- Managed spend: The portion of addressable spend that is actually being managed effectively through contracts and negotiation by the procurement teams.
In an ideal world, organizational “managed spend” should be equal to their “addressable spend”. However, based on studies, the gap is about 20% for mature procurement organizations and can get up to 50% for laggers. When we research the key drivers for this gap across multiple industries, we find the following weighted contributors;
- Limited visibility. Too many data sources (pockets of spend) across the organizations
- Poor data quality and lack of standardization in procurement processes
- Limited procurement resources and lack of skill set
- Insufficient tools and systems to satisfy procurement requirements
- Lack of budget on IT development and maintenance & dynamics of the business
- Organizational structures which limit procurement influence
Above listed are the reason why procurement professionals miss sights, between 20% to 50% of their potential addressable spend, not even mentioning that in some organizations the total spend is still a mystery. A closer look at these 6 root causes reveals that the Top 3 (visibility, data quality and resource allocation) are much easier for procurement to focus on while having the highest impact. If procurement teams can collect all spend data (Internal & external), and be able to cleanse, and classify those effectively with limited resources then they could focus on the execution of key areas and generate significant value.
Threads and Opportunities
The gap between total, addressable and managed spend represents not only lost or hidden opportunities but also risk for the business overall. Specifically in terms of securing supply and adhering to corporate compliance commitments. which have been exacerbated since the COVID-19 pandemic and will remain a concern for all industries. The upside is that, increasing visibility will not only shed light on hidden opportunities but also could be used as a proactive way to mitigate obvious and high impact risks. Depending on the company maturity and support level this can generate a healthy pipeline of projects and initiatives so procurement teams can generate constant value toward the business.
How Mithra-Ai can help
At Mithra-Ai, we have firsthand experience with the challenges of maximizing addressable spend in procurement. That’s why we’ve been working hard to develop a solution specifically tailored to the needs of procurement professionals. With our technology, you’ll be able to scan all areas of your spend across all data sources in just a few hours, without any IT effort required. This will allow you to quickly identify opportunities for cost savings and mitigate key risks. Plus, our solution allows you to do all of this 100x times faster and with only a tenth of the resources you would normally need.
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