Getting a Grip On Spending

Getting a Grip On Spending

Struggling to grow revenues, businesses have turned their focus to developing strategies designed to rein in costs to maintain profitability.

"Show me the money" is all well and good, but following the money is no less important.

There were quite a few pleasant surprises in store for Lion Nathan once it implemented a package of spend management solutions from Ariba back in 2002. For one thing, being able to categorise its indirect spend into logical category groups led it to discover that, with operations in New Zealand and China as well as Australia, the company was a much larger user of international sea freight than anyone had hitherto appreciated.

Armed with that knowledge, of course, the Australian-based alcoholic beverages company found it was a simple matter to realise significant savings by consolidating its sea freight spending into a single service provider. Similar revelations on other categories of spend meant the company easily achieved its business objectives - improving the visibility into the corporate spend (how much it was spending, on what and with whom), improving contract compliance (reducing "maverick" spending) and decreasing the costs and accounts payable resources associated with processing invoices - and achieved payback in less than three years.

But also surprising was the way implementing systems designed to give Lion Nathan control over spending on external suppliers is changing the entire culture of the organisation.

Derek Jones, technical manager new technologies, says cultural change has come through making people aware of the organisation's obligations under certain contracts; through a broad education and communication effort around the benefits it is deriving from some of its sourcing activities and the way these reflect back to the bottom line; and via the linking of both to individual employee's bonuses, pay objectives and accountabilities. Combined with a major organisational restructure, the initiative is transforming Lion Nathan.

"We have raised a fair bit of awareness, and this comes particularly from being a set of businesses that were one time stand-alone business units and are now integrated into a broader business. It has led to a significant transformation of the whole culture of the organisation," Jones says.

Accountability Rules

With organisations struggling to prepare themselves for an uncertain global environment, cost control is the order of the day in companies of all shapes and sizes. Struggling to grow revenues, businesses have turned their focus to developing strategies designed to rein in costs to maintain profitability.

Adding urgency to those efforts is the impact of the US Sarbanes-Oxley Act signed into law by President George W Bush in 2002 with the aim of strengthening accounting oversight and corporate accountability by enhancing disclosure requirements, increasing accounting and auditor regulation, creating new US federal crimes, and increasing penalties for existing federal crimes. Sarbanes-Oxley requires organisations to enhance greatly their ability to report on expenses and revenues in a timely manner, as part of growing demands for greater visibility into the activities of public companies and their finances. Australian organisations doing business in the US will be similarly bound by its requirements.

Yet a study last year by Comshare (now part of Geac Computer Corporation) of CFOs found only 11 per cent were very confident that a spreadsheet-based process ensures the accuracy required for them to feel comfortable signing off on financial statements, as required by Sarbanes-Oxley. Another 42 per cent say they are somewhat confident, leaving 47 per cent who say they are not confident.

You would think CIOs, at the urging of their CFOs, would be rushing to implement spend management software. The Yankee Group points out, for example, that the single most important difference between organisations with longevity and those that fall by the wayside is the ability to create a culture of fiscal discipline.

"Successful organisations realise that they have little or no control over the business climate in which they operate. However, they can ensure that their strategy and level of expenditures are aligned with their ability to generate revenue - they can control their rate of spend," Yankee Group says. "The organisations who have firm control of their expenditures will outperform competitors when the economy is strong and gain market share when the economy is soft. Although organisations cannot control market economies they can take charge of their single most important asset - the money they earn."

Spend management control is a lesson that small businesses learn quickly, or die, the research organisation points out. But as companies grow, fiscal discipline often goes out the door, while the simple tools used to manage spend in a small organisation rapidly lose their potency. "Organisations that survive this current [US] recession will be those that put the controls in place to manage enterprise spend," Yankee predicts.

But it seems many major corporations have been slow to heed the message. A recent Aberdeen Group study of spending analysis procedures of 157 enterprises uncovered what Aberdeen chooses to call "corporate America's dirty little secret": few businesses truly understand how much they spend, on which products, and with which suppliers. "Insufficient visibility and analysis of spending information limits a company's ability to understand spending patterns, maximise buying leverage and make optimal sourcing and supply management decisions," the research group says.

Almost 80 per cent of enterprises surveyed by Aberdeen view spending analysis as "very important" or "critical" to their success, yet only half of those businesses currently have a formal spending analysis program. "Worse yet, firms with formal spending analysis procedures analyse only about half of their total spending," says Aberdeen's Tim Minahan, vice president supply chain research.

Without visibility of analysis of spending information, companies find it impossible to understand spending patterns, maximise buying leverage, execute informed sourcing and supply management decisions, drive continuous improvement in contract compliance and supplier performance, optimise budgeting and planning or measure the impact on changes, inflation and other factors. The uncertain atmosphere in which enterprises operate with current sourcing spend information leads to higher cash costs and inefficiencies in sourcing. Aberdeen estimates failure to adequately analyse corporate spend is costing businesses $US260 billion in missed savings opportunities annually.

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