Before the COVID-19 pandemic, organizations were already hunting for ways to control and reduce their overall spend. Since then, rising costs and intensifying supply-chain complexity and volatility have only increased the pressure to consider expenses carefully. Yet the spending culture at many companies still starts from a budget mindset: “I can spend as long as it is within my budget.”
The experiences of companies across industries show that a rigorous approach for better demand management helps optimize indirect costs. And by setting up a spend control tower (SCT)—a cross-functional, decision-making team of senior stakeholders—to process and review spend requests according to their need and urgency, organizations can capture 5 to 15 percent of addressable indirect spend.
At its core, an SCT provides a structure for challenging spending, with explicit roles designed to scrutinize spend requests objectively regardless of whether budget is available (Exhibit 1). An SCT thus helps the organization develop a cost-conscious culture as people begin to rethink what is really needed, breaking old habits. The resulting demand management can help CFOs, COOs, and chief purchasing officers (CPOs) achieve a wide range of goals: optimizing return on investment (ROI) for marketing campaigns; reducing contractor costs by substituting in-house talent; encouraging transparency in maintenance, repair, and operations (MRO) providers’ breakdowns of activities; or rethinking server replacements versus cloud-based solutions.
Making the SCT concept work well, however, is not easy. Often-heard complaints include added bureaucracy (“just an extra layer of control”) and time demands for the team (“getting the data is largely manual”). With advances in technology, early adopters have discovered that a digital version of an SCT (or “DSCT”) can overcome many of the limitations inherent in their manual predecessors.
Easier implementation with digital
Newer systems can now automate day-to-day workflows, making the SCT more efficient to run. And, a DSCT can perform analysis and monitor trends across multiple SCTs, with a single source of truth in a unified dashboard (Exhibit 2).
Part of what makes a DSCT so powerful is that it uses purchase requests (PRs) developed across the organization as the central input to the SCT’s challenging process. The DSCT process can therefore be automated from end to end, with limited manual intervention needed to arrive at a decision.
Moreover, because the DSCT decision is made before a commitment to a supplier as a purchase order, it complements category-analytics solutions that typically use invoice data retrospectively to find actionable procurement insights. Combining category analytics and DSCT therefore allows organizations to improve spend control from request to invoice. In addition, the data-crawling capability of the analytics solution enables the organization to link SCT decisions on requests to purchase orders and invoices. This offers a holistic analysis from requisition creation through invoice payment (Exhibit 3).
How the digital spend control tower creates impact
The process standardization that the DCST enforces, together with its effect on longstanding mindsets, generates value across the organization.
Rigor yields quick financial results
The DCST’s mandate to approve, defer, modify, or reject each purchase request (PR) usually leads to immediate bottom-line effect: a materials company, for instance, consolidated licenses and subscriptions to reduce costs by about 20 percent. But those sorts of savings would likely fade without the cultural transformation DCST can make possible. As one executive noted: “The digital SCT has really changed how people think about spending money—they think twice before submitting the request and provide much better documentation to support why they believe the requested spend adds value to the company.”
By increasing transparency of spend requests, a DSCT can also spur organizational innovation. One mid-size consumer goods company found it could connect different maintenance teams to pool high-value spare parts and reduce working capital.
Automating repetitive tasks increases efficiency
Automation reduces the time required for setting up, scaling, and operating a DSCT. PRs are extracted from a standard enterprise-resource-planning (ERP) system or a similar source, requiring team members only to manage request inflow and assignment. The decision to approve, defer, modify, or reject is registered in a digital tool and automatically linked to a real-time dashboard to demonstrate the impact across different sites.
At the end of the weekly cadence, the digital SCT makes reporting available to key stakeholders, allowing the analyst to focus on the next set of incoming spend requests. It eliminates the need to manually combine data sources and reports.
Standardization leads to scale
The number of control towers an organization requires will naturally vary, depending on factors such as the company’s size, geographic footprint, organization structure, and the scope of the DCST. Nevertheless, the towers will share a standardized workflow centering on a single process and means of reporting across the organization—with a degree of flexibility to adapt to particular needs. Combined with the ease of use, this common design makes it easy for teams to replicate the approach and scale it across an enterprise. A DSCT can also be operated remotely, enabling SCT team members to focus their work on value-added activities, such as helping managers prioritize requests.
For businesses that were already familiar with the SCT concept, the difference from digital can be dramatic. Even seemingly small improvements have a cumulative effect: at one Fortune 500 company, applying digital to an existing SCT structure reduced the time required for meeting-agenda development from 6 hours to 2 hours. That sort of change made it easy for the company to set up more than half a dozen DSCTs, each reviewing more than 150 requests a week from roughly 100 different requesters. Collectively, the DSCTs have achieved a 10 percent direct reduction in spending through rejection, modification, and deferral of spend requests.
For an Asian healthcare provider, the resulting transparency gave leaders a much better understanding of procurement across the enterprise, so that leaders could be more thoughtful about the commitments the company was making. And it enhanced capability building. “Our DSCT provided us the ability to scale the SCT process across the organization, freeing up resources and providing improved training opportunities,” said one analyst at the company.
Success factors for SCT implementation
To ensure successful implementation, organizational leaders can take three steps: making DSCT part of the company’s core infrastructure, establishing the right DSCT processes for decision making and reporting, and supporting long-term mindset shifts.
First of all, the organization must define a top-down mandate giving the DSCT team the directive to approve, approve, defer, modify, or reject every spend request. The setup then requires relatively simple configuration, together with links to a source for accurate PR data and a destination for reporting decisions. These are usually not major hurdles: despite having multiple ERP systems, the Fortune 500 company was able to establish its DSCT structure with a manageable level of investment, so that the DSCTs now extract the data in a standard process across the entire organization.
Establishing the right processes
Once these links are in place, a DSCT allows organizations to challenge spend requests remotely in a standardized manner irrespective of the current workflow’s ERP systems or automation level. Standard reporting lets the team keep track of meeting progress and performance, while a simple tool link the DCST’s decisions back to the company’s main ERP system to ensure decision outcomes are captured and widely accessible.
Sustaining bottom-line impact over time means resisting reversion to past practice—and supporting a deep mindset change, from spending every dollar in the budget to spending only where critical. The DSCT can help by enabling the team to extract and showcase the data and trends that support the changes, which become the basis for communications campaigns reaching the entire organization.
It’s easy to think that spend is under control. But is it really? By challenging each spending request according to objective criteria, a DSCT helps companies find substantial new savings—in a scalable way that can support a new, value-centered culture.