What is ‘spend’?—Defining spend in the procurement process

What is your spend? At face value, the question is simple, but the answer rarely is. Do you know the answer off the top of your head, or might it take you a few minutes to find it in your files? Maybe you don’t really know because getting that information has never been easy. Or maybe your first response is: “What exactly do you mean by ‘spend’?” It’s hard to have a conversation about anything before defining the basic terms of the discussion.

Imagine you want to quantify the value your procurement team brings to the organization in hopes of increasing your head count next year. To do so, you report that you saved the organization 2.5 percent of spend. But what spend do you mean? The actual dollar value of 2.5 percent can vary wildly depending on whether you mean 2.5 percent of the organization’s total expenditures or 2.5 percent of the spend that the procurement team can influence. When talking about spend – or money in any context – it’s important to be precise.

There is no single definition of spend that will be universally understood, even within the confines of public sector finance and procurement. The word by itself isn’t specific enough and doesn’t tell the whole story. Based on years of discussions with hundreds of public sector procurement directors, managers, supervisors and officers, this article seeks to clarify what we mean when we talk about spend, and how we can use that clarified meaning to discuss spend more effectively both inside and outside procurement.

Overall spend

The best place to start is at the top. Any organization will complete thousands, if not millions, of transactions each year, some that are spend in a procurement sense, and others that are not. Getting to the “overall spend” figure first involves excluding transactions that relate more to the movement of money than spending on goods, services or staff. Examples of these transactions include cross charging between departments, transfers to other public sector organizations, financial investment transactions and legal settlements paid. There may be other similar exclusions unique to an organization, but transactions for any category of goods, services or staff costs should remain in overall spend.

With those exclusions applied, overall spend should represent the organization’s expenditure on staff costs as well as the purchase of goods and services from external suppliers. Overall spend will always be less than the total value of all financial transactions, and should be relatively straightforward to calculate. Often this figure will be the same as, or similar to, the organization’s operating budget.

Non-payroll spend

Now let’s narrow down and further define spend. “Non-payroll spend” is overall spend minus direct staff costs such as payroll, retirement contributions and other costs that are paid to, or on behalf of, a staff member, and which are not directly for the purchase of goods and services from third parties. For example, while payroll and employee retirement contributions should be excluded at this stage, health insurance costs could go either way. This is because the organization usually has some choice and influence as to how health coverage is provided and through which vendor, but it may not be a type of spend that procurement can influence. Another exclusion local governments typically make at this stage is for any social service direct aid payments to individuals, or to individuals who provide social care such as foster parents.

Non-payroll spend is typically 25 to 40 percent of an organization’s overall spend and is the figure that really begins to resemble what procurement professionals would recognize as spend. With the exclusions applied in the steps above, non-payroll spend should include only the organization’s transactions with third party creditors for the purchase of goods and services.

What is spend? continued

Influenceable spend

This is the level at which the spend figure becomes very open to manipulation and interpretation, and with good reason. “Influenceable spend” is the subset of non-payroll spend that the procurement team can actually influence and is always either equal to or less than non-payroll spend. To calculate influenceable spend, some or all of the following are excluded from the non-payroll spend figure because the procurement team has little or no control in these areas, or because other category experts who are not in the procurement team manage procurement in an area:

• Construction and facilities maintenance,
• Capital projects,
• Utilities,
• Healthcare and other insurances, and
• Transactions less than a specific dollar amount, which is often the same as the organization’s competitive solicitation threshold.

Consider an example of two cities, close to each other, serving similar populations and having a similar non-payroll spend. The procurement team at the city with a centralized procurement function is likely to have a much higher influenceable spend than the team at the city with a completely decentralized procurement function.

Influenceable spend can also be an important figure when comparing staff levels and reporting savings. It stands to reason that the greater the influenceable spend, the more staff or more highly qualified (and possibly more highly paid) staff are required to manage it. When reporting delivered savings, it is reasonable that the procurement team report their savings as a percentage of the influenceable spend, rather than non-payroll or overall spend, much of which they have no control over.

The influenceable spend figure should reflect the spend that the procurement team has the authority to influence, even if the team isn’t actively doing so right now. When discussing influenceable spend, the procurement professional should be ready to explain what was included, what was excluded, and why.

Managed spend

A final level of granularity of spend is “managed spend.” This figure will be equal to or less than influenceable spend and represents the categories and vendors that the procurement team is actively managing on an ongoing basis, often through a contract or category manager. Another often used description is “contract spend,” but this description is ambiguous. Usually, contract spend is used to describe the value of transactions with a vendor where a formal contract is in place and was either let by the organization or utilizes a cooperative purchasing agreement. But there could quite easily be spend with a contracted supplier that isn’t managed by the procurement team yet, but probably should be. In order to actually be considered managed spend, the procurement team should be involved in the letting and/or management of the contract.

Where is spend data captured?

When trying to determine any of the above types of spend, data usually comes from multiple sources. It is extremely important to make sure that all sources are included. The main sources of data are the organization’s accounts payable (AP) system (which may be a module within an ERP system) and a p-card system. If payments are made to third parties other than through the AP or p-card systems (such as a voucher system, direct pay system or travel and expense system) they should also be included.

If you have them, you may find the following systems useful in determining your organization’s overall, non-payroll, influenceable and managed spend because they include additional information about your organization’s financial transactions:

• E-procurement systems: For many organizations, spend managed by an e-procurement system has gone through an approval process and/or through a catalog (whether hosted or punch-out) and is more likely to be managed spend than other methods of buying.
• Contract management systems:These systems can provide information on which vendors and goods have a contract in place and are therefore likely to be influenceable or managed spend.
• Vendor management systems:They contain additional information about the vendors to help determine what transactions should be influenceable and which are not.

Your own definition of spend

It’s crucial in the business of public sector finance and procurement to make sure that everyone in any given discussion understands what kind of spend they are all talking about. You may have your own set of words to describe spend at your organization which everyone already understands. If not, this article can help clarify the question so you can hopefully provide a precise and consistent answer the next time you’re asked about your organization’s procurement spend, or your total savings as a percentage of spend.