The True Cost of Spend silos

March 7, 2013

Many organizations lack visibility into spend because of disparate processes, technologies and workflows between departments and business units. Can an otherwise successful company suffer from erosion of profits and performance due to spend silos? The answer is an unequivocal yes. Well-developed rationalizations are made to support the existence of such silos, but–more often than not–they exist because of interdepartmental naiveté and politics as well as the lack of a strong C-level advocate for procurement optimization.

Recently, we were asked to address spend silos for a profitable and growing company that didn’t realize, until identified in an audit report, the magnitude of their inconsistencies in spend management. While the circumstances we encountered were somewhat extreme, they serve as a reminder for why a consistent and holistic approach to procure-to-pay (P2P) is so important for any organization today.

A Thousand Cuts: Our analysis revealed that a lack of enterprise P2P strategies, processes and technologies had significant bottom-line implications. These included:

  • Limited control over spend & budget
  • High labor cost per transaction
  • Inaccurate forecasting of payment liabilities
  • Foregone early payment incentives
  • Late payment penalties
  • Non-compliance to contracts, catalogs, and inventory levels
  • Chronic inability to meet business requirements

P2P Benefits: By implementing a holistic approach to P2P, the company can significantly reduce headcount for transaction processing and reassign these individuals to enhanced roles that drive savings, decrease cycle times and reduce risk throughout the company. In addition, several redundant software implementations can be eliminated reducing licensing fees and support costs. Once the new procurement optimization program is implemented, the company can expect to benefit from up to 10% total savings from increased efficiencies in procurement operations, invoice management and negotiated savings.

Lessons learned? Particularly within dynamic, growing and decentralized organizations, spend silos can represent an invisible drain on corporate resources. The magnitude of the problem is also difficult to quantify due to the lack of a complete audit trail for P2P events.

It is important to note that, for many companies, the evolution of procurement as a shared corporate service is still a new idea. Standardized Procurement is necessary to improve savings, eliminate redundant processes, reduce risk and improve cash management. Today, best-in-class organizations achieve these objectives and deliver strategic business impact by enabling internal stakeholders to focus on what they do best.

Dave King
Manager, Procurement Optimization
The Shelby Group