Key Differences Between Managed vs Unmanaged Spend

Managed and unmanaged spend, naturally, require different approaches. Procurement teams simultaneously must try to optimize managed spend by managing supplier relationships, practicing strategic procurement, and monitoring the procurement cycle for inefficiencies. Meanwhile, teams must also identify unmanaged spend and try to reduce its negative impacts. 

Often, managed vs unmanaged spend compete for a procurement team’s attention. For instance, a procurement team may focus exclusively on eliminating unmanaged spend — while neglecting cost savings that can be achieved with spend management. Spend management best practices, however, make it possible to minimize unmanaged spend while still improving managed spend. 

Here are the key differences between these two spending categories, as well as some best practices that teams can use to optimize both types of spending.

Managed vs Unmanaged Spend

Managed spend is defined as any spend under contract, a key performance metric that represents any transaction in which the procurement team has been involved in sourcing and negotiating the terms. Managed spend is also sometimes known as “spend under management” or “strategically managed spend.” 

Managed spend involves a little more than simply copying the procurement team on an order confirmation email. Strategic procurement best practices carefully optimize everything from vendor selection, payment terms, vetting, contract negotiation, and the purchase of goods and services. 

In contrast, unmanaged spend refers to any spending that occurs outside of a company’s defined procurement cycle. Within this category, there are a few specific types of unmanaged spend, such as: 

• Rogue or maverick spend: this spending behavior is the result of employees deliberately ignoring procurement processes. It can also result from the misalignment of procurement policies with the everyday practices of those in charge of purchasing within the organization.
• Tail spend: often defined as the money a company spends on purchases that account for roughly 80% of total transactions, which makes up about 20% of the company's spend by volume. There is no one-size-fits-all definition for tail spend across different businesses. When any company’s purchases are categorically grouped and plotted on a chart from largest to smallest, there is a mandatory trailing off in the size of each category and the amount of money that falls within it. Invariably, the shape of the trailing purchase categories will take the form of a tail — which is where the term “tail spend” comes from. 
• Indirect spend: the goods and services purchased by a company that are incidental to the product or service a company is offering — for instance, safety goggles, office supplies, or janitorial services. 
  

Unmanaged spend and tail spend are, essentially, two different terms for the same problem. Tail spend can include anything from maverick spend to misclassified purchases. 

Indirect spend quickly can become a form of unmanaged spend if not carefully monitored. Research by McKinsey found that indirect spend tends to be fragmented among multiple locations, business units, and categories. This makes it hard for the procurement team to identify and manage indirect spend.

The problem with unmanaged spend

Unmanaged spend can quickly drag down a company’s productivity and profitability. By reigning in unmanaged spend, studies show that companies can optimize resources to achieve 10 - 15% savings right away, plus an additional 2 - 5% savings each year thereafter. At Fairmarkit, our spend management solutions helped the MBTA increase the number of bids received while reducing order prices by 5% to 40%, achieving a $100K+ monthly savings.

Unmanaged spend is informal, un-monitored, and lacks analysis, allowing employees to make decisions at their own discretion. The results are bad for business and open the organization up to three categories of risk: 

• Price risk: When someone takes a shortcut to buy a product with little concern about getting the best price, organizations risk going over budget and leaving savings on the table.
• Time risk: Though the initial purchase may have reflected the best price, unmanaged spend is not tracked; no one in the organization has visibility into how susceptible different products are to fluctuations in price. 
• Operational risk: If the purchase is completed without oversight from the procurement or compliance team, it may not have been properly vetted. 
  

Likewise, companies that ignore unmanaged spend are at risk of losing a competitive advantage. If your competitors are addressing tail spend and your organization is failing to do so, your business will be at a disadvantage. 

Not only does unmanaged spend drag on the business’ bottom line, but it also prevents opportunities for growth and creates an uninspiring — or even downright lazy — work environment. Luckily, there are key spend management practices that can help convert unmanaged spend to managed spend with the proper oversight. 

Spend management: best practices

Spend management is defined by SAP Ariba as “the tried and true practice of comprehensively managing all supplier relationships and company purchasing to identify every dollar spent and get the most out of it.” Spend management helps procurement teams reduce costs, drive growth, and improve the business’ profit margin. 

Both managed and unmanaged spend require spend management. That is, procurement teams should consistently seek to optimize managed spend, building vendor relationships to smooth out the procurement cycle and ensure no overspending or input shortages. And, spend management should help bring unmanaged spend under the purview of the procurement team. 

Unfortunately, when approaching spend management, some companies neglect to take their tail spend into consideration. This is where spend management software can play an important role. Spend management software offers visibility and control into a business’ cash flow — including tail spend. By some estimates, companies that deploy digital tools to manage their tail spend can cut overall annual expenditures by 5% to 10%. 

[Read more: Spend Management: Staying Ahead of the Game with the Right Software]  

In addition to finding the right software, spend management best practices require planning your spend throughout the year and incorporating it into every aspect of your business: from budgeting and sourcing to inventory management and product development. Taking a big-picture view of spending can allow procurement teams to be more efficient, manage risk, and collaborate between departments to improve productivity and optimize resources.

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To learn more about managed and unmanaged spend, check out Fairmarkit’s blog The Source.