Spend Under Management: What It Is & How To Calculate

There are many ways to achieve financial efficiency, and spend under management (SUM)—a powerful concept that’s changing how companies control their expenses and make the best use of their financial resources—is prime among them.

At its core, SUM deals with the portion of a company’s expenditures that’s actively controlled, monitored, and governed by formal processes and systems. It’s not a cost-cutting measure but, rather, a strategic spending scheme that aligns expenditures with business objectives and drives value. SUM can have a positive effect on everything from improving supplier relationships to enhancing budgeting and forecasting. This article explores how understanding and implementing effective SUM strategies can reduce costs and align spending with the business goals.

What Is Spend Under Management (SUM)?

SUM refers to the portion of a business’s total expenditure that’s actively controlled and optimized through formal procurement processes and systems. It’s a key metric in procurement, often expressed as a percentage of total organizational spend for measuring effectiveness and efficiency. As a form of managed spend, SUM typically includes spend that goes through approved suppliers, contracts, and purchasing channels. SUM is the antithesis of unmanaged, or “maverick,” spend, which occurs outside of established processes.

Key Takeaways

• SUM is a crucial metric that measures how well procurement is controlling organizational spend.
• Higher SUM percentages generally indicate better spend visibility and control, as well as greater potential for leveraging buying power.
• Improving SUM requires a multifaceted approach that involves people, process, and technology.
• Benefits of increasing SUM include significant cost savings, improved compliance, and fewer procurement-related risks.
• SUM is a key indicator of a business’s procurement maturity, reflecting the degree to which procurement processes are strategically managed and optimized.

Spend Under Management Explained

SUM is a critical metric that measures how effectively an organization controls and oversees its procurement processes. By understanding and optimizing different levels of spend management, companies can improve how they track their purchasing activities, identify cost-saving opportunities, and maintain compliance with established procurement policies. There are several levels of spend management that companies must consider when optimizing SUM:

• Fully managed is spending that goes through the entire formal procurement process, from sourcing to payment.
• Partially managed is spending that adheres to some, but not all, official procurement processes.
• Influenced is spending that the procurement department has input into, but not full control over.
• Unmanaged is spending that takes place completely outside of procurement’s purview—otherwise known as maverick spending.

Increasing SUM tends to correlate to increased cost-savings opportunities. SUM is also closely tied to contract compliance rates, as well as supplier performance, in that managed spend facilitates better supplier performance tracking. And, when they continuously improve processes, organizations can use SUM metrics to track spending over time, identify areas for improvement, and benchmark their performance against that of industry peers.

Why Is Spend Under Management Important?

SUM is important for a variety of reasons, both for the procurement department and the business as a whole, and chief among them is cost savings. Increasing SUM facilitates volume-based discounts through spend consolidation, or getting bulk discounts for placing larger orders rather than various small ones across the company. It also allows for sharper negotiations with suppliers and cuts down on maverick spending, which often results in paying higher prices. On the risk-management side, SUM helps ensure compliance with regulatory requirements because managed spend is often subject to compliance checks, which improves contract management and reduces legal exposure.

The strategic value of spend under management extends far beyond basic procurement oversight. When organizations effectively manage their spend, they gain access to rich data that transforms their decision-making capabilities because SUM consolidates data from various departments and spend categories so businesses can compare factors, such as vendor performance or risk. This insight enables leadership to make smarter choices about whether to produce goods in-house or purchase them from suppliers, and it supports efforts to optimize the supplier base. By analyzing categorized spend data, procurement teams can streamline purchasing processes and reduce administrative overhead, leading to tighter operations. Perhaps most important, enhanced spend visibility strengthens a company’s financial planning—whether it’s for day-to-day cash flow management or long-term cost reduction strategies—allowing all departments to stay within budget and contribute to the company’s overall financial health.

To provide some perspective, below are some general industry benchmarks relating to SUM. It’s important to note that these figures can vary based on certain factors, such as company size, maturity of procurement processes, and specific sub-industries.

• Manufacturing
  • Average SUM: 70%–80%
  • Top performers: 85%–90%
  • Manufacturing tends to have higher SUM due to the importance of direct materials procurement and established supply chains.
• Services
  • Average SUM: 60%–70%
  • Top performers: 75%–85%
  • Service companies often have more diverse and decentralized spending patterns, making it more challenging to achieve high SUM percentages.
• Public sector
  • Average SUM: 50%–60%
  • Top performers: 65%–75%
  • Public sector organizations often face regulatory constraints and complex approval processes, which can impact SUM.
• Retail
  • Average SUM: 65%–75%
  • Top performers: 80%–85%
  • Retailers benefit from centralized purchasing for resale of goods but may struggle with indirect spend management, which oversees spending on goods and services that support business operations.
• Healthcare
  • Average SUM: 55%–65%
  • Top performers: 70%–80%
  • Healthcare companies often deal with a mix of centralized and decentralized purchasing, impacting overall SUM.
• Technology
  • Average SUM: 65%–75%
  • Top performers: 80%–90%
  • Technology companies often have sophisticated procurement processes, leading to higher SUM percentages.

Additionally, large companies (those with revenue of $1 billion or more) tend to have higher SUM percentages—often 5% to 10% higher than their smaller counterparts in the same industry. Geography plays a role, too: Companies in North America and Europe generally have higher SUM percentages than those in developing markets, often because of more mature procurement practices. It’s important to note, however, that a higher SUM percentage doesn’t automatically equate to better overall procurement performance. SUM should be considered alongside other metrics, such as cost savings, supplier performance, and process efficiency.

Spend Under Management Formula

SUM is a critical metric in procurement and financial management that measures the proportion of a company’s total expenditure that’s actively controlled and optimized through formal procurement processes. Simply put, SUM is calculated by dividing managed spend by total spend and then multiplying by 100. By increasing the SUM percentage, businesses can often achieve better cost control, improved supplier relationships, enhanced compliance with regulations and internal policies, and greater overall financial efficiency. By regularly calculating and analyzing SUM, companies gain valuable insights into their spending patterns and procurement efficacy, ultimately leading to better financial management and strategic decision-making.

Once calculated, companies can use their SUMdata in various ways, such as for:

• Benchmarking: Compare your company’s SUM to industry standards or competitors’.
• Goal-setting: Establish targets for improving SUM over time.
• Risk assessment: Flag areas of high unmanaged spend that might pose financial or compliance risks.
• Process improvement: Identify departments or categories where procurement processes can be refined.
• Savings opportunities: Focus on bringing more spend under management to negotiate better terms with suppliers and reduce overall costs.

Clearly, SUM can do much to help businesses analyze spending patterns, track improvements over time, and measure the impact of procurement policies—all leading to sound financial management.

How to Calculate Spend Under Management

Here are the three basic steps companies should follow to calculate SUM.

Step 1: Collect data on total spend and managed spend from financial and procurement systems.

This involves gathering comprehensive data from various sources within the organization, including:

• Enterprise resource planning (ERP) systems
• Procurement platforms
• Accounts payable records
• Contract management systems
• Expense management tools

It’s also important to define what constitutes managed spend for a business. Typically, managed spend includes:

• Purchases made through approved suppliers and contracts
• Spend that goes through formal procurement processes
• Expenditures that are actively monitored and optimized

Here’s an example of a midsize manufacturer with different spending categories:

Total spend: $10,000,000

Total managed spend: $8,500,000

Step 2: Verify data accuracy and ensure completeness.

Data verification is critical to make sure the SUM calculation is reliable. This process can involve:

• Cross-referencing data from different systems
• Conducting internal audits
• Reconciling discrepancies between procurement and finance data
• Ensuring all spending categories are accounted for, including often overlooked areas, such as subscriptions or small, frequent purchases

During verification, a company might find that:

• $100,000 of IT services spend was misclassified as equipment
• $50,000 of travel expenses wasn’t initially recorded

This would result in these corrected numbers:

Corrected total spend: $10,050,000

Corrected total managed spend: $8,500,000

Step 3: Apply the SUM formula to calculate the percentage.

The basic formula for spend under management is:

SUM = (Managed spend / Total spend) x 100

Note that some companies might choose to refine this calculation by:

• Excluding certain types of spend that can’t be managed, such as taxes and regulatory fees, as is the case in our manufacturer example
• Weighting different categories of spend based on their strategic importance
• Calculating SUM for specific departments, projects, or spend categories to gain more granular insights

Here is what the SUM calculation looks like using the corrected figures from our hypothetical manufacturer:

SUM = ($8,500,000 / $10,050,000) x 100 = 84.6%

The manufacturer can also calculate SUM for individual categories, like so:

Raw materials SUM = ($4,500,000 / $5,000,000) x 100 = 90%

Equipment SUM = ($1,700,000 / $1,900,000) x 100 = 89.5%

Office supplies SUM = ($400,000 / $500,000) x 100 = 80%

IT services SUM = ($1,300,000 / $1,600,000) x 100 = 81.3%

Travel SUM = ($600,000 / $1,050,000) x 100 = 57.1%

Clearly, SUM can do much to help businesses analyze spending patterns, track improvements over time, and measure the impact of procurement policies—all leading to sound financial management.

Key Benefits of Spend Under Management in Procurement

By focusing on increasing SUM, companies not only optimize their current operations but also position themselves for sustained success in an increasingly competitive global market. Here’s a closer look at some of the more common benefits of increasing SUM.

• Increased cost savings: The most immediate and tangible benefit of increasing SUM is the potential for substantial cost savings. Consolidated purchasing power makes volume discounts possible, and standardized processes lessen the likelihood of maverick spending or duplicate purchases. Additionally, when more spend is brought under control, procurement teams can gain greater visibility into purchasing patterns and use this information to negotiate better terms with suppliers. Moreover, managed spend often improves contract compliance by ensuring that negotiated rates and terms are consistently applied across the organization.
• Improved supplier relationships: As SUM increases, businesses typically find themselves working more closely and strategically with a core group of suppliers. This concentrated approach fosters stronger, more collaborative relationships. With a larger portion of spend flowing through managed channels, suppliers enjoy more predictable business volumes, which can guide businesses to preferential treatment, better service levels, and an increased willingness to continue, even expand, the relationship. Additionally, suppliers may even be more inclined to share innovations and provide early access to new products. For instance, a retail company with high SUM could work closely with key suppliers to develop exclusive product lines, giving them a competitive edge in the market.
• Enhanced risk management: Higher SUM often correlates with greater supply chain control and more effective surveillance of plausible financial, operational, or compliance risks. SUM typically involves thorough supplier vetting, ongoing performance monitoring, and regular audits. This rigorous oversight can help identify potential issues before they escalate into major problems.
• Better strategic decision-making: Increasing SUM provides procurement teams and business leaders with rich data and insights that can contribute to strategic decision-making. With a comprehensive view of spending patterns, companies can identify trends, forecast more accurately, and align procurement strategies with broader business objectives, such as expansion into new markets. For instance, a technology company analyzing its SUM data might recognize a growing reliance on a particular type of component, causing them to consider developing this capability in-house or acquiring a supplier. Intelligence derived from SUM can also highlight areas of the business that are underperforming or overspending and ripe for targeted interventions.

Overcoming Challenges in Spend Under Management

Achieving high levels of SUM is crucial for procurement excellence. However, various challenges can result in inefficiencies or missed opportunities. By identifying and addressing these challenges, companies can unlock the full potential of their procurement functions. Here are some of the most common obstacles to effective SUM, along with actionable recommendations to help businesses overcome them.

• Data accuracy: Accurate data is vital for informed procurement decision-making. When data is inconsistent or outdated, the resulting strategic purchasing decisions based on it can lead to suboptimal contract negotiations and missed savings opportunities. Bad data entry practices, fragmented storage, and a lack of real-time updates are all possible culprits here.

  Example: If a company regularly misclassifies its expenses, it might miss out on volume discounts because its data suggests that it’s spending less with a particular supplier than it actually is.

  Recommendation: Implement data validation processes and invest in data cleansing tools to ensure that procurement data is accurate and up to date. This will provide a clearer picture of spending and improve decision-making. Automating data entry or adding data governance policies can also help.

• Integration of systems: Many companies operate with disparate systems that don’t communicate well, making it difficult to get a complete picture of procurement and financial data. These silos lead to inefficiencies and hinder the ability to optimize spending.

  Example: A retail company using different tools for procurement and finance may struggle to reconcile expenses in real time, causing delays in approvals and missed opportunities for cost savings.

  Recommendation: Invest in integrated procurement platforms that centralize data from all functions, allowing for real-time reporting and better-informed strategies.

• Resource constraints: Many companies lack the necessary resources—in terms of both personnel and technology—to competently manage all procurement activities. Limited budgets or small teams can lead to reactive, rather than strategic, purchasing, which can reduce the potential for optimized spending.

  Example: A midsize manufacturing firm might have only a small team managing procurement for multiple departments, resulting in suboptimal purchasing decisions. The team might also lack the ability to analyze data or the resources to ensure compliance.

  Recommendation: Prioritize investments in procurement automation tools that can reduce manual workloads and empower small teams to focus on more strategic activities. Outsourcing certain tasks can also be beneficial.

• Change management: Resistance to change is a common barrier, particularly in companies with established procurement practices. Procurement teams may be hesitant to adopt new technologies or processes, fearing additional workloads or disruption, and line of business managers can feel as though they’ll lose control of purchasing if it becomes more centralized under SUM.

  Example: A large corporation trying to implement a new procurement system might face pushback from employees who are accustomed to manually drafted purchase orders and paper-based workflows.

  Recommendation: Establish a clear change-management strategy that includes employee training, greater communication, and ongoing support to ease the transition to new systems and processes.

• Lack of standardization: Without standardization, individual departments might handle procurement differently, creating inconsistencies that lead to inefficiencies and missed opportunities.

  Example: In a global company, the procurement team in one region might follow different procedures from a team in another region, leading to fragmented supplier management and lost chances for consolidated spend analysis.

  Recommendation: Implement companywide global procurement policies and standardized procedures to guarantee consistency throughout departments and regions, including centralized procurement portals and supplier scorecards.

7 Ways to Increase Spend Under Management

Improving SUM requires a strategic approach tailored to the specific needs and maturity level of a business. Not all strategies apply universally, so it’s important to prioritize them with an eye toward a company’s unique capabilities and goals. Here are seven practical strategies that can increase SUM.

1. Standardize Procurement Processes

Standardizing procurement across the company allows all departments to follow consistent procedures for purchasing, vendor selection, and contract management, which cuts down on inconsistencies while improving compliance and spending visibility. For instance, when a global technology firm implements standardized procurement software in all of its regional offices, each location will follow the same approval workflows and contract templates, reducing manual errors and increasing SUM. Achieving companywide buy-in for standardization can be challenging, but businesses can overcome this hurdle by engaging stakeholders early in the process and clearly demonstrating the benefits of standardization, such as cost savings and smoother approval procedures.

2. Adopt Spend-Visibility Tools Spend-visibility tools

give procurement teams a clear and real-time view of organizational spending, so they can identify trends, risks, and opportunities for savings by aggregating data from multiple sources. A healthcare company, for example, might adopt a spend-management platform that gives the procurement team insights into which departments are overspending and which suppliers offer the best value and ultimately helping to increase SUM. Before rolling out a spend-visibility tool, companies should invest in data-mapping and data-cleansing efforts to achieve a seamless integration and ensure reliable data.

3. Use Data Analytics Data analytics

help procurement teams analyze purchasing trends, identify cost-saving opportunities, and improve supplier management, all of which can lead to higher SUM. Consider a construction company that uses analytics to review supplier performance and finds an opportunity to switch to a supplier offering better terms for bulk orders, resulting in significant cost reductions. If procurement professionals initially lack the technical skills to fully leverage data analytics tools, companies can provide training or hire dedicated data analysts to support the procurement function.

4. Expand Strategic Sourcing

Strategic sourcing is a comprehensive approach to managing supplier relationships and contracts that aims to secure long-term value beyond mere cost savings. By evaluating suppliers according to multiple criteria, such as quality, sustainability, and risk management, companies can significantly improve their overall SUM percentage. For instance, a large hotel chain might transition from maverick purchasing to strategic sourcing by negotiating long-term contracts with a smaller, carefully selected set of suppliers that meet the hotel’s required metrics for quality, service levels, and sustainability. Although implementing strategic sourcing can be resource-intensive and may require changes in supplier management, businesses can address these challenges by starting with a pilot program that focuses on a key category. This approach allows organizations to demonstrate success before scaling the strategy across the entire operation, ultimately creating more efficient and effective procurement practices and higher SUM.

5. Establish Key Procurement Metrics

Tracking key procurement metrics is essential for companies seeking to measure the success of their procurement strategy and identify areas for improvement. These metrics may include cost savings, supplier performance, and contract compliance. For example, an energy company might introduce procurement metrics, such as spend under contract and supplier lead time performance, to evaluate its procurement team’s effectiveness and pinpoint areas needing enhancement. Companies should start by choosing a few key metrics that align closely with organizational goals. As the procurement function matures, the range of metrics can be expanded to yield a more comprehensive view of procurement performance. This approach allows organizations to gradually build a robust system for monitoring and improving their procurement processes, as well as for fostering better decision-making and increasing SUM.

6. Enhance Supplier Collaboration

Building strong relationships with key suppliers is a crucial strategy that can lead to numerous benefits, including better pricing, higher-quality products, and increased innovation. Enhanced supplier collaboration also increases SUM by improving spend visibility, boosting contract compliance, and facilitating spend consolidation with preferred suppliers. This closer partnership supports better data sharing, early involvement in sourcing decisions, and more accurate spending information, all of which enables procurement teams to more effectively manage and optimize a larger portion of the organization’s total spend. For instance, a global manufacturing company might implement a supplier collaboration program with its top 20 suppliers, resulting in shared forecasting systems and quarterly strategy meetings. This enhanced collaboration can lead to an increase in SUM, as the procurement team gains better visibility into spend patterns, negotiates more favorable contracts, and consolidates purchases across multiple business units.

7. Adopt AI Where Possible

Adopting artificial intelligence (AI) can significantly increase SUM by automating routine procurement tasks, enhancing spend visibility, and providing data-driven insights. AI streamlines workflows, such as invoice processing and purchase approvals, freeing up resources to pursue strategic initiatives. For example, a manufacturing company might implement AI-powered spend-analysis tools to monitor purchasing trends, thereby identifying inefficiencies and consolidating supplier contracts to refine procurement processes and reduce unnecessary spending. Companies should invest in scalable AI solutions that integrate easily with existing platforms and provide training to procurement teams to ensure smooth adoption and maximize the technology’s benefits.

Measure and Increase Spend Under Management With NetSuite

Manual calculation and management of SUM can be time-consuming and prone to errors, but modern ERP systems are up to the challenge. ERP modules such as NetSuite Procurement can transform how organizations approach SUM. NetSuite Procurement goes well beyond simple spend tracking, offering features that include centralized data management, automated spend classification, real-time reporting and analytics, supplier management integration, approval workflows, and contract compliance tracking. The module also matches purchases against existing contracts, helping to maximize the use of negotiated terms and relationships with preferred suppliers.

SUM isn’t just another financial metric to consider—it’s a powerful lens through which businesses can view their procurement practices, spending patterns, and overall financial health. By measuring the proportion of total spend that moves through formal procurement channels, SUM provides critical insights that can drive strategic decision-making and operational efficiency. Indeed, the rewards of calculating and analyzing SUM are substantial. Most financial experts agree that a higher SUM percentage typically translates to better cost control, improved supplier relationships, enhanced compliance, and, ultimately, a much-enhanced bottom line. However, as with any financial and accounting operation, improving SUM mustn’t be relegated to a one-time effort; it’s an ongoing process that requires consistent focus, regular assessment, and a willingness to adapt as needed. Advanced ERP solutions can significantly improve SUM calculation and overall procurement management, but implementation must be purposeful and aligned with overall organizational goals.

Spend Under Management FAQs

What is total spend management?

Total spend management refers to the comprehensive process of managing and optimizing all the spending activities within an organization. It encompasses procurement, supplier management, contract management, and expense tracking to ensure that spending aligns with corporate objectives.

What is a spend under management contract?

A spend under management contract refers to a procurement agreement that’s actively managed by the procurement team. It typically involves strategic oversight to make sure the contract terms are clear and align with the business’s goals for cost savings, risk management, and supplier performance.

How do you calculate managed spend?

Managed spend, or spend under management (SUM), is calculated using the following formula:

SUM = (Managed spend / Total spend) x 100