The Sourcing Post

Following to my Part 1 of my series on Start-ups, here are some suggestions on how to use Spend Management techniques and processes to help new companies reap the benefits of the latest practices. Spend Management is one part the mandatory holistic approach to making your business successful, and that approach is not less valid in start-ups. Resources are scarce, and here I explain some techniques to help you conserve them.

1.- Understand your spend.
See if the one or more of the following statements is true:
- I don’t know if I’m paying too much for rent, bandwidth, furniture third-party services, recruiting, etc. compared to what the market is offering.
- I don’t know the total cost of including a new employee in the payroll.
- My projected spend in some or all the spend categories is unknown
- I have never heard the term “strategic sourcing”
- I consistently spend more in services than what was originally budgeted.
- I don’t have time to track all the invoices and match them with the corresponding PO.

If you answer is yes to any one of these statements, then it is likely that you don’t have control of your spend. A relatively simple exercise listing all your invoices and organizing them by category and vendor, for a period of one year, will tell you a very interesting story. Compare total cost per vendor/spend category vs. the original budget. You’ll be surprised. Some categories you thought didn’t exist when you created your business plan are likely to be a significant portion of you total spend.

Equally important to know where the money was spent is where is it going to go. You can create what-if scenarios for low, medium or high volume sales and see what could be the future demands on your company resources. Build those scenarios in your contracts with vendors so you can get discounts on volume if your best estimate becomes a reality, or conversely, secure a price for a year or more if sales are sluggish.

2.- Time-to-market.
Your product needs to reach the market, but “boring” administrative tasks are using so much of you valuable time. Turns out that a lot of start up companies make the common mistake to underestimate the time commitment to make the business successful. You can save countless hours by having a clear strategy and process when it comes to purchasing. You can do one or several of the following:

- Hire a resource who solely focuses on purchasing and spend management. This person must be brought with compensation based on equity, so he or she shares the burden and the vision.
- Devise a spend management strategy that drives an efficient PROCESS. This is the key element of the entire initiative. If you don’t know how to do it, then hire an industry expert for a few weeks to help you, so you are ready faster than your competitors.
- Ask your vendors to show how fast they can implement, deploy or deliver their goods or services. The fastest one should get the deal, even if it is slightly more expensive than the best offer. In the end you save money.
- Look for risk-sharing partnerships with some strategic vendors. This may not be to the liking of the founders, but it can save a great deal of cash and time. Cisco may not want to partner with you, but a third-party reseller, being a smaller company, may be the perfect one to manage your server farm. You focus on programming, and they do their own thing with the servers.

Remember, the more time you have in your hands, more time you can dedicate to sell your idea or product.

3.- Strategic alignment
Your purchasing practice MUST be aligned with the overall company objective. For example, if your start-up will consume vast amounts of bandwidth, the focus should be in getting the best possible deal from a telecom vendor. You VC or angel investor may have contacts in the industry who can help you find the best deal. More importantly, make the local telecom vendor pool compete for your business. That is just one example. There other areas in which you can leverage your contacts to make the business more successful.

You can build your purchasing strategy by analyzing the following:

- List your current spend by category and make a projection for 6,9 and 12 months. This will tell you where your money will go and the areas in which you are likely to need help.
- Research the market for the top categories. Is time well invested and you may find vendors with better ideas that can help you save money.
- Define your procurement objective clearly. Is it time to market? Cost savings? If you know what you need, your purchases will have to comply with the vision and company strategy
- Devise metrics to track your goal attainment. No metric, no management.
- Implement a basic technology implementation roadmap for procurement. You may have a set of Excel spreadsheets to track everything, but at some point you will have to make the transition to a more robust platform. Be sure that when that transition comes, you have the right data to make the transition.

4.- Building your infrastructure for growth
Another common mistake is not to have the proper infrastructure in place. And by infrastructure I mean not only computers or office space. I ‘m talking about mail services, janitors, HVAC maintenance, telecom, security, recruiting, accounting, payroll, PR, investor relations, etc. Finding and implementing vendors in those areas can be overwhelming and distracting, but most if not all of them can be outsourced. With the right strategy you can build a pipeline of projects that identify the right vendors at the right price so they take over those tasks. Any investment in those outsourced services are money well invested and it is also the way big corporations manage their core businesses.

These are a few ideas on how, by implementing a Spend Management practice, you can save cash and time, the two most precious resources in your search for success.

Start-ups face a unique set of challenges when it relates to the balancing of time and resource management. On one side, they are likely to be cash strapped and in a race to get their product or service to the market and generate cash flow. On the other, they need to manage their day-to-day operation, namely dealing with vendors, paying bills, meeting with VC firms and all the other ancillary tasks to run an operation.

The first part, getting a product or service to market, is their primary task and likely the main area of expertise of the founders and initial pool of employees. But sometimes this initial team lacks the resources or knowledge to make the day-to-day operation an efficient one. Among the administrative tasks that are usually neglected are the ones related to spend management. This articles focuses on the common mistakes made by small enterprises around spend management and some steps and techniques on how to avoid them. Also, we will make the point that a company that avoids those mistakes is in much better position to make a better impression to outside investors by showing it’s commitment to be the best-in-class in every area, including non-core activities, therefore rendering their business case a much more robust one.

Definition of Spend Management

Before we define the practice of Spend Management (or variations of the term) for the purposes of this article, let’s review what the leaders in the area have to say.

1.- Institute for Supply Management [ISM]
“ Supply Management is the identification, acquisition, access, positioning, and management of resources the organization needs or potentially needs in the attainment of its strategic objectives. Other key components of supply management are disposition, distribution, inventory control, logistics, materials management, packaging, product or service development, procurement, quality management, receiving, transportation and shipping, and warehousing.

2.- Ariba, Inc. Leader in Spend Management Solutions [Link]
“Spend Management aligns organizations, processes, and systems to analyze, source, contract, procure, pay, manage and continuously improve global supply for best-value performance in support of the strategic objectives of the business.”

3.- AMR Research
“Spend that is currently under control or management. Control includes the use of structured events (RFX, auctions), contract management, preferred suppliers with active supplier development programs, and spend analysis/visibility involving spend data management and the use of third-party content.” This definition was provided by Lora Cecere to Jason Busch of SpendMatters blog.

These definitions are substantially different, going from the strategic approach from the ISM to almost entirely tactical from Lora Cecere. I really like the one from the ISM, as it really puts into perspective the fact that all organizations must have a spend management practice in order to be successful, and that’s the one we are going to dissect.

With this definition cleared, now we can start to translate it into practical steps and techniques that a start-up can actually use in order to avoid waste and save scarce resources. Please check The Sourcing Post tomorrow for the second and final part in the series.