Three Quick Ways to Address Leaky Spending and Improve EBITDA

The term "Spend leakage" should be an uncomfortable thought for all of us. For me personally, I know that I have about a dozen subscriptions to things I rarely use. Like my Netflix account. Every once in awhile (like right now) I remind myself that I am wasting money. Ugh!

Here is another example: I know that if I use a specific credit card at a restaurant I get 5% cash back. I pay an annual fee to be able to enjoy this benefit. However, I often forget and use the wrong credit card. This is another example of money leaking out of my bank account.

In the corporate world, these same examples apply. Organizations will spend money on things that they really do not need. They will be offered incentives they don't always leverage. There are likely 1,000s of examples similar to this that cause funds to leak out of the organization's bank accounts.

Spend Leakage is a serious problem and a growing problem. Therefore it is worth the energy to address it. It is also important to look at the problem differently.

Three quick ways to address "Leaky" spending:

Tail Spend Analysis

Tail spend is a term applied to the 20% of total annual spend that is of non-strategic or non-tactical use. Tail spend while just 20% of total spend, often makes up 80% of the total number of purchase transactions. There is a lot of noise in the environment to hide non-optimal or even fraudulent spending. Look at the problem differently: instead of just evaluating policies, evaluate the activity. Organizations can find quick wins by applying advanced analytics to help identify patterns within this transaction data that can potentially uncover waste, fraud or abuse.

Cloud Spend Analysis

Annual spending on Cloud services is likely to continue to grow at a prodigious rate unless organizations devote resources and strategies to curtail it. Look at the problem from a different perspective: instead of relying on IT to find ways to reduce this spend, conduct internal audits using your risk and compliance teams. These teams are better suited for this type of work and can offer a less biased perspective. By applying advanced analytics, the organization can categorize this spend against corporate objectives helping to drive budgets and rebalance portfolio spending accordingly. Without much effort, the organization can use this new found data to negotiate better terms or change tactics.

License Spend Analysis

When a software contract is executed there are often incentives or restrictions negotiated with the software vendor during the procurement process. Restrictions on the amount of data or the number of users often apply. When negotiating these terms, the procurement team often takes a measured guess as to how many licenses they need. Times change quickly don't they?! Look at the problem differently: ask internal teams to summarize license usage/consumption for each team and then apply usage quotas. This exercise alone can be eye opening. By comparing actual usage against predicted usage you may find information that can be useful for negotiating with the software vendor and can offer quick wins. Perform this exercise annually.

How To Get Started

Each of these scenarios often requires skills that the Finance or Procurement teams do not have. It is therefore important to pair up with internal resources or contract for external support. Look at the problem differently: this does not have to be a boil the ocean engagement. Ask for concrete results within a 30-day timeframe. Software vendors will be happy to jump at the opportunity to prove their value and will often agree to a limited engagement that can produce results.

What is Needed?

Using data to analyze wasteful spending will require the following steps:

• Data collection - data needs to be extracted and loaded into a common repository
• Data categorization and cleansing - the data will likely need some prep work to map records to the right team or classifier
• Data analysis - concrete examples will be needed that can be used to change policy. Fancy dashboards won't cut it. The bonus is that once you get to this point, your data will now be useful for machine learning algorithms and AI.
• Workflow and automation - this is the ability for executives and stakeholders to track the resolution of the issues that caused the leaky spending in the first place. Identifying the problem is half the battle. The organization needs to fix the root cause and workflow/automation will help.

Summary

Chances are the organization is aware of leaky spending and already taking steps to address it. However, it may be worth looking at the problem differently. Using a different perspective may generate new ideas on how to solve the problem.

The most important deliverable for these exercises is a roadmap or a plan that will address spend leakage on an ongoing basis. Change is constant and therefore the chance for wasteful spending is constant. This should not be a one and done effort.