Adriana Carpenter is CFO of spend management platform company Emburse. Views are the author's own.
The Tibetan yogi Milarepa returns to his quiet mountain cave one evening and finds it filled with demons. He tries to chase them out, but they only grow stronger. He tries to teach them the dharma. To no avail; they just settle further into his home. He realizes he may have to co-exist with them for a while, so he invites them to teach him something. At this, all but the fiercest demon vanish. Feeling he is powerless, Milarepa surrenders himself. He puts his head in the monster’s mouth and says, “Eat me if you wish.” The vicious demon bows its head and disappears.
If only unmanaged spend could be conquered in a similar way, but that is unlikely; as long as there is spend, there will be unmanaged spend. And in fact, unmanaged spend — indirect or tail spend that falls in between invoice-based procurement purchases and traditional T&E spend — is becoming more pernicious.
It’s thought that unmanaged spend constitutes about 80% of a company’s transaction volume and 20% of total spend. But increasingly I’ve heard talk that tail spend is beginning to defy the 80/20 rule and taking over a larger percentage of total spend and volume.
I see two factors driving this growth:
- Rise of software-as-a-service (SaaS). Every company now uses dozens or hundreds of SaaS apps. Because many subscription vendors sell using low-touch, self-service channels, more employees are transacting outside the typical AP process.
- Rise of remote work. Invoicing and procurement lives online. You can’t mail an invoice to a company without an office. Spend that was once centrally procured is now decentralized.
The nature and volume of spend has evolved, so our strategies for reconciling it need to evolve.
Traditionally, finance departments have thought of unmanaged spend as a problem rooted in how well we track purchases, enforce T&E policies and consolidate vendors. If we ever discuss the human element, it’s usually only in regard to how we can coax employees to better comply with policies.
But like Milarepa in the cave, we have an opportunity. Learning from what scares us can help us conquer it. To defeat uncontrolled spend, we must surrender to the most fearsome demon of them all: human behavior, or more specifically, the psychology of how our employees make purchase decisions.
Here are some thoughts on tackling the human element in tail spend.
1. Strive for a higher spend purpose. Manual strategies for shepherding more transactions under management can alleviate spend leakage — especially when they target frequently occurring or high-dollar purchases where no prior agreement existed. But, they don’t patch the hole completely.
One can, for example, identify spend outside of your preferred suppliers by analyzing personal card data against invoices. One can try to lump the worst-offending external categories into new or existing supplier agreements. If you’re particularly committed, you can consolidate these suppliers into a catalog. Of course, stock will change constantly. The catalog will no sooner be finished than be out-of-date, prohibiting anyone from using it effectively. If employees can’t find the product they need quickly, they’ll make a rogue purchase and you’re back to square one.
I believe finance’s time is best spent on strategic efforts that deliver more value to the business, not tracking down every last stray dollar. Truly “solving” for indirect spend requires us to empathize with the experience of making purchases as an employee.
2. Accept imperfect employee purchase behavior. The world’s most successful companies all started by identifying a customer need or want then figuring out how to uniquely provide for it. Finance professionals need to think harder about what their customers — in this case, the company’s general employees — want.
As it is, most of our coworkers want something reasonable. They’re looking for the quickest route to goal. They want to attain equipment and services as effortlessly as possible. They don’t want to spend 15 minutes searching through a catalog. They don’t want to flag down a finance person because they can’t remember their budget. They don’t want to check if they’re allowed to buy from a certain vendor, or figure out the process for working with a new vendor. When we insist on funneling purchases, approvals and reconciliation through arcane, “oversight-promoting” workflows, we don’t make it easier to control unmanaged spend. We just make it harder for employees to do their jobs.
Think of the marketing manager who wants to access a SaaS platform to support the company’s digital ad campaigns. He’s not “senior” enough to have a corporate card, so he pays with his personal card and submits for reimbursement. If he leaves the company with his card still tied to that service, he inadvertently shuts down the company’s digital advertising efforts. In this example, an employee has made a good-faith effort to stay within policy, and still inadvertently created a major inefficiency in unmanaged departmental spend.
We may be tempted to react in frustration at the employee who got us into such a messy situation. But whose responsibility is it to make sure employees are spending correctly? It’s certainly not the marketing manager’s job.
Furthermore, why maintain a finance process that fails us even when employees comply with it?
You can spend years erasing rogue spend and accrue more while you’re at it. You can preach the corporate process to employees quarter after quarter, knowing policy will never be perfect in practice. You can fight your demons, or you can give in to them.
3. Achieve peace through automation. Most CFOs (myself included) need to change perspective around how we manage unmanageable spend. For me, expense and AP automation brought a watershed of peace. Instead of obsessing over the degree at which I could manually control indirect spend, I now channel all individual and departmental purchases through corporate cards.
Introducing virtual cards enabled my employees to procure the resources they need quickly and always within set parameters. When we onboard a new team member, I no longer worry that they’re going to go out and buy the monitor that’s $50 over budget. Their manager simply issues a virtual card that’s pre-approved for a certain budget, expiration date and equipment categories. If the employee needs to manage a few software subscriptions, they issue a card for that specific recurring transaction. Once the employee makes a purchase, the card automatically sends the merged receipt and transaction data to accounting.
Automation helps me rest easy knowing that I’ve routed more transactions under management, and not at the expense of employee productivity. My employees appreciate having guardrails to help them make purchases the right way, but most of all, they relish a life without expense reports and long waits for approval and reimbursement.
To reach its strategic vision — maybe that’s building the best product, or serving the most customers — a company needs to invest. To invest, they have to spend. That’s where finance comes in. Our job is to enable employees to spend effectively, so they can be the best engineer, marketer or salesperson they can be. When we, for the sake of reining in control, limit employees from attaining the resources they need (purposefully or not), we fight a demon we can never beat.