From ‘spent management’ to ‘spend management’ – practical ways to cut costs now

In today’s difficult economy, companies are scrutinising their cost base like never before. Faced with the double whammy of reduced work and increasing pressure on fees, law firms are not exempt. When controversial measures like cutting back staff are considered, indirect spend represents a hidden and, in many firms, largely untapped reservoir of potential savings. This includes non-payroll related costs such as IT equipment, office supplies and outsourced services.

Close inspection of systems, processes and controls around indirect spend should be at the forefront of firm management as a project that can deliver quick returns to the bottom line.

Embracing spend management systems

Firms can realise significant cost savings by embracing the disciplines, best practices and systems that have been in place in other business sectors for some time. These are known collectively as spend management (SM) – the opportunity to cut costs, enhance corporate controls and improve visibility of the indirect cost-base by streamlining procurement and accounts payable (AP) procedures. More than the typical AP process, SM takes a wider, more comprehensive approach to controlling and minimising indirect costs.

If reducing costs is a priority, here are five areas where SM systems, geared towards the specific requirements of professional services organisations, can drive practical improvements and make significant contributions to the bottom line.

1. Optimise AP

If your firm has a SM-process problem, the issues will surface in the AP department. This can be traced to problems originating upstream in the process, not in AP itself. For example, a good number of firms don’t insist on an authorisation signature or approval process before goods or services are purchased. Consequently, invoices turn up unannounced, after the firm has contracted and the money is spent. AP then chases down the originator, determines if it is an internal charge or disbursement and codes it accordingly – this is a very inefficient process. Worse, there is no control on spend in this environment. Lack of upstream controls exposes the firm unnecessarily to downstream processing issues, maverick spending, budget overages and fraud.

Many AP issues can be resolved by implementing an automated purchase/check request process utilising electronic workflow for approvals. Employees and administrators are allowed to select items/services for purchase online. Requests are percolated up to management electronically where they are approved online or via a PDA.

Automating the front-end of the process is critical to controlling spend efficiently. It prevents unauthorised spending, streamlines the process for AP and solves other issues, as discussed below.

2. Eliminate unnecessary write-offs

Writing off legitimate client expenses is frustrating, yet many firms find themselves in this position. One cause can be the log jam of ‘mystery’ invoices handled by AP at month-end. Researching, validating, authorising and correctly coding an invoice is time consuming. Lost, miscoded or delayed disbursement invoices can miss the billing cycle and a project’s billing window. SM systems eliminate this problem by identifying reimbursable costs and the associated client matter up front before a purchase is made. When the invoice arrives, the disbursement coding is automatically pulled through to the invoice. AP can easily perform a match and expeditiously forward it for disbursement.

3. Enable quick and easy budget checking

As legal engagements have become more project-based, budget tracking has grown in importance. Most firms operate relatively blindly against budgets until the month-end process is complete. Spend control systems can check budgets before expenditures are committed and well before an invoice arrives, giving partners the ability to know where they stand on a particular engagement at any time. It also prevents budget overages and a potentially contentious situation with the client.

4. Improve cost visibility by employee and client matter

Closely related to budget checking is the notion of accountability. Many firms have difficulty attributing costs accurately to specific client matters or employees. By implementing a front-end authorisation process, it becomes very clear where expenses are coming from. To help solve this problem, most spend control systems also have detailed default coding mechanisms. Default account codes are generated based on the user profile, ensuring that accounts are charged accurately and appropriately upfront – not to mention saving the finance department from researching, re-coding or re-classifying entries.

5. Leverage aggregated spend

In most firms, purchasing activity is dispersed across the organisation and fragmented across numerous suppliers. A well-deployed SM system will funnel and consolidate all the firm’s spend activity to preferred suppliers. This allows the firm to leverage quantity discounts and preferred contracts, a major source of instant savings.

SM systems are right for the times. Close inspection of the processes and systems managing your firm’s indirect spend is worth the effort. You have nothing to gain but greater control, visibility and cost savings.

David Thorpe is general manager, EMEA at ADERANT (david.thorpe@aderant.com) and Phil Robinson is a partner at PROACTIS (phil.robinson@proactis.com).