Managing Discretionary Spend with a Growth Mindset

by Valent Partners

As enterprises begin to move past pandemic planning and emerge from hibernation, there is renewed focus on growth and therefore investment. However, keeping the reigns on discretionary spend, something more easily managed in the pandemic crises, remains important. Many companies struggle to manage discretionary spend and have no proven method to control it. Individual departments fight for what they think is important inciting divisiveness and animus, when in fact they should be working to understand how their varying goals align with company imperatives.
 
Large multi-year investments involving capital and infrastructure investments reasonably consume the bulk of an organization’s focus. Discretionary spend is glazed over and swaths of money calculated as a percentage of a budget are attributed. Business units focus on driving value based on expertise whether it be Marketing, IT, Sales, Support etc., not strictly on controlling how they spend. Often there are ambiguous rules of engagement for spending and who approves it, and they do not want to slow down key programs, so ask for forgiveness afterwards. Spend review becomes a once a year or once a quarter activity and there is a nonspecific cadence to revisit trends in recurring costs (utilities, benefits, staff aug, IT, etc.).

Leaders are quick to admit that there is always room to pragmatically improve spending habits, but often the onus is placed in the lap of the Finance organization and departments do not own their part in the process. This can result in reactionary and haphazard methods of controls and spend freezes that can hamper growth and derail innovation.

Companies that employ a structured process and framework for decision-making and spend approval can expect to reduce leakage, reset expectations across the company and increase transparency in the budgeting process. Further, it creates an opportunity for organizations to quickly identify areas of duplicate spend and get more “bang for their buck”. We have seen as much as a 30% improvement in OPEX efficiency where this is in place. All of this leads to constructive discussion on where and when the company should spend. Here are 4 proven steps to setting up this structure:  

1.       Leverage your existing tools to control who approves spend
This one sounds easy, but is often overlooked. Lock down who approves what in your various financial systems and lower approval limits at the onset. It sounds draconian, but it sets the stage that you mean business and want immediate behavior change.

 2.       Evaluate and prioritize which categories of spend may benefit from a revisit
Look across the organization and identify broad categories of spend, then categorize all of expenses by organization. These categories might be contract services, licenses, swag, benefits etc. Prioritize those that spread across multiple business units and have the highest spend/ability to impact.

 3.       Set up and manage a recurring spend review committee
Even though it requires some initial lift and some resourcing, a standing committee with senior leadership involvement, where departments come to request funding before it is spent will increase diligence beyond just senior leadership. If the people asking for the approval are made to defend their business case, they will own the reasons for the spend. This will permeate the organization at all levels.  

4.       Clearly communicate these changes to the company
The secret sauce to successfully changing behavior is to elicit buy in at all levels and being transparent and straightforward. By taking the time to explain the reasoning and value of this change, you create a groundswell of support throughout the enterprise. People will start to treat the company’s money as their own and if you can show them where the saved dollars can be spent (bonuses, raises, events, swag, etc.), you get an engaged supportive group of allies. It will become obvious that the goal is not to be cheap but to create more value and ownership for them.