spend management

What the WeWork saga can teach businesses about spend management

November 18, 2019

At the time of writing, WeWork is close to becoming a textbook case - in how not to handle company resources.

According to Business Insider, the company expenditure amounts to $219,000 (approx SGD$297,000) per hour. As of now, WeWork bonds have been downgraded to junk-bond status (CCC+) by Fitch.

A Wall Street Journal article published in September this year gives some good hints as to the problem. One of the incidents highlighted was from 2016, when then-CEO Adam Neumann held a meeting to discuss laying-off 7% of headcount.

Immediately after the meeting, the attendees downed shot glasses of tequila, and Darryl McDaniels (a celebrity singer from the famed 1990’s pop group Run DMC) entered to play a set. This, in the same year WeWork told its employees they would need to start “managing the nickel.”

WeWork’s problems are not, of course, as easy to summarize as “just” excessive spending - their money woes are accompanied and exacerbated by issues like market saturation, a flailing business model, and Neumann apparently leasing properties to his own company. Rather, WeWork might be a major case of senseless spending.

What can SMEs learn from this?

SMEs often focus on issues such as funding and financing, for good reason - capital is the lifeblood of a young company. But in the pursuit of greater capital, many SMEs fail to pay enough attention to the equally vital task of tracking business expenses.

Managing “invisible spend” is a necessity, given new employee travel habits

Left unregulated, employees - or even senior management - can get more than lavish with transport. At WeWork, this took the form of a private jet that cost around SGD$81 million for Neumann. This was a corporate governance red flag: Neumann purportedly used the jet as a venue for lavish parties.

Adam Neumann of WeWork at a tech conference

While it’s unlikely that a single employee could match Neumann’s scale of expense, many excessive travel expenditures can collectively cost the company major funds. This manifests in the form of invisible spend - travel costs incurred by employees, due to unregulated travel on the company dime.

A recent study by Phocuswright, for instance, points out that only around a third (36 per cent) of travellers used approved corporate tools for flights. A practical example of why this happens:

Say your company has a deal with Star Alliance, Delta Airlines, or some other travel body, which gives a discount based on the volume of travel.

However, your employees all have different credit cards or bank deals, that give them cashback, bonus miles, or other incentives. These incentives, while beneficial to employees, ultimately cost the company more when claims are made. The discounts you’ve negotiated are useless, and company spending increases.

In addition, this can jeopardize existing deals (e.g. you lack the volume to maintain your discount), and result in compliance issues (the spending may not be properly tracked, if every employee is using their own source of travel).

Switching to Spenmo cards could solve these problems instantaneously. By having your employees put their spending on a Spenmo card, it becomes possible to gain complete visibility over the use of company funds for travel services. You’ll receive real-time updates when your employees use the card, and you can enable or disable each card at the tap of a few buttons.

Track expenses to ensure employees aren’t “paying themselves more”

Neumann’s most glaring offences could have been picked up almost immediately if company spending were tracked better.

WeWork’s then-CEO had a stake in four different buildings, all of which were leased to WeWork. Neumann also trademarked the name “We” under a different company, then made WeWork pay a license fee of $5.9 million to use the name.

WeWork Coworking Space, 333 Seymour, Vancouver courtesy of GoToVan

C-suite managers are not the only employees capable of such infringements. Even ground level employees can persuade colleagues or immediate supervisors to use a vendor run by a relative, a close friend, or even themselves.

Likewise, businesses must be aware of employees setting up companies of their own that then acts as a supplier for the business (e.g. a manager in a restaurant chain setting up a food supply business under a different person’s name - and then supplying to his own employer).

This may not be inherently wrong if it results in the best deal for the company, but if expenses are never tracked, you may never become aware of the situation (if there are investors or shareholders, there’s also the possibility of legal entanglements over kickbacks or other conflicts of interest.

Receiving real-time updates of each employee’s expenditures isn’t enough. A company also needs to be able to analyze the data to understand where exactly the money is going, and dig deeper into who owns or runs their suppliers.

Track expenses to get a real sense of growth, outside of revenue numbers

spenmo card

WeWork generated around SGD$2.44 billion in revenue in 2018; almost doubled from 2017. If the company’s business expenses are ignored, then this would be a phenomenal number. But what the revenue alone doesn’t reflect is that, over the same time period, WeWork recorded expenditure of about SGD$2.58 billion.

This means that, despite impressive revenue numbers, WeWork was just turning money into less money.

New companies, which are just finding their footing, are often excited over revenue generation. This is sometimes justifiable - the “earn $1, lose $1” phenomenon may be tolerable when a business is a start-up, or during its first three years of operations.

Ultimately, all growth comes at a price. Business owners simply need to measure that price to check whether they’re really making profits.

A standardized procurement process is a major step to controlling costs

coworking

Many of the issues above can be managed through a standardized, well-enforced procurement process.

Companies should have approved vendor lists (with some flexibility), and a clearly-defined process by which a vendor is picked. For SMEs, which may not have the luxury of a specialized procurement team, these decisions ultimately come down to the owners.

At the very least, there should be a simple process of comparison. An example is having to source quotes from at least five different vendors, before making a major purchase. Employees should also be able to quantify their decisions, answering questions such as:

  • How much will we save over a time period (six months, 12 months, five years, etc.) by using a different vendor
  • How much time will be saved by using a given vendor due to better after-sales support, or better logistics
  • Whether supplies are cheaper on a per-unit basis, or there is a lower quantum despite higher price-per-unit (can buy in smaller quantities that suit the company)

The same procurement process should also apply to intangibles, such as when sourcing for business loans.

Spenmo offers a system where it’s easy to tell if your procurement methods are being followed. Simply match the transactions (recorded in real-time) to the forms showing intended expenses.

What gets measured gets managed

It’s an old adage, but is especially true when it comes to corporate spending. Tracking expenses - contrary to common belief - is not about rigidity. In fact, it actually creates more flexibility and empowers companies to spend their money more wisely.

When companies can see and track their expenses properly, they’re better equipped to make decisions, like switching suppliers or increasing budgets. It’s when a company can’t track expenses that processes need to be more ironclad (you won’t have the data needed to make quick exceptions).

There are plenty of tools available today to help businesses track expenses without extra hassle. Switching over to automated, real-time processes is the first and most important cost-saving step any company should take.

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