What is addressable spend?
Addressable spend is the part of a company's external spend that procurement can realistically influence through sourcing, negotiation or policy. It leaves out payments like taxes, statutory fees and inter-company charges, where there is no supplier to choose and no price to negotiate.
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Not every rupee a company pays out is something procurement can do anything about. GST paid to the government, provident fund contributions, stamp duty and charges from a group company all leave the bank account, but there is no supplier to choose and no price to negotiate. Addressable spend is what remains once you take those out.
It matters mostly because other numbers are built on it. If you want to know how much of your spend procurement actually manages, you divide by addressable spend, not by everything that was paid out.
What is usually left out
Companies draw the line a little differently, but these are almost always excluded:
- Taxes, duties and government fees
- Salaries, statutory contributions and other payroll costs
- Inter-company and group charges
- Donations and CSR payments
- Loan repayments, interest and other finance costs
The grey areas are things like electricity, long-term rent and some regulated services. You may not be able to switch the power company, but you might change the tariff category or add rooftop solar. Some teams count these as addressable and some don't. Pick a rule, write it down, and keep it the same every year so the trend means something.
The formula
Addressable spend = total third-party spend minus non-addressable spend.
It then becomes the base for spend under management: spend under management % = spend under management ÷ addressable spend × 100.
A worked example
Say a mid-sized manufacturer paid ₹80 crore to outside parties last year. Of that, ₹11 crore was taxes and government fees, ₹2 crore was charges from a group company and ₹1 crore was CSR. That leaves ₹66 crore of addressable spend.
| ₹ crore | |
|---|---|
| Total third-party spend | 80 |
| Less taxes and government fees | 11 |
| Less inter-company charges | 2 |
| Less CSR | 1 |
| Addressable spend | 66 |
| Spend through procurement | 40 |
| Spend under management | 61% |
Procurement ran sourcing events, rate contracts or approved POs for ₹40 crore of it, and departments bought the rest on their own. Spend under management is 40 ÷ 66, about 61%. Dividing by the full ₹80 crore would have given 50%, and the team would have been marked down for spend it could never touch.
Addressable spend vs spend under management
Addressable spend is the ceiling: everything procurement could influence. Spend under management is how much of that ceiling it actually influences today. The gap is the opportunity. In the example it is ₹26 crore where nobody compared prices, checked terms or used an agreed vendor. A lot of that is usually maverick spend, or tail spend spread across hundreds of small vendors.
Frequently asked questions
Is addressable spend the same as total spend?
No. Total spend includes payments procurement can't influence, like taxes and inter-company charges. Addressable spend is total spend minus those items.
How do you calculate spend under management?
Take the spend that went through procurement's processes (sourcing events, contracts, approved POs), divide it by addressable spend and multiply by 100.
Should rent and electricity count as addressable spend?
It's a judgment call. If procurement can renegotiate, switch or reduce the cost, count it. What matters most is using the same rule every year.