Key Takeaways
- Recognize the high proportion and potential savings in indirect spend categories like IT, MRO, logistics, and travel.
- Implement measures to eliminate unauthorized purchases outside agreed contracts to reduce inefficiency and fraud risks.
- Centralizing purchasing operations can help achieve economies of scale, better supplier scrutiny, and compliance with procurement policies.
- Employ automated procure-to-pay processes for better visibility, control, and efficiency in managing indirect spend.
- Regularly review supplier performance and renegotiate contracts to ensure better terms and conditions.
- Ensure alignment across departments to promote collaboration and efficient procurement strategies.
- Regularly evaluate and streamline indirect spend processes to identify inefficiencies and enhance operational effectiveness.
- Utilize advanced procurement software to gain transparency, reduce manual errors, and make data-driven decisions.
- Educate employees on procurement procedures to ensure compliance and reduce wasteful spending.
- Centralize and periodically review all indirect spend contracts to maintain relevance and optimize terms.
Most companies often focus their efforts on direct spend categories and place a low level of importance on indirect spend. However, indirect spend can make up a high proportion of third-party spend in most companies. Often overlooked, indirect spend management is gaining attention due to its ability to derive more value from their supplier spend and further increase savings. Indirect spend management is not so straightforward and easy. Managing IT, MRO, logistics, utility, and travel requires a different kind of skillset and expertise from the procurement teams. If procurement teams are able to manage and take control over the indirect spend effectively, they can create more savings opportunities. So what are the barriers procurement professionals need to overcome to unlock new savings opportunities?
Controlling maverick spends
Maverick spends are purchases made outside of agreed contracts. Companies make many purchases out of their agreed contracts due to various reasons and circumstances. However, it can be detrimental to the organization as no contract means no legal protection and it can also impact the profit and contract fulfillment. Unmanaged spends can account for billions of dollars of ineffective and inefficient purchases in a large enterprise. Additionally, it also makes the organization vulnerable to procurement frauds. A major problem faced by the procurement professionals is the implementation of control measures to eliminate such maverick spends. Organizations struggle to regulate such spends as employees usually try to be efficient by using a ‘just get things done’ attitude. Also, procurement professionals often bypass the contracting system as it is laborious and time-consuming. At an age where agility is necessary, they cannot afford to waste time in excessive documentation. Additionally, sometimes employees can feel that they can find a better deal elsewhere than in the contract offers. It is essential to review HR policies and educate stakeholders of the detriments of unmanaged spend. A review of the P2P process and a proper spend analysis are also essential to put a stop to such maverick spends.
Lack of centralized control
A common misconception outsiders have about the organization is that it sees the company as a single entity. The truth is far from that, as they function with multiple departments with decentralized control. The problem with such decentralized control is that, when implementing indirect spend management, professionals often lack the knowledge of the scale of diversity within their organization. Each department is provided with their own budgets, and have measures and regulations to spend the budget where they need it. This again gives rise to maverick spends and purchases that are not centralized. Therefore, it becomes problematic to assess who is spending on what. To get on top of the indirect spend management, organizations should centralize their purchasing operations. It will not only help achieve economies of scale but also allow greater scrutiny of suppliers and their contracts. Additionally, it eliminates the practices of offering contracts based on each department’s convenience and ensures qualified suppliers are selected. Apart from its contribution in cost-savings, it also affects the non-price factors such as risk management, CSR initiatives, and supplier diversity.
To tackle the challenges arising out of indirect spend management, companies have turned towards automated procure-to-pay (P2P) processes. Such processes eliminate process errors, increase visibility of payments, and provide better control over indirect spend. Additionally, eProcurement, eInvoicing, AP, order lifecycle management, electronic payments, and supplier management are some tools used by the organization to increase visibility and control over their indirect spend management.
For more information on challenges in indirect spend management, maverick spends, and unmanaged spends:
Challenges Faced by Procurement Professionals in Indirect Spend Management
Procurement professionals in indirect spending often encounter several challenges due to the unique nature of indirect goods and services procurement. Here are three common challenges they face:
Fragmented Supplier Base:
Indirect spending covers a wide range of products and services, including marketing, facilities management, IT services, office supplies, and more. As a result, the supplier base becomes fragmented, with many vendors providing niche goods or services. It can be difficult and time-consuming to manage connections, negotiations, and contracts with many different suppliers. While making sure that the needs of the company are satisfied and cost savings are accomplished, procurement specialists need to rationalize and consolidate the supplier base.
Lack of Visibility and Data:
In contrast to direct expenditure, where procurement experts frequently have access to particular data on quantities, requirements, and past purchasing trends, indirect spending can be difficult to see and lack standardized data. When data is dispersed across numerous departments and systems, it becomes difficult to track and analyze spending trends, spot potential for cost savings, and make wise decisions. To understand indirect expenditure and promote cost minimization, procurement managers require reliable spend analysis tools and data management procedures.
Stakeholder management and alignment:
Indirect expenditure involves a number of parties from various organizational areas, each with their own objectives and preferences. In order to connect these varied interests with the organization’s overarching procurement strategy, procurement experts must manage these interests. It can be challenging to balance the demands of various stakeholders with the requirements of procurement laws and regulations. To successfully address these issues, effective stakeholder engagement, communication, and change management strategies are necessary.
Some key strategies that can boost organisational efficiency
Establishing appropriate category plans:
Using a one-size-fits-all approach to managing indirect spend is not the best option. Instead, it’s better to analyse the unique dynamics within each category and develop targeted strategies to maximize value. For facilities, consolidating suppliers and bundling service demands can help procurement take advantage of economies of scale. Using internal benchmarking and external market pricing research, renegotiating long-term maintenance and utility contracts based on updated requirements can lead to significant savings. Implementing energy management analytics provides visibility into usage patterns and opportunities for optimization.
Centralize control under procurement:
Spending on indirect expenses happens far too frequently across disjointed entities such as business divisions, regional offices, and functions. Data silos and dispersed purchases are the results of this. For procurement processes, centralising operations under a single, uniform data model allows for aggregated negotiating leverage with suppliers and transparent visibility into enterprise-wide spend. Additionally, it makes it easier to standardise corporate policies and procedures, which encourages uniformity.
Enabling new and updated technologies:
Procurement teams can gain transparency into requests and streamline indirect expenditure management by implementing the appropriate source-to-pay software. Contract repositories guarantee compliance while providing visibility into agreements. Catalogues that offer guided buying ensure that indirect purchases follow policy. With today’s AI-powered procurement platforms, businesses can improve accuracy while speeding up cycle times and use advanced analytics to make data-driven decisions about opportunities.
Managing supplier relationships:
Managing important supplier relationships with care is essential to getting the most out of indirect spending. Review supplier performance regularly based on factors such as cost, quality, delivery, and service standards; renegotiate agreements to get better conditions. Organising suppliers according to categories helps improve negotiating leverage.
Establishing cross-functional collaboration:
Decisions about indirect sourcing frequently involve several departments, including marketing, IT, HR, and facilities. Aligning priorities and objectives is valuable because it promotes collaboration, knowledge sharing, and clear communication among stakeholders involved in procurement choices, all of which improve outcomes.
Continuous improvement:
Evaluate indirect spend procedures on a regular basis to find the sources of inefficiency. Remove unnecessary, redundant steps from the process. Streamline and standardise the ordering, onboarding, processing of invoices, reporting, and supplier selection processes. Automate as much as you can, and use data analysis to continuously improve operations.
Tips to improve indirect spending
Identify and Categorize Costs: Begin by categorizing your indirect costs into relevant categories, such as administrative, marketing, IT, utilities, and more. This will give you a clear overview of where your spending is going.
- Regular Expense Audits: Conduct regular audits of your indirect expenses to identify areas where there might be overspending or inefficient use of resources.
- Prioritize Expenses: Determine which indirect costs are essential for smooth operations and which ones can be trimmed or eliminated without affecting performance.
- Benchmarking: Compare your indirect spending to industry standards to identify areas where you might be over or under-spending. This can help you set realistic targets for improvement.
- Negotiate with Suppliers: Negotiate contracts with suppliers for better rates or discounts on services, products, or subscriptions that your business uses.
Best practices: Indirect procurement strategy
Invest in the right technology
Many organizations struggle to achieve desired indirect spend savings due to over-reliance on ERP systems alone. Implementing a dedicated indirect procurement strategy is essential. Modern solutions offer a digital procure-to-pay process with automated workflows, notifications, and centralized records, ensuring control at every approval and transaction stage. This reduces manual errors and provides comprehensive visibility into indirect spend. With transparent processes and accessible data, organizations can partner with high-performing, cost-effective suppliers, consolidate purchase orders, and buy in bulk for better financial value.
Streamline your processes
Automated efficiency enabled by procurement tools is crucial for managing indirect procurement. Streamline admin-intensive and repetitive tasks like supplier onboarding, and template frequent purchases to save time and minimize errors. Automated workflows enhance visibility, efficiency, and workforce productivity in purchasing activities.
Track your spending
Indirect procurement often operates outside of procurement’s oversight, leading to untracked or unapproved purchases. To improve transparency and control, track indirect spending as meticulously as direct supplies. An indirect procurement strategy can streamline and track spending with automated features. These features channel spend to contracted vendors, enhancing purchasing power and enabling better negotiation of terms to reduce costs.
Encourage responsible spending
Non-procurement professionals often handle significant portions of indirect procurement, resulting in low compliance, wasteful spending, fraud risks, and higher costs. Educate the entire company on procurement procedures and implement frameworks to guide purchasing decisions. Ensure compliance, maintain budgets, and eliminate rogue spending by using a user-friendly indirect procurement solution that promotes accountability and informed purchasing on any device, from any location.
Review all indirect spend contracts
Indirect procurement contracts are often fragmented across departments and locations. Centralize and review contracts to identify opportunistic terms like evergreen clauses. Regularly assess service contracts to ensure relevance and renegotiate terms as necessary to maintain alignment with organizational needs.
Conclusion
Effective management of indirect spend is crucial for organizations aiming to maximize savings and operational efficiency. By investing in the right enabling technologies, companies can streamline processes and gain comprehensive visibility into various categories such as maintenance, utilities, security, hardware, software, telecom, and cloud computing. Implementing automated procurement solutions not only enhances control over spending in areas like advertising, PR, events, and promotional items but also ensures compliance in legal, auditing, consulting, and training expenses. Tracking expenditures in airfare, hotels, meals, and transportation, along with managing temporary contractors and freelancers, can lead to significant cost reductions. Centralizing and reviewing all indirect spend contracts regularly can further optimize resource allocation and ensure alignment with organizational needs. By embracing these strategies, businesses can foster responsible spending, enhance procurement efficiency, and achieve substantial financial value.
