Five Action Steps to Bring Indirect Spend Under Direct Control

Indirect procurement costs are often underestimated and unprioritized. Since indirect costs are not linked to a specific bill of materials as with direct procurement, they are inherently more difficult to measure and to factor into the bottom line. Organizations therefore tend to undervalue the influence better management and control over indirect spend has. Estimates are that even a five percent reduction in indirect spend can translate to a one to three percent impact on the bottom line. What are the challenges surrounding indirect spend and how can companies manage it to their best financial advantage? Here we highlight five action steps to bring indirect spend under direct control.

The challenge in managing direct spend

In many organizations, indirect spend is highly decentralized, with purchasing performed at a departmental level. For example: Human Resources handling purchases like employee travel; Facilities Management handling building maintenance functions; Operations handling new technologies to support growth; Sales and Marketing adding new trade shows to annual marketing plans and so on. In this arrangement, the procurement cycle becomes fractured by function. Unknown amounts of money may be misspent, wasted, or duplicated by bypassing best practice protocols such as consolidated purchasing, dynamic approval workflows, vendor contract management, or even competitive bidding.

To centralize or not

While decentralizing portions of the procurement function makes sound business sense, the balance of the procurement cycle is better served by centralizing vital functions within the procurement department. This hybrid-approach of incorporating elements of both centralized and decentralized procurement presents the best of both worlds. For example, individual departments, and individual users within each department, can be empowered to create requisitions and monitor the status of those requisitions through the approval process, while the centralized procurement department performs the strategic sourcing tasks, vendor contract negotiation, and other high-value tasks.

Action steps for managing indirect spend

Below are five distinct action steps to take to help bring indirect spend under direct control.

1. Categorize and Consolidate

When purchasing is decentralized, you may be missing out on cost savings from volume pricing. Take the time to review and categorize your organization’s indirect spending across all locations and departments. Group items and identify key suppliers for each category (such as computer equipment or office supplies). Review your purchase history of similar items company-wide and then work to negotiate favorable contracts with suppliers based on volume pricing or identify redundancies and areas for cost savings.

2. Empower employees

Decentralize the requisition step by empowering employees across all departments to create new requisitions. Functions like guided buying catalogs make it convenient for employees to pick from a list of company-selected items and easily create a requisition to be routed for approval. Mobile access allows off-site employees to efficiently create requisitions and check on the status of existing requests.

3. Improve supplier management

Indirect spend involves many suppliers, and it can be daunting to manage all contracts, but without proper review and management you may end up overpaying. Contracts allow you to track committed amounts and quantities against contract budgets, restrict purchases to a defined list of items, enforce pricing and terms agreements, and limit overall spending to a particular supplier. Review all supplier contracts on a regular basis.

4. Automate processes

Leveraging technology to automate tasks can lower the overall costs of indirect spend. Automated approval workflows, vendor self-service capabilities, automated purchase order creation, and OCR invoice capture are a few examples of technology tools that can streamline tasks and lower the overhead associated with managing indirect spend.

5. Keep it simple

A well-designed and well-enforced requisition and approval process is fundamental to managing indirect spend. But if it is overly burdensome and complex, employees may look for ways to work around the process, sabotaging your efforts to manage indirect spend. A flexible, dynamic request and approval solution can strike the balance between enablement, compliance, and control.

A direct focus on indirect spend

In a 2017 research paper, McKinsey reports that “implementing a world-class indirect sourcing process can yield 100-150 basis points of incremental profit within 12 to 24 months.” And since indirect spending can account for 15-27% of a company’s total revenues, it is certainly worthy of direct focus.