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Controlling Indirect Spend 




Market View

As a general observation from talking to professionals in the market and from numerous articles, seminars and reports around the subject it is estimated that procurement departments across all industries actually only probably control around 60% of their company’s spend.

Unsurprisingly most of this 60% is given over to the more strategically managed core or critical nature categories commonly known as direct spend items as they relate directly to the ‘business of the business’.

If we accept this figure to be true then the non-critical or indirect spend i.e. items that are not directly attributable items sold to a customer (items such as company wardrobe, mail house, stationary, print, facilities, property, marketing, furniture, fleet, telecoms, IT, Utilities, to name but a few) must account for at least the remaining 40% and probably more of the overall expenditure of organisations.

When these statistics are considered alongside the reasoning that it is far easier to add profit to the bottom-line by saving a dollar on your expenditure than it is to add a dollar through sales activity, it is easy to see why more and more organisations are (or should be) focusing their procurement departments attention on leveraging their buying power and centralising their indirect spend.


The traditional approach

In the past, most of the purchasing decisions around these items habeen decided at a localised level sometimes within individual silos of a business and are therefore fragmented, involving a multitude of buyers, suppliers and products.

For example it is not unheard of for a large organisation to have literally hundreds of people not only ordering stationery, but making the strategic sourcing decision as to which company it is sourced from. The result - hundreds of thousands of dollars leaving the organisation with no clear co-ordination or planning.

The traditional solution to controlling this indirect spend has been to either assign specific resources to become the in-house procurement consolidators or to engage external consultants to drive and develop these categories. In both cases, whilst there is often an initial short term consolidation win, ongoing projected savings nearly always fail to materialise due to companies believing consolidated sourcing alone is the way to control indirect spend.

Whilst consolidation of spend is often the first and most necessary step on the road to controlling non-core spend without any strategic thought around the medium and long-term management of non-core items or the measuring and enforcing of compliance to the companies needs, maintaining the benefits of spend consolidation will prove to be a forlorn task.

The most common reasons cited by our industry contacts for the failure of companies to maintain medium to long-term control of their non-core spend is the inability to properly implement and manage the agreements they have worked so hard to establish.

Factors such as failure to manage changing market dynamics, poor execution of key communications and badly executed change management procedures seem to be at the root cause of why stake holders do not always using contracted suppliers and therefore become contributing factors to the continuation or increase in ‘maverick’ buying. The main reason for these failures is often deemed to be the inability to install company-wide reporting software that enables to procurement professionals to see the size of the spend and target problem areas.


Strategic sourcing solutions

Strategically aggregating volumes is becoming harder and harder to do as industry knowledge has become more transparent and the number of willing suppliers becomes fewer, negotiating new and innovative agreements is becoming more difficult. There are only so many cost reductions and service levels that can be met by suppliers to make sustainable progress.

Where focus does need to be placed is on management of these agreements; Strategic sourcing experts we speak to however believe they have very little time to which they can allocate for these duties, due to the never-ending work involved in trying to understand and contractually bind existing suppliers.

This is in addition to the fact that indirect spend managers have difficulty in gaining sufficient traction with internal stakeholders and key business units, who often feel their needs are better served by maintaining their own relationships with suppliers as the procurement department are too busy to do the job properly.

Having canvassed opinion on the topic, it was the widely expressed opinion of many that establishing strategic contracts is not enough, the real and ongoing value and benefits are only realised if these contracts are managed effectively.

Critical to this management process are the establishment of measurable savings criteria and the reporting of this to internal stakeholders. Often ‘maverick’ or noncompliant spend can be eradicated simply by identifying where it is occurring from and how much the cost-centre owner who is authorising that spend is actually costing the organisation.
An ongoing flexible model that can adjust to variances in pricing levels, demand, service levels and continuous improvements and which has enough resources to maintain it will also ensure that the contract remains valid and continues to add value to the organisation.


Delivering Contract Management and Compliance

Contract management and compliance for individual non-critical categories involves investment in qualified and diligent tacticians to deliver on-paper savings promised by strategic sourcing specialists.

The investment in diligent contract managers driving contract management and continuously evaluating both internal compliance and external supplier performance is required. Take into account coordination of the legal hurdles in creating a new agreement cycle, communicating the results to adverse suppliers and the overall need to raise the profile of agreements awarded internally and the role is every bit as strategic as the sourcing.

Other factors to take into account include supplier order-to-payment processes; ensuring control from the start ensures reduction in costly errors later down the track. End users should receive adequate training on new systems with KPI’s being monitored through the transition stages so any issues can be neatly and quickly resolved.

Fragmented businesses that have a broad footprint offer more challenges as each subsidiary business may have unique contract requirements that fit into it’s location and segmented industry.
In line with strategic sourcing, contract management and compliance, indirect spend managers need to be coordinating their efforts in order to achieve projected outcomes. With total investment in your procurement team, daily transactions can be monitored and continuously measured to the buying trends of products and services throughout the business.

As with all industries this space is being revolutionized by forward thinking solutions providers who are now well established and can take total responsibility for the complete portfolio of indirect items.

Not only do they consolidate spend, they consolidate, systems, knowledge and procurement expertise. Organisations are now outsourcing these ongoing problems and holding these new providers accountable for their spend and the saving s they wish to attain.

If you would like to know more about these companies and you are interested in employing them or being employed by them talk to us or click here.