Controlling indirect spend in large enterprises poses a unique set of challenges for procurement executives, category managers, and other sourcing professionals.
If you’re among them, you’re likely grappling with expenditures scattered across multiple company locations, diverse business units, and elusive spend categories involving a diverse range of stakeholders and suppliers.
However, within these complexities lie hidden opportunities and untapped avenues for achieving procurement cost savings.
So, let’s delve into how you can enhance control over indirect spend in your organization and unlock the keys to substantial cost savings.
Before exploring indirect spend categories and how they can be leveraged for cost savings, let’s quickly cover the basics.
For starters, “indirect spend” and “indirect procurement” are more or less synonymous, which is confusing not only for professionals but for academics and researchers as well.
So, what is it? According to one definition, indirect procurement includes all non-revenue-generating expenses that do not relate directly to the product or service that the company sells.
As such, indirect spend stands opposed to direct spend, i.e., expenditures directly tied to producing or creating final goods and services that a company sells to its customers.
While these two aspects are equally essential for business success, it’s clear that classifying spend categories into one group or the other is entirely open to company-specific interpretations.
Despite this high variability, some categories are still commonly classified as indirect spend, like the ones shown below.
Although the above image covers the main categories, the potential candidates for indirect procurement are far from exhaustive, especially due to confusing terminology in this field.
Ultimately, the number and scope of indirect spend categories will depend on:
For instance, telecommunications could be classified under IT, Utilities, or as a standalone category.
This example indicates that there are countless possible spend taxonomies, and you should create one that fits into your organization’s business categories.
Although spend categorization is a science in itself, the main objective is to pool different expenditures into relevant groups to reveal opportunities for:
Bottom line, to prepare for the next steps, first identify and classify various indirect expenses to establish a robust indirect spend category structure.
With the indirect spend categorization framework in place, it’s time to perform an in-depth indirect spend analysis and gain visibility.
Ideally, this analysis should encompass a thorough examination of expenditure patterns, supplier relationships, and cost drivers within each identified category.
In other words, it should provide crucial insights into indirect spending across your organization, enabling you to formulate and implement cost-saving strategies.
As illustrated below, any spend analysis focuses on answering a series of key questions.
As you can see, this process can be demanding even for usually better-controlled, consolidated, and monitored direct spend categories, such as raw materials, product components, or related services.
More specifically, when procurement officers attempt to analyze indirect expenditures, they’re met with the same but more complex set of challenges.
This is primarily because indirect spend is scattered across various company departments and locations, involves multiple stakeholders and suppliers, and often entails low-value, low-volume, and low-risk products and services.
So, how can procurement teams overcome these challenges and effectively perform an indirect spend analysis?
For starters, they should collect and combine multiple spend datasets from different business units and stakeholders.
Then, they can leverage advanced technologies like AI-driven machine learning (ML) algorithms (contained in procurement analytics software tools) that can:
We’ll explore these tools and their capabilities more in-depth in the last section.
Moreover, enhanced indirect spend visibility can be achieved through process improvements, such as establishing standardized data formats, transparent data collection procedures, and clear communication channels.
To accomplish this and identify cost-saving opportunities, close collaboration with indirect spend stakeholders is essential, leading us to our next tip.
Since indirect spend is typically much more diverse and fragmented than direct spend categories, controlling these expenditures requires that business units, managers, and staff members making such purchases do the following:
Of course, that’s easier said than done.
One way is to engage top management to enlist employee compliance, but that could backfire in various ways.
For instance, proposing a consolidation of travel expenses, such as reducing the number of hotel chains used, might face opposition from those same top managers and other executives, so a cautious approach is advised.
More precisely, achieving cost savings in this indirect spend category involves a delicate balance between reducing expenses and not compromising the travel experience of company employees, including management.
Continuing with this example, here are some findings from a 2023 survey of over 200 travel and expense (T&E) managers at US companies that directly relate to cost control challenges and strategies in this particular category.
If we look more closely, some of these survey results point to a potential approach to collaborating with stakeholders across departments, namely by addressing specific issues they find relevant.
Simply put, you should reframe your data and compliance requirements and model potential cost-saving measures in such a way that stakeholders recognize their value.
This means that any proposed cost-saving strategies should not only be about cost control and compliance with company policies and procurement guidelines but also help employees do their jobs more efficiently.
To identify such opportunities, you should first, by utilizing the analytics tools we mentioned, analyze indirect spend data you have and extract insights specific to each department, unit, function, or location.
Then, you can share these data-driven insights with the relevant stakeholders, framing them in a way that invites their input.
This can help you engage stakeholders, motivate them to share information, collectively identify areas for improvement, and secure their support for cost-saving initiatives.
One of these initiatives can be to consolidate suppliers, which is covered next.
Indirect spend can often involve company departments and functions using multiple suppliers providing similar services.
For instance, when each department is free to choose its own office supplies vendors, this leads to a variety of suppliers used for purchasing the same or similar items.
In turn, this means multiple contracts, varying pricing structures, and inconsistent service levels across departments.
By consolidating the purchasing process of office supplies in this example, you could negotiate better terms, including volume discounts and standardized pricing.
This applies to all indirect spend categories, which usually hold more consolidation potential than direct procurement categories.
The main reason for this is that indirect expenses are less controlled by the procurement function.
For instance, the below graph shows average percentages of indirect spend categories under purchasing/supply control.
Source: Procurement Academy
Note that the highest percentages are recorded in categories where a lack of supply control and high levels of maverick spending could seriously compromise business operations, such as Maintenance, Repair, and Operations (MRO) supplies, utilities, and services.
These control issues and the innate fragmentation of indirect spend are why all the previous tips in this article are focused on identifying, categorizing, and analyzing spend data in collaboration with stakeholders.
These steps should allow you to:
This should be followed by analyzing key suppliers on the market in each spend category and respective subcategories to get insights about pricing and market conditions.
Armed with this knowledge, you can proceed to assess the performance of each shortlisted supplier according to different criteria, such as pricing, quality, reliability, delivery timelines, and customer service.
From there, you can initiate negotiations to achieve the most favorable terms, including volume discounts, standardized pricing, and improved payment terms.
When transitioning from multiple to one or few selected suppliers, it’s also important to develop a clear consolidation plan to prevent potential disruptions to business operations.
Then, all that’s left is to establish a relevant procurement policy and ensure that employees comply with it, i.e., use the approved consolidated supplier(s) and make purchases according to the terms and prices negotiated with them.
Overall, while consolidating suppliers might be difficult in some indirect spend categories, this method still holds great potential for taming your organization’s indirect spend and achieving procurement cost-savings.
Another potential way to tame indirect spend and generate cost-savings can be to explore and consider joining one or more Group Purchasing Organizations (GPOs).
According to Cnect, a GPO is:
“…a company that leverages the purchasing power of its members to negotiate special pricing with suppliers.”
Because a GPO represents many companies, it can negotiate better terms with suppliers and provide access to bulk purchasing discounts, particularly in some common indirect spend categories.
For instance, instead of trying to consolidate frequent low-volume purchases of office supplies from diverse vendors into purchases from one or a few preferred suppliers, you could consider joining a specialized GPO.
Source: Insight Sourcing
By joining this office supplies GPO program, you gain the purchasing power of over 250 member companies, all of which receive the same best-in-class pricing.
The program has no membership fees and advertises typical cost-savings on office supplies between 10 and 25%.
Considering the success potential of GPOs, it’s worth exploring options beyond office supplies.
There are numerous GPOs (procurement partners, procurement co-operatives) that specialize in various indirect spend categories, ranging from IT and professional services to facilities management.
When selecting a GPO, you should:
By relying on a GPO to ensure the best prices from reliable suppliers, you also free up the resources of your procurement department, allowing them to focus on strategic sourcing activities and supplier relationship management.
To recap, joining the right GPO(s) can be a great way to avoid the complexities associated with managing many indirect spend categories and still achieve procurement cost savings.
Leveraging the right technology solutions can significantly enhance your organization’s indirect spend management.
As we already mentioned, advanced analytics tools can help analyze large datasets to identify spending patterns, track expenses, and uncover opportunities for cost savings.
When such tools have AI capabilities, they can further streamline procurement processes, enhance indirect spend categorization, identify trends, and forecast future expenses.
Likewise, there’s a range of other procurement automation solutions that can be instrumental in improving indirect spend control.
For example, Enterprise Resource Planning (ERP) systems integrate various business processes, including procurement and finance, for a holistic view of operations and expenses.
Then, there are specialized travel expense management platforms that can act as standalone solutions or be integrated with your ERP system and accounting software, such as SAP Concur Travel.
This solution helps procurement officers optimize travel expenses in several ways.
First, it provides a centralized platform for booking and managing travel arrangements, which enables procurement officers to consolidate travel expenses.
This consolidation allows for better negotiation power with travel service providers, leading to potential cost savings.
Second, it provides visibility into spending patterns in this category, enabling procurement professionals to identify areas of excessive spending, track trends, and formulate cost-optimization initiatives.
Lastly, it helps enforce company travel policies and spending guidelines through expense monitoring, thus ensuring that employees adhere to predefined budgets and opt for cost-effective options.
Naturally, these advantages can be generated in other indirect spend categories by utilizing similar specialized software platforms.
Other technology solutions relevant to indirect spend control can include budgeting and forecasting software, Supplier Relationship Management (SRM) systems, and supplier sourcing tools.
On that note, when a company wants to gain more control over indirect spend by consolidating suppliers, this necessarily involves comparing existing suppliers with others on the market and being prepared to switch if new suppliers with better terms are found.
To do that, you can use Veridion, our supplier sourcing tool that leverages AI to give you access to a global supplier database with over 80 million companies and 200 million products and services.
Moreover, all this data is updated weekly.
This database and its advanced search functions are easily integrated with your other procurement management systems, allowing you to simplify and accelerate the supplier sourcing process.
In practical terms, this means you can use Veridion’s Complex Search API to quickly find potential suppliers in a range of indirect spend categories and compare them with your current suppliers according to a range of your specific procurement criteria.
Simultaneously, by leveraging the Match & Enrich API, you can keep the data on your suppliers updated, which allows you to timely react to supplier-unreported changes or increase your negotiation power through data-driven insights.
Overall, utilizing technology solutions to control indirect spend is, in today’s world, a necessity.
Ultimately, such tools can help you analyze, track, and control your organization’s indirect spend while also contributing to increased efficiency, strategic decision-making, and better cross-departmental collaboration.
There you have it! The tips provided in this article can help your company better control indirect spend, detect cost-saving opportunities, and implement them in practice.
Empowered by evolving indirect spend control methodologies and advanced technologies, this brings about a whole new perspective on indirect procurement, allowing you to not only realize cost savings but also enhance the overall efficiency of purchasing processes.
Finally, we hope this article inspires you to do further research, explore developing spend control methods, and leverage new technology solutions.