Defined as the sourcing of goods and services for a business to maintain and develop its operations, indirect procurement items are purchased for consumption by business units, as opposed to external clients. Indirect spend can be as heavy a cost and burden as direct spending; if left unchecked, it can increase your business costs and stunt your cost-saving potential.
McKinsey & Company reports that, since 2011, indirect spend has been increasing globally by an estimated 7 percent per year. Listed as items like technology, facilities management, utilities, rent, travel expenses, and office supplies, indirect spend may not form a direct part of your production or supply cost, but plays a major role in your overall budget and performance. Spending is usually dispersed across multiple locations, branches, and categories, complicating methods of identifying potential saving opportunities and aggregating spend.
Recent studies show that indirect spend can account for as much as 50% of purchases for an average business. In a manufacturing concern, you’re looking at a further 20% of total revenue set aside for indirect expenditures. Therefore, procurement professionals are on a constant mission to access hidden areas of indirect spend, to make the most impactful cost savings in this spend category, with the assistance of spend management solutions.
Indirect procurement accounts for a significant portion of your budget. By analyzing your spend and procurement processes, you can identify areas where your indirect procurement teams can start injecting cost savings immediately.
Core procurement areas your indirect spend teams can improve on today
Managing your indirect spend is essential for cost-conscious business operations, and this influences your propensity to save. By focusing your teams on these core indirect procurement areas, you’re better equipped to map out and control spend at each juncture.
Supplier relationship management
In contrast to direct procurement, indirect procurement focuses mainly on spend management over supplier collaboration benefits. The supplier relationship is mostly viewed as transactional, with competitive costs prioritized as the indirect procurement team’s key focus.
While investing in relationships and focusing on building strong supplier relationships is traditionally a direct procurement strategy, your indirect procurement teams should take a leaf out of the direct procurement strategy playbook.
By forging strong supplier relationships, indirect procurement benefits from a consolidated supplier pool, inevitably leading to better saving opportunities for indirect spend.
Approaches to spend management
In an attempt to drive savings, businesses can deploy software solutions to manage indirect procurement in a holistic manner. To manage operational expenditure effectively, you need to understand how your business spends money, and reduce the right costs in response. Spend management software is efficient in providing a framework for internal controls, spend visibility, analysis and reporting. With this technology in place, it’s easier to differentiate strategically-critical costs from non-essential costs, manage supplier bases, promote accountability, and ultimately realize savings in time and costs.
Use of technology
Indirect procurement teams rely heavily on best-in-class technology to streamline and simplify indirect procurement processes.
Spend management or e-Procurement software specifically tackles indirect procurement’s diverse and fragmented requirements.
As an augmentation to your internal business system, e-procurement software enables automation of processes and workflows, with the relevant delegation of authority, budget visibility, and policy compliance, to effectively manage indirect procurement. Procurement teams aim to cultivate a simple buying experience for users, with the assistance of easy-to-use technology that is accessible on mobile devices, from any location, and enables users to get the goods and services they need, quickly and seamlessly. User adoption is the key to the success of any spend management software investment.
Indirect procurement may have a decentralized approach, which is managed by multiple internal stakeholders, each with individual budgets and spend protocols. Indirect teams can benefit from the centralized structure that e-procurement software provides, resulting in efficiency, cost reduction, and compliance.
With these core indirect procurement functions addressed, it becomes increasingly clear that a fully integrated spend management solution is the secret ingredient to unlocking indirect procurement saving success.
Identifying cost saving potential within your indirect procurement process
With a solution like Fraxion’s cloud spend management software, you’re equipped to streamline and manage your indirect spend and improve procurement processes, and, in doing so, maximize business savings. Where should you focus immediate efforts?
While the categories of indirect procurement differ from business to business, there are operational expenditure areas that are common to most businesses. Here, we'll identify the six most prominent indirect spend categories, the various levers to adjust or optimize, and the possible saving opportunity for each category.
Category 1: Professional services
Professional services like consulting, HR, and onboarding or training make up a large portion of mandatory, indirect spend.
- Levers to adjust: Rationalizing and consolidating supply bases, reducing consulting hours and controlling contract compliance.
- Saving opportunity: 10 - 15%
Category 2: Facility services
Another area of mandatory indirect spend that a majority of businesses contend with is facility services, such as cleaning, security, janitorial or catering services.
- Levers to adjust: Supply base rationalization, controlling compliance of contracts, service level agreement (SLA) building, key performance indicator (KPI) measurement, and renegotiating existing contracts.
- Saving opportunity: 5 - 10%
Category 3: IT services
IT services are one of those areas that businesses simply cannot operate without. Our digital age dictates that efficient business operations and functions rely on IT teams, whether on-premise or outsourced. Being dependent on IT services can become quite costly, so savvy spend analysis goes a long way in saving on this indirect expenditure.
- Levers to adjust: Replace legacy software with cloud solutions, consolidate spend, review volume requirements, renegotiate existing contracts, and practice cost avoidance.
- Saving opportunity: 5 - 20%
Category 4: Marketing services
Marketing services act as the backbone supporting the digital presence of your business. Your digital marketing is the voice and aesthetic that attracts potential prospects and engages them as they familiarize themselves with your brand; a key indirect cost that today’s successful businesses cannot go without.
- Levers to adjust: SLA building, configuring and managing budgets, and ensuring spend authorization with multi-level approval workflows within your spend management solution.
- Saving opportunity: 10 - 15%
Category 5: Utilities
Perhaps one of the most vital and inescapable indirect costs entail your business's utility bills. These can range from the essential rent, water, and electricity, to costs with a greater impact on the budget, such as landscaping, staff parking or common areas.
- Levers to adjust: Operational efficiency, energy saving measures, recycling, low-cost or alternative sourcing such as solar panels, supporting local or domestic services and products, managing supplier approval, enforcing quoting policies, and implementing spending policies using spend management software.
- Saving opportunity: 5 - 10%
Category 6: Others
This category refers to ancillary costs such as expense reports, travel expenses, or office stationery and supplies, without which it would be nearly impossible to conduct your day-to-day business activities.
- Levers to adjust: Supply base rationalization, leveraging low-cost sourcing, reviewing volume requirements, contract compliance, standardizing products and/or services, and implementing quoting policies and managing policy compliance for expense claims and travel in your spend management solution.
- Saving opportunity: 10 - 15%
An average of 10% saving across these areas and beyond (depending on your specific business) goes a long way in saving on your monthly and annual indirect expenditure. Identifying and consolidating within these areas is a sure way to navigate where you’re able to trim and save for both the short and long term, as the majority of these cost cuts promote longevity in saving.
Tracking, analyzing and reporting through your spend management solution will align your efforts to your goals, as well as your month-on-month savings outcomes. Deploying these indirect saving strategies will result in cumulative business cost savings, while supplementing your profit margins and saving holistically across your procurement processes.
How e-procurement software can regulate your indirect spend
As many as 70% of procurement executives cite indirect spend as the top focus for not only controlling, but reducing costs.
Direct procurement teams may not wish to adopt new technology. However, it’s the logical choice to enlist the assistance of next-generation technology, such as Fraxion’s end-to-end, cloud-based spend management solution, as an effective and clear-cut solution to maximizing savings from indirect procurement.
Fraxion’s advanced spend and procurement technology not only assists in streamlining your processes holistically but helps you to save time and cost while doing so.
With role-defined access, spend visibility, accountable audit trails, policy compliance and automation across your indirect procurement process, you’re empowered to make informed decisions, identify saving opportunities, and achieve cost containment goals.
Reach out to Fraxion for a customized demo for your business requirements.