Defined as the sourcing of goods and services that maintain and develop your business operations, indirect procurement items are purchased for internal consumption, as opposed to external client consumption. 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 every year. Listed as items like technology, facilities management, utilities, rent, travel expenses, and office supplies, indirect spend does not form a direct part of your production or supply cost. It does, however, play a major role in your organization’s overall budget and performance. Spending is usually dispersed across multiple locations, branches, and categories, complicating methods of aggregating spend and identifying indirect spend savings opportunities.
Recent studies show that indirect spend can account for as much as 50% of the average business’s purchases. From a manufacturing perspective, you’re looking at a further 27% of total revenue set aside for indirect expenditures.
Therefore, procurement professionals should be on a constant mission to access hidden areas of indirect spend., With the assistance of an indirect procurement solution, you should be able to make the most impactful cost savings in this spend category.
By ensuring your team is implementing the following indirect procurement strategies, you can identify areas that offer immediate cost savings.
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 building strong supplier relationships is traditionally a direct procurement strategy, your indirect procurement teams should still take a leaf out of the direct procurement strategy playbook.
Forge strong supplier relationships and build a consolidated supplier pool to generate inevitable indirect spend saving opportunities.
Indirect procurement solutions use cases
To manage operational expenditure effectively and drive savings, you need to understand how your business spends money. Indirect procurement solutions are efficient in providing a framework for:
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Internal controls
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Spend visibility
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Spend analysis
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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.
Indirect procurement solutions also enable the automation of processes and workflows, with the relevant delegation of authority, budget visibility, and policy compliance, to effectively manage indirect procurement.
And lastly, procurement teams can finally cultivate a simple buying experience for users with the assistance of an easy-to-use interface that is accessible on mobile devices, from any location, and enables users to get the goods and services they need, quickly and seamlessly.
Organizational structure
Indirect procurement may have a decentralized approach, which is managed by multiple internal stakeholders, each with individual budgets and spend protocols. Teams can benefit from the centralized structure that software solutions provide, which result in efficiency, cost reductions, and compliance.
With these core indirect procurement functions addressed, it becomes increasingly clear that a fully integrated indirect procurement solution is the secret ingredient to unlocking saving success.
How indirect procurement solutions can help you realize your cost-saving potential
With an indirect procurement solution like Fraxion, you’re equipped to streamline and manage your organization’s spend and, in doing so, maximize business savings. But where should you focus your 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 procurementspend.
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Levers to adjust:
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Rationalizing and consolidating supply bases
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Reducing consulting hours
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Controlling contract compliance.
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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.
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Levers to adjust:
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Supply base rationalization
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Controlling compliance of contracts
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Service level agreement (SLA) building
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Measuring key performance indicators (KPIs)
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Renegotiating existing contracts
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Saving opportunity: 5 - 10%
Category 3: IT services
IT services are one area businesses simply cannot operate without. Our digital age dictates that efficient business operations and functions rely on IT teams, whether they’re 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.
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Levers to adjust:
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Replacing legacy software with cloud procurement solutions
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Consolidating spend
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Reviewing volume requirements
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Renegotiating existing contracts
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Practicing cost avoidance.
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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.
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Levers to adjust:
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SLA building
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Configuring and managing budgets
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Ensuring spend authorization with multi-level approval workflows within your indirect procurement solution
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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.
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Levers to adjust:
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Operational efficiency
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Energy saving measures
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Recycling
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Low-cost or alternative sourcing such as solar panels
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Supporting local or domestic services and products
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Managing supplier approval
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Enforcing quoting policies
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Implementing policies using indirect procurement software
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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.
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Levers to adjust:
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Supply base rationalization
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Leveraging low-cost sourcing
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Reviewing volume requirements and contract compliance
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Standardizing products and/or services
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Consolidating orders to qualify for bulk discounts and reduced shipping rates
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Implementing quoting policies
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Managing policy compliance for expense claims and travel (e.g. pre-authorization) in your indirect procurement solution
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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 surefire way to navigate where you’re able to trim and save for both the short and long term.
Tracking, analyzing and reporting through your indirect procurement solution will align your efforts to your goals, and drive month-on-month, cumulative savings outcomes.
How indirect procurement solutions regulate your 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 indirect procurement solution, as an effective and clear-cut solution to maximizing savings from indirect procurement.
Fraxion’s advanced solution not only assists in streamlining your processes holistically but also helps you to save time and costs 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 and achieve cost containment goals.
Reach out to Fraxion for a customized demo for your business requirements.