Direct versus Indirect spend – not an issue for some procurement organisations?

I don’t often disagree with my business partner and friend Jason Busch, but something he wrote recently did have me shaking my head and murmuring ‘really’?

In this excellent post for Spend Matters US, he talked about how ‘indirect’  procurement, particularly those areas related to 'buying people' in some sense, is finally coming  to the fore after being neglected or seen as a second class citizen for years -  “Yet to date, the vast majority of dollars and time invested by procurement organizations in talent, processes and technology has focused on approaches to better managing the acquisition of goods, not people.”

Now this was driven largely by the recent SAP acquisition of Fieldglass, so he was really arguing the case that this move will drive greater focus on indirect spend, including of course the core contingent labour category that Fieldglass largely addresses.  But whilst I agree that this move will increase the focus,  his analysis of the past is, I’d argue, only partially true. There’s no doubt that for manufacturing, construction or related types of firms,  direct spend areas (the materials that form part of the finished product) were generally and historically the first to be subjected to professional procurement and supply chain disciplines and technology.

Many of those firms do look at indirect spend as well these days. But at the recent ProcureCon Indirect conference it was clear, for instance, that procurement functions in many manufacturing organisations were still at the relatively early stages of even gaining influence over indirect spend, let alone being able to apply leading procurement practices.

However, what Jason didn’t say is that for many organisations, the distinction between direct and indirect spend is not as clear as it might be for a manufacturer. Indeed, we might argue that there is no such thing as ‘direct’ spend for these organisations. Some physical goods are purchased, but what is normally termed indirect spend has been the centre of attention for many years.

My sensitivity to this is driven by my personal cv, of course. Whilst I started out in food manufacturing (nine years with the Mars Group), I was then CPO for three large, services based organisations – the D&B Corporation (Europe), a large UK government body (the Department of Social Security), then the NatWest Banking group.

In none of those was there a clear manufactured ‘product’ and therefore the direct / indirect split just didn’t happen. The most important spend categories arguably in NatWest were around IT and outsourced business process services. Marketing would have been pretty high on the priority list too. In the government department, IT again, outsourced medical services, perhaps even estates and facilities contracts, all had the core strategic, business importance that gearboxes might have to Ford or Toyota.

In fact, contingent labour was one of the top three spend categories at NatWest, because all new staff in operational roles came in first as ‘temps’ and then were transferred to permanent after a while if we liked them / they liked us. So we might almost have argued that was a ‘direct’ category, and certainly there contingent labour was in no sense a second-class citizen.

And of course, services-based markets and industries have been the major economic growth engine in developed countries for some years now. Whether we are looking at health and social care, business services, consultancy and legal services, hospitality and entertainment, banking and finance, sports and leisure, travel and tourism...   all growing sectors where it is hard to define a manufactured product and therefore the ‘direct’  spend.

So whilst Jason’s analysis holds for manufacturing, I don’t think ‘indirects’ have suffered from a lack of focus in those industries where they were, and are, the very core of procurement activity. But he is right in that developments such as the SAP / Fieldglass deal will emphasise even more strongly how important the 'indirect' spend areas are for many organisations.

Voices (3)

  1. Dan:

    I’m still astonished that people still talk about direct and indirect in a world where Kraljic’s matrix is such a basic part of the profession and ‘indirect’ items can be a higher risk – and therefore more important – than some ‘direct’ items.

  2. bitter and twisted:

    But what that means is that direct/indirect is an unhelpful dichotomy.
    If ‘expensive specialised oil extraction equipment’ and ‘office janitorial servicesk are both ‘indirect’ then the term has no use.

  3. Ian Heptinstall:

    How about the Oil & Gas sector? Whilst important, the “raw materials” part takes very little of the procurement team resource – usually long-term licences from state governments. The very large procurement teams buy mostly indirects (MRO & projects), and services are usually the largest part of the external spend.

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