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A Simplified Approach to Indirect Spend Management

11/29/2018 By

The consequences of poor indirect spend management can be costly — overspending, lack of visibility and control, and too many suppliers doing too little.

Having poor visibility into your indirect categories means you have no real understanding of your actual spend, cash flow and working capital status. This can lead to an inability to apply cash to the business when needed. Additionally, CFOs often significantly underestimate indirect expenditures. The reality is the lack of visibility into what you are spending day-to-day can be up to 40% of your total spend.

Indirect spend includes expenditures on everything consumed by internal stakeholders, including professional services, IT services and equipment, printers, uniforms and office supplies. When it comes to capital expenditures, direct spend and payroll, there is typically more organizational oversight and focus. The same type of diligence can be applied to indirect spend through a combination of spend visibility, improved technology, compliance and supplier management strategy. This allows you to get control of your tail spend and reduce the rogue elements that are freely spending without oversight.

Spend Matters, in its study “Fix the Tail to Propel Procurement: Attacking the Tail Spend Problem in B2B,” states that 35% of respondents identified managing tail spend as a major priority, noting: “The biggest problem based on total economic value is that, on average, procurement professionals spend the majority of their time on the 80%-90% of the suppliers that represent less than 5%-10% of spend and business value.”

4 steps to help gain control over indirect spend:

1. Consolidate indirect spend into key categories and suppliers.

By aggregating the needs of all departments into fewer orders with preferred suppliers, indirect procurement can implement company-wide contracts that will allow for benefits such as volume discounts, favorable contract terms and more attentive suppliers.

2. Educate employees on indirect spend.

By adding and monitoring some general performance metrics, managers of indirect spend can measure contract compliance, customer satisfaction and cost competitiveness, as well as promote continuous improvement.

3. You can’t fix what you can’t see

Using technology that provides real-time visibility into all transactions to the line-item level is key to ongoing spend visibility and management. Then, and only then, will procurement be able to truly evaluate all spend, providing the ability to manage it properly. That knowledge, along with analytical capabilities, will enable better decision-making from all stakeholders.

4. Complacency is the enemy.

Once procurement has created this consolidated list does not mean the job is over. It is just as easy to become complacent with a smaller list of suppliers as it is a larger one. And it is not just procurement that can get complacent. If a supplier feels overly confident with your continued business, it may focus on getting new business instead of growing yours. So procurement should always be challenging complacency by consistently looking at their suppliers’ performance, pricing and services to identify areas of continuous improvement. Having a clear view of current market conditions, and your suppliers’ place in that market, will ensure that you have optimized your supplier relationships as well as the money you spend with them.

A procurement team is tasked with managing and controlling indirect spend. But if you don’t look at the whole picture, you will find yourself focusing on the wrong things with too few results. By improving your approach through improved process, visibility, technology and supplier management, you can find savings you never knew were there while providing true impact to the bottom line.

Discover how a strategic digital approach to procurement can result in greater visibility into your spend. Download the Corcentric white paper, Defeating Dark Purchasing.

Sean Bliss is Corcentric’s vice president of procurement services.