6 successful tactics for efficient indirect spend control

Being largely overlooked in the past, indirect spending has started to receive due attention from senior procurement management. It’s not surprising as, on average, indirect spend equals 50 percent of a company’s purchases. With a proper approach and well-planned strategy, companies are expected to achieve as much as 25 percent of savings, improve the quality of products and services they provide and strengthen their business operations.

Keep reading to find out simple tips that will help you get your indirect spending under control and ensure long-term business success.

What is indirect spend?

Indirect spend refers to purchasing goods and services that aren’t a part of an organization’s final product or service. Unlike direct spend, which describes what then becomes a manufactured product, indirect spending plays a supporting role and is meant to ensure you have everything to run the business successfully.

Here’re some of its most common categories:

Technology subscriptions, e.g., NetSuite, Slack
Marketing, e.g., advertising, content marketing
Utilities, e.g., water, electricity
Facilities, e.g., security and cleaning services
Office supplies, e.g., laptops, personal computers
Professional services, e.g., consultancies, advisors
HR services, e.g., recruitment, training
Travel and transportation

Why you should care about optimizing indirect spend management

According to the Critical Issues Report, the percentage of indirect spend varies from 35 percent to 60 percent of all business expenses. Being a large part of a business budget, indirect procurement significantly impacts an organization’s long-term success. It’s especially critical for fast-growing companies, as when the company expands, there’re more vendor contracts, data and purchases, so the costs can quickly spiral out of control.

That’s why paying more attention to the quality and value of products and services that fall under indirect costs is essential, as it can:

Strengthen your company’s operations.
Improve the quality of the products and services you provide to customers.
Reduce the risks of expenses quickly getting out of control.
Develop more strategic supplier relationships.
Reduce costs and more.

Six successful tactics for efficient indirect spend control

By making a few adjustments and focusing on high-cost areas, your business can achieve significant savings and avoid costly contractual issues. Let’s see what can be done.

Categorize your indirect spending

Before creating a clear plan for reducing indirect costs, you must first organize the information you will work with. Take the time to review and categorize your organization’s indirect spending across all locations and departments. Group items and identify key suppliers for each category.

Perform an in-depth analysis

Review your purchase history and determine the most high-cost categories and in which areas potential savings are possible. Answering the following questions may help you with performing your indirect spending analysis:

What does each department spend the most money on?
What suppliers do we work the most with? Are contract conditions fulfilled, and are they beneficial to us?
How effectively are we spending?
Are there any saving opportunities?

Prioritize areas that account for a high proportion of your indirect spending budget and those that impact your company’s ability to deliver products and services to your customers. For example, manufacturing businesses spend the most on transportation services, repair and maintenance. For the healthcare industry, it may be insurance, IT and training.

Continue with supplier management

Once you conclude the analysis, the next step will be to review the vendor relationships that don’t deliver the desired value. It doesn’t mean you should necessarily start finding new vendors. Quality improvement and cost reduction can often be achieved by re-engaging with your existing supplier. Thoroughly review the contracts that govern the service or product delivery. Are there any unexpected restrictions that drive up costs or limit service, e.g., termination charges, automatic price increases or contract renewals? Collect the information, identify room for improvement and you’re ready for the next step.

Renegotiate the terms

If you found contractual elements you’re not satisfied with, it’s time for renegotiation. The key here is to find the middle ground, meaning you probably don’t want to ruin the supplier relationships by forcing conditions favorable only to you. Still, you do want to find the best mutual interest and ensure that your business isn’t overpaying.

Ask whether the vendor is willing to adjust the terms, e.g., payment conditions. If the contract contains year-to-year price increases, go for a price stabilization or gradual increases tied to an accepted index rather than a fixed percentage. If you see that the specified payment timeframe is too short, it’s not uncommon to prolong it from six weeks to 120 days. Remember, the small contractual changes may have a significant long-term impact.

Educate and collaborate

One important thing to remember is that people always come first, so don’t forget to build trust with your business stakeholders and involve them in setting new policies and procedures. It will help you manage the indirect spend and create value for all teams within an organization.

Educate your stakeholders on the importance of following indirect procurement procedures and seek feedback. Don’t assign all the indirect spend tasks to junior procurement professionals. Make them collaborate with senior management and train them on supplier performance requirements, contract compliance, cost-effectiveness, etc. With proper communication and trust, controlling your expenses will require much less effort.

Get spend visibility and control with the help of technology

With an advanced reporting system and real-time document status visibility, you always know at what stage of the procurement process your purchases are, how much you spend and what suppliers you choose.

Data accessibility is also what helps find savings and cost reduction opportunities, as well as track supplier performance. Automating standard purchasing operations, such as data entry, document creation and approval workflows and gaining complete visibility help thousands of companies get their expenses under control.

Check out our last Spend Matters article to learn more about choosing the right e-procurement software for your business and how to overcome its adoption challenges. Or visit our website to see how you can quickly and effectively fulfill your procurement needs in one easy-to-use platform.