Procurious on Direct and Indirect Spend – Yes, It’s a Useless Definition for Procurement

A recent blog on the Procurious website by Jordan Early asked whether the classic Direct and Indirect spend definition is a useful classification for procurement. (By the way, he sounds like a cool sort of guy - “When I'm away from the wonderful world of procurement I enjoy surfing, snowboarding, running and playing guitar.” Yeah, you and me both, Jordan ...)

He finds a CIPS quote on the topic;

The CIPS definition suggests that “As direct materials usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups” ...

Jordan suspects this might not be correct - well, I can tell him without any hesitation that in this case, CIPS is making a huge generalisation and is frankly talking rubbish. And the answer to his question about whether the direct / indirect spend classification has any value is one word – NO.

The whole concept of direct and indirect comes from the financial world, where it has some merit in terms of calculating costs and determining pricing strategies for products. Procurement adopted it back in the dark ages when I first entered the profession, purely because we hadn’t really thought of other ways of classifying spend and looking at what was useful to us (pre Kraljic days, for instance). But really, it is a useless demarcation or definition as far as procurement is concerned, for reasons that include;

  • It does not tell us which spend items or categories are important for our organisations – indirect can be more important in many cases.
  • It does not tell us anything about how we might approach the market or suppliers.
  • It does not tell us anything about the procurement processes or techniques we should use.
  • It does not tell us anything about stakeholders – the same people may well be of interest to us across both.
  • It does not tell us how difficult categories might be to handle, or how much effort or priority we should put behind different spend areas.

So it is useless. We should ban all mention of “direct and indirect” from procurement literature as far as I’m concerned. And one final clinching factor. I was CPO in two huge organisations; a major UK government department, and an international financial services giant. In neither case did our multi-billion pound spend have anything that could be traditionally defined as “direct spend.”

That certainly did not make procurement any less important or strategic, I would argue. We could have argued that IT was pretty “direct.” Or property maybe? Or what about “welfare to work” services in the government organisation? But even thinking about that highlights how pointless the exercise is. What difference would it make whether I had defined IT as “direct” or “indirect”?

So well done to Jordan, you hit the nail on the head, and it is an interesting topic (we will return to it, I’m sure). But let’s ditch the terminology.

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Voices (4)

  1. Jordan Early:

    Thanks for the mention Peter. I post I saw on LinkedIn yesterday provided some more fodder for this argument. Uber, the worlds largest taxi service owns no cars. Facebook the worlds largest media outlet creates no content, airbnb the worlds largest accommodation network owns no hotel rooms, alibaba holds no inventory etc etc.

  2. RJ:

    Totally agreed but not to be confused with the differences in retail buying between “Goods For Resale” and “Goods Not For Resale” which I would argue is a very useful distinction.

  3. bitter and twisted:

    Splitting something in two is analytically pointless, but bureacratically excellent. Another level in the hierachy. An extra pair of senior roles. Trebles all round !

  4. Paul@Provalido:

    Interesting article, but I’m not sure ditching the terminology is a great idea. You have to start a category hierarchy somewhere and for most manufacturing companies, having directs & indirects as the first tier makes a lot of sense, as it separates direct costs and overheads.

    I agree that direct vs indirect doesn’t affect the way we approach the market, and I’m certainly of the belief that the required skill-set is pretty much the same for both (stakeholder & supplier management, analytical skills, market knowledge etc.) but this doesn’t mean the classification doesn’t have use from a procurement reporting perspective.

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