Is indirect spend management on the verge of a significant step change? Indirect spend has always been very much the poor relation to direct (or ‘strategic’) spend, in many cases almost an afterthought. And that was fine.
Or it was understandable, at least. If 80% of your spend is going on strategic purchases like raw materials, you want to be really sure that your procurement of these is as efficient and cost-effective as possible. Getting these materials quickly and for the best possible price will improve your turnaround time and increase the profit margin on your end product, after all.
Direct spend has a direct impact on product and service quality, price and availability, all things that no business on earth can afford to ignore. So it has always made sense to focus on getting this right… although perhaps not at the exclusion and oversight of all other corporate expenditure.
And that is perhaps why the issue of indirect spend is rising up the corporate agenda.
As direct spend reaches the limits of optimization, thanks to increasing digitalization and automation, more and more organizations are looking at how to drive procurement efficiency in other parts of the business.
Indirect spend is increasingly being placed under the microscope, in order to identify and achieve the cost efficiencies that CPOs are prioritizing this year. A recent study by Aberdeen Group highlighted how 70% of procurement executives aiming to control and reduce costs cited indirect spend as a key area of focus in their business.
Attracting particular interest in this quest for savings is the long tail of indirect spend, or ‘tail spend’, which has traditionally been an inevitable and unavoidable burden for procurement leaders, causing up to 20% of overlooked savings due to poor supplier management, contract negotiation and maverick spending.
This 20% of spend is largely or entirely unmanaged. Waste and inefficiency within this segment of spend is rife. But with the increasing availability of, and role played by, cloud software solutions and innovative technologies, effective Tail Spend Management is no longer hard to achieve.
Companies are now able to identify, evaluate and manage their unmanaged, unstructured spend across their entire supply chain. And they are increasingly doing so. Spend Matters claims managing indirect services spend could well be procurement’s greatest opportunity.
“Improving procurement across indirect services categories offers significant opportunities for savings,” it says. “However, data, tools and capability must be carefully chosen to meet the specific needs of these spend categories.”
In the UK, lack of progress on improving indirect spend management within government procurement has become a political hot potato.
Meanwhile the Indirect Spend Summit held in Orlando, Florida, this February drew attendance from more than 650 professionals representing over 50 companies and 150-plus suppliers.
Growing awareness of the importance of indirect spend management is part of the reason why “the procurement function is changing, and fast,” according to Brian Miller, vice president of services at Intesource.
“A sourcing approach should be holistic in nature, tackling direct and indirect spend, simple and complex categories, and should be aligned with the overall strategy of an organization’s business,” he says.
This more holistic approach is evident in the way tail spend is referenced by consultancy firms such as Deloitte, which now touts the benefits of better indirect materials sourcing in the same breath as direct procurement.
All in all, then, it appears that indirect spend is finally getting the attention it deserves. True, indirect spend may only be a minor item compared to some firms’ direct procurement expenditure. But it still amounts to a significant portion of an organization’s budget.
In fact, dependent on sector and industry, indirect spend can account for up to 75% of an organization’s overall spend. Some enterprises, therefore, will undoubtedly be keener to get control of their indirect spend than others due to the vast amount of spend that falls into the indirect category.
And more importantly, until recently this portion has been largely unmanaged and unmonitored, making it a fertile ground for inefficient purchasing practices, fraud and waste.
Organizations that aspire to the efficiency of a Size Zero enterprise now realize the issue of indirect spend management cannot be swept under the carpet. The tools needed to combat maverick spending, fraud and inefficient purchasing processes are now readily available and easy to deploy.
All that is missing is the will to put indirect spend under the kind of scrutiny previously reserved for direct procurement. Come the revolution, that too will change.
Contact an Enterprise Solutions Manager today to discover how blur’s cloud software and managed services platform will help your organization to get control of its indirect services spend and achieve significant savings.