“Saving money” is usually the quick, ready answer that executives give when I ask them what drives their indirect spend management objectives.
The truth is that most businesses fail to give spend management the strategic consideration it warrants. They may not have identified or communicated any objectives other than cutting costs as much as possible for the products and services they need to run their business. It’s the true reason most businesses fail to control their indirect spend in a meaningful, sustainable way. It’s also the reason why they miss out on readily-available opportunities to improve the company’s bottom line.
Obstacles to reducing indirect spend
We find the same operational and cultural issues keeping most organizations from being able to manage their indirect spend, and doing so in a way that doesn’t hinder operational effectiveness or reduce employee satisfaction.
Indirect spend expenses are spread across various divisions and departments, and typically there is little input from procurement during the budget process. De-centralization becomes a bigger issue for multinational organizations, operating from various locations around the globe. The growing trend of mobile and remote workers also exacerbates spend management issues and contributes to the next common obstacle.
Indirect spend is difficult to understand and monitor because organizations often have little visibility into their actual expenditures across categories like IT-related expenses, office products, fleet management, marketing costs, travel and more. Expenditures across many of these categories is very difficult to understand and monitor because of “shadow” procurement, which is buying done by employees outside of procurement or other authorized buyers.
It may seem more efficient for employees to buy now and expense it later, especially for small-ticket items like office supplies. Sometimes it’s the most practical solution, or it’s the only solution as companies have cut back on support staff, leaving employees to do some of their own sourcing, such as travel arrangements.
At the same time, this kind of maverick, off-contract purchasing is not incorporated into a business process. The spend data is incomplete, and instead of being linked to appropriate spend categories, it’s linked to accounting or expense codes – which means category spend is not accurate, volume is not aggregated and leveraged, and wasteful spending occurs.
Lack of cohesive spend data
This obstacle is closely linked to off-contract purchasing. While procurement technology is making inroads, many organizations have not fully automated their procurement process, relying on mostly manual processes like spreadsheets. In addition, indirect spend management is a process itself, with many different parts. Contract management, data monitoring and analysis, vendor knowledge, current market awareness based on benchmarking – these are all part of the process needed to gain visibility and control over indirect spend management.
Lack of collaboration between procurement and user groups
Indirect spend offers procurement the opportunity to add value to the organization and strengthen their role by collaborating with, and guiding the decisions of the department heads responsible for budgets and business decisions. There is a lack of understanding on both sides. Procurement officials fail to understand user requirements and priorities, and users fail to understand the importance of vendor relationships and procurement processes. The common perception most employees have of purchasing is that of a time-consuming gatekeeper concerned with the lowest price and nothing else. All that’s needed to knock down this obstacle is bringing procurement and department heads closer together, on a regular basis.
Indirect spend given low priority
Indirect spend does not get the respect it deserves as a financial tool. The products and services it covers are viewed as a “necessary evil” and not given much thought until the numbers stop making sense are start adding up, which happens when you multiply thousands of purchases over time and small-ticket items turn into big expenses.
When indirect spend is given low or no priority, companies miss out on opportunities to save, such as:
- Aggregating spend across categories.
- Improving vendor selection and management.
- Negotiating the best terms and conditions across all major spend categories.
- Monitoring contract compliance.
Even in organizations with stated spend management objectives and initiatives, the actions they take do not always lead to the desired results. For example, many prospective clients tell me they have negotiated great savings across all their vendor contracts, but when I follow up with questions, I help them realize that contract pricing negotiations are not enough.
Why? First, successful contracts involve terms and conditions other than pricing. Second, companies are rarely vigilant about all their indirect vendors and all their contract vehicles. In fact, contract management is another area with great improvement potential.
Finally, the prices that are negotiated are not always the prices that are billed. We spot numerous examples of this across virtually all our clients on a regular basis, and research shows that contract non-compliance is common. Accenture estimates that up to 30% of negotiated vendor savings are never realized due to factors like poor internal controls on the buyer side and pricing discrepancies on the vendor side.
Cutting costs is worthwhile, but it’s not the whole indirect spend picture and it should not be the sole driver behind spend management objectives. Profitability, cash flow, operational effectiveness, worker satisfaction, business growth, competitive advantage and other big-picture goals are examples of drivers that should guide spend management goals and objectives.