Mid-size companies that excel at direct spend may be missing out on a key area ripe for savings and process efficiencies: indirect procurement.
As more mid-sized companies move to adopt new technology and turn to outsourcing for the procurement of non-strategic supplies and services, executives who are still on the fence about making a change might start by taking a closer look at the procedures they already have in place. What they’re typically finding is a piecemeal approach when it comes to their outsourced Procure-to-Pay (P2P) solution, where the Account Payable (AP) function is often outsourced as a standalone service1. This approach may offer significant cost reductions, but fails to address specific areas, such as a lack of centralization and compliance, as well as high maverick spending.
So why have companies not exerted the same disciplines for the purchases of things like office and maintenance supplies and HVAC services as they have for the products, materials, and services related to their competency? What are the reasons why managing indirect spend has become such a challenge?
Here are just few:
Since indirect spend is often siloed in functional areas or business units of a company, it’s frequently managed independently. The procurement professionals who play such a pivotal role in the product or manufacturing groups find they lack the power to control indirect spend throughout the organization.
Likewise, procurement managers may have excelled at building quality relationships with a relatively small number of suppliers of core needs, but have not or cannot create the same kind of relationships required by the significantly larger number of indirect spend suppliers, representing a dizzying number of commodities. It’s almost impossible to have category coverage and current market knowledge across all these areas.
While the actual amount of each purchase may be lower – think a shipment of paper clips vs. heavy duty truck axles – the number of procurement transactions and their frequency is certainly higher. When they are processed manually, a disproportionate amount of time and resources is devoted throughout the P2P process. Adopting an end-to-end Source to Pay (S2P) approach, however, provides organizations the benefits of having a single, end-to-end solution2 which assists in overcoming this and other key business issues. In fact, S2P solutions provide supplier management and price negotiation, e-invoicing and payment, and strategic sourcing and spend managementcapabilities. It also allows companies to install the right KPIs, such as days payable outstanding, vendor satisfaction, and invoices processed. S2P also often includes
Detailed spend analysis is also usually not available for indirect spend, partially because it’s undertaken manually and kept within the functional silo. This may be the reason companies don’t realize the true value of managing their indirect spend: they don’t know which opportunities are being missed out on because they don’t know opportunities are there. If companies became fully aware of the volume of indirect spend that’s generated – some say it can account for up to half of a company’s purchases – they may stop calling these purchases “non-strategic.”
Another reason why indirect spend is hard to evaluate is that the purchases are typically not subject to incoming inspection so there is no means of quality control and measurement. Plus, because of the nature of the purchases, delivery is usually not captured in the ERP system and key data that could be used in forecasting and analytics isn’t generated.
These are, of course, just some of the reasons why procurement professionals with mid-sized companies find it so challenging to focus on and gain control of indirect expenditures and why many of them are turning to third party solution providers. In an upcoming blog, we can take a look at other possible hindrances and what can be done to transform a splintered, manual system into one that can bring significant process efficiencies and savings.
1 Everest Group. Procure-to-Pay (P2P) Outsourcing: Unlocking Value from End-to-End Process Outsourcing. February 2013.
2 Magnus BERGFORS, Gartner, Procurement Hype Cycle. 2013.