This is the final installment of our Procurement Trends blog series: Controlling indirect spend.
The three procurement trends we covered in this series (collaboration, digitization, and analytics) all had to do with the process that can affect many aspects in procurement. However one of the most notable trends in procurement is the focus on one specific aspect: indirect spend and the ability to control it.
Few would question the ability of procurement to manage a company’s direct spend. Optimal management of direct spent is directly related to the fact that these types of expenditures on goods and services are incorporated into the product being manufactured, and is usually centralized within the procurement department itself, with controls in place that ensure accurate accruals and a well-managed cash flow.
Consequently, indirect spend is often decentralized and managed in functional areas or business units of the enterprise. These materials are often managed in silos often leaving procurement professionals feeling inadequately equipped to control this category of spend. When it comes to indirect products like stationary, uniforms, MRO supplies, laptops, and myriad other products and services; the anticipated smaller transactional cost may seem inconsequential when viewed in a vacuum. However, life, business and reality do not exist in a vacuum. Aggregating the cost of these indirect purchases from all locations, functions, and departments can lead to a shockingly high amount of uncontrolled expenditures for the business.
How high? In a report on tail spend, a smaller subset of indirect spend, consulting giant Accenture found that a billion-dollar company will waste about $15 million annually due to a lack of control. Extrapolate that amount over a company’s total indirect spend, estimated at about 20% of total company spend and the projected waste is even more daunting. What makes it more difficult to control are the numbers of suppliers involved, the proverbial 80/20 split, If you look at the percentages, 80 percent of a company’s spend is on direct spend and usually involves 20 percent of all suppliers. The exact opposite is true of indirect spend, where 20 percent of the company’s total spend involves 80 percent of all vendors.
It’s vital that this 20 percent of expenditures be controlled, but the sheer number of vendors and the amount of paper and manual effort needed to gain that control has often been declared to be too costly for the business. That assertion has started to change with the growth in automated financial solutions entering the market, including P2P solutions that specifically targets indirect spend. This growth has created a virtual sea change in the industry. These procure-to-pay solutions strengthen the procurement and AP collaboration, ensure contract compliance by validating pricing and terms across the organization, increase visibility to both internal and external stakeholders, enforce budget accuracy, eliminate manual errors, and maximize cash flow. Gartner observed the growth of these solutions, stating that they “witnessed a 67% increase in end-user inquiry on the subject from January through August 2015 compared with the same time period in 2014.”
While accuracy and compliance are key benefits of implementing an indirect spend automation solution, there are additional benefits to consider. One is the new role that both procurement and AP can play as strategic players helping the enterprise achieve its financial and process improvement goals. The other is the good will and trust that will be cemented between vendors and customers due to everyone having access to verifiable information at any time; that means less disputes, faster payments, and potential captured discounts.
The question shouldn’t be “if” you should implement an automated solution to help control and manage your indirect spend; the question should be “when.”