5 Tips for Managing Indirect Spend
Cost control is not just a priority anymore — it’s a necessity for sustainable growth. With prices on the rise and the fact that indirect spend can account for 25-40% of your company’s budget, ignoring the impact this spend can have on your bottom line is not an option. Yet due to resource constraints, limited expertise, or even a lack of awareness, the hidden opportunities within indirect spend are often overlooked.
In this blog, we'll share 5 practical tips to consider as you manage your indirect spend.
1. Get Insight into Your Spend
Analyze and document your current indirect spend situation. This initial analysis will provide a baseline for improvement, identify areas of opportunity, and help to prioritize your efforts.
Recommendation
Collect and Consolidate Spend Data: Aggregate and analyze at least two years' worth of data from your various source systems (i.e. ERP, e-Procurement, Purchase Order, Travel & Expense Card, Purchasing Card, and Contract Management etc.).
Prepare a Spend Dashboard: Create a consolidated spend summary presented in an easy-to-interpret dashboard highlighting key metrics important to your specific business.
Pro Tips for Success
Data Cleanse: Be sure to cleanse your data to eliminate errors and supplier duplication.
Align Opportunities with Company Goals: Ensure that opportunities presented in the spend dashboard are in alignment with your company’s goals. This will ensure you’re directly contributing to the company’s overall success.
Data Analytics: Utilize data analytics tools and processes to uncover trends, patterns and anomalies. Ensure accurate interpretation and analysis of the output to make sound decisions.
2. Craft Your Approach to Category Management
Determine how you’ll manage each of your spend categories. These different approaches can directly impact elements of your procurement strategy so it's important to select the approach that aligns most effectively with your company’s requirements.
Recommendation
Categorize Your Indirect Spend: Group your indirect spend into meaningful categories (i.e., IT, Marketing & Advertising, MRO (Maintenance, Repair & Operations), Professional Services, Legal, Facilities Management, Insurance & Financial Services, Travel Management, HR Services & Office Supplies) and define clear criteria for distinguishing between strategic and tactical suppliers.
Develop a Category Management Framework: Consider a comprehensive process that encompasses category planning, supplier segmentation, strategy formation, governance and performance management.
Pro Tips for Success
Allocation of Resources: Category Management requires dedicated resources. Allocate personnel based on the complexity and importance of the categories. Different categories often require different expertise. Having subject matter experts can lead to better decision making and optimized strategies.
Supplier Relationships: Identify those supplier relationships critical or strategic to your business. These are the suppliers whose performance directly impacts your business outcomes.
Organizational Alignment: Ensure the objectives of each category align with your procurement and overall organizational strategy and objectives.
3. Create a Culture of Informed Spending
Manage your spend pro-actively. A significant issue with indirect spend is that most of it is done by non-procurement employees on behalf of the company. We cannot fault uncontrolled spending if there are no policies or procedures in place. It’s important to realize that just wanting employees to make informed spending choices doesn’t happen automatically.
Recommendation
Create Procurement Policies, Procedures & Training: Develop clear procurement policies and procedures and make them easily accessible to employees when they need to make purchasing decisions. Create and perform training on an on-going basis as well as whenever a new policy or procedure is implemented.
Secure Buy-In from Top-Level Executives and other Departments: Ensure that indirect spend is prioritized at the top level of the company so that the necessary resources can be allocated. Collaborate with other teams like finance and legal to ensure alignment and support.
Pro Tips for Success
Continuous Education and Awareness: Training should be an ongoing process. Consider offering regular workshops, webinars, or online courses to keep employees updated on purchasing policies and procedures. Encourage open communication channels for questions and concerns.
User-Friendly Documentation: Ensure procurement policies and procedures are clear, concise, and easy to understand.
4. Understand Your Contractual Commitments
Implementing a contract management process is pivotal for companies aiming to gain control over their indirect spend. Let's face it – it's all too common for companies to lose track of critical contract details. By proactively managing the lifecycle of contracts, organizations can both trim costs and protect themselves from unforeseen financial and operational vulnerabilities associated with indirect spend.
Recommendation
Centralized Repository: Locate all your supplier contracts. Create and maintain an organized central repository.
Critical Contract Data: Every company has unique procurement processes, contract types and compliance requirements. Track the critical contract details important to your organization. Ensure you have the control and flexibility to add or remove details as your business changes or grows.
Contract Management Systems: Consider implementing a contract management system. While end-to-end contract management systems offer comprehensive solutions for many companies, it's crucial to remember that one size doesn't fit all. The key is to choose a solution that aligns with your organization's unique needs and capabilities.
Pro Tips for Success
Use Contract Management to Level Up Your Contracts: A contract management solution can help incorporate additional relevant information into your contracts. For example, if sustainability is important to your company, you can add a field to your contract management tool to track supplier commitments to reduce carbon emissions, use sustainable materials, or adhere to ethical labor practices. Incorporating this field in your Contract Management tool will let you easily see which contracts have or don’t have sustainability commitments.
5. Leverage KPIs, Benchmarking & Feedback Loops
Utilize KPIs, benchmarks and continuous improvement. To steer your company towards enhanced performance and success, it’s imperative to have a compass guiding you towards your goals (KPIs), strategic inspiration (benchmarks) and a systematic effort of improvement (continuous improvement).
Recommendation
Define and Track KPIs: Track key KPIs such as cost savings, supplier performance, compliance rates, and process efficiency to guide you toward your goals and ensure accountability.
Benchmark your Company’s Performance: Use industry benchmarks and best practices to identify areas where you shine and where there's room for growth. Benchmarking isn't about imitation; it's about strategic inspiration, sparking innovation and continuous improvement.
Continuous Improvement: Establish mechanisms for gathering feedback from stakeholders, measuring the impact of changes, and adapting data driving decision making. By establishing these mechanisms, you enable your company to swiftly adapt its strategies based on results. This iterative approach will help you fine-tune your strategies and guide your continuous improvement efforts.
Pro Tips for Success
Select Relevant KPIs: Choose Key Performance Indicators (KPIs) that align with your company's specific objectives and pain points. Tailor them to reflect your unique procurement challenges and goals, rather than relying solely on generic metrics.
Real-Time Monitoring: Aim to track KPIs in real-time or near real-time whenever possible. This allows for immediate identification of issues and the ability to take corrective action promptly.
Benchmarking Applicability: Adapt benchmarks to your specific circumstances. Benchmarking can be insightful, but blindly applying industry benchmarks without considering the uniqueness of your company’s operations and objectives may not yield accurate or relevant insights.
Continuous Improvement: Based on the analysis of KPIs and benchmarking results, identify where improvements can be made.
In conclusion, effective management of indirect spend is a vital component of optimizing your company's financial health and achieving long-term success. It is not a one-time effort, but an ongoing journey towards financial efficiency and strategic excellence. Managing indirect spend requires cross-functional collaboration, subject matter expertise and organizational alignment. A proactive approach to this facet of procurement will provide those companies with a competitive advantage.
