Three Reasons It's Time to Pay Attention to Your Indirect Procurement Strategy
By Hugo Britt | August 10, 2021
You know that feeling when you keep putting off a task, even though you know it has to be done? For me, at present, it’s doing my taxes. I think about them multiple times a week but just can’t summon up the energy to sit down and get the job done.
For many CPOs, one of the biggest tasks they’ve been putting off is coming to grips with their indirect procurement strategy. They know it has to happen, they know the benefits make it worthwhile, but they somehow manage to keep delaying the project for months on end.
3 Reasons to Pay Attention to Your Indirect Procurement Strategy
In this article, we share three reasons why now is the time to pay attention to your indirect procurement strategy, and hopefully motivate you to roll up your sleeves and get started.
1. The cost savings are significant
Indirect spend typically accounts for 15% to 30% of an organization’s total spend. That’s a massive chunk of business spend to attempt to manage via procurement policy and crossed fingers.
McKinsey also revealed that tackling indirect spend can slash product and service costs by 10% to 25%, and reduce the manual effort involved in supplier governance by 30% to 50%.
Procurement professionals can take weeks or even months negotiating with strategic suppliers in an effort to drive direct procurement costs down by just 1% to 2%. Yet at the same time, they let much more than this go down the drain in the form of indirect costs.
Factors that drive up indirect costs include duplication, inefficiencies, maverick spend, automatic price increases, and automatic contract renewals.
2. The risk is getting harder to justify
Again, it is worth comparing the huge efforts procurement professionals go to in terms of managing and mitigating direct procurement risks compared with indirect procurement. Direct suppliers are often subjected to weeks of due diligence, credit and legal checks, and ongoing monitoring in an effort to reduce risk. Yet up to 25% of spend is only guided by policies that non-procurement professionals may be too busy to follow.
This leaves an organization open to risks in indirect categories, such as:
- Reputational risks
- Ethical and compliance risks
- Cybersecurity risks
- Operational risks.
The solution? Indirect spend visibility.
Bringing all indirect supplier data into a single repository will enable you to monitor for risks (with the help of automation and AI) and set up red flags that will allow the procurement team to take immediate action if required. In a decentralized spend environment, a red-flag system will mean the procurement team can step in when a purchaser has made a risky decision.
For example, somebody booking corporate travel accommodation might choose to ignore the recommended options and book a hotel room in a dangerous area – perhaps in a misguided effort to save the company money. The system could flag this with procurement, who can get in touch with the purchaser to discuss the issue and potentially override the purchase.
3. Technology has made it easier than ever
For a long time, the biggest factor holding procurement teams back from developing an indirect spend strategy has been the manual work involved. But technology has caught up. There are plenty of procurement software solutions on the market, many of which specialize in managing indirect spend, collecting and analyzing data, and providing recommendations to support decision-making.
Automation can make the management of indirect spend a breeze, but there will be still a lot of manual work to be done in terms of change management. It can be hard convincing stakeholders who usually pick up the phone to order something to start entering it into a procurement system instead. But if you can nail the change management and implementation aspect, you’re on the way to significant indirect savings and risk reduction.
If you are overwhelmed by the number and variety of software options available, a great place to start is to attend a procurement conference and talk to the exhibitors there about your needs.
Una can help formulate an indirect procurement strategy
Want to tackle your indirect spend but don’t know where to begin? Why not start with some massive cost savings?
As a group purchasing organization, Una can undertake a data analysis of your indirect spend, category by category, to identify opportunities for immediate cost savings through the power of collective buying. From there, we’ll connect you with pre-negotiated contracts with top suppliers.
Contact us to learn more!