Indirect Procurement Quick Reference Guide
Highlighting indirect procurement, why it’s important, how to bring it under control, and common mistakes to avoid.
Your Quick Guide to Indirect Procurement
Indirect procurement is an essential part of an organization’s sourcing function. Far too often, however, this portion of spend is left unmanaged leaving companies at risk and money on the table.
We’ve put together a quick reference guide that defines the concept, explores the challenges involved and mistakes to avoid, and shows how a group purchasing organization (GPO) can help you bring your indirect spend under control.
In This Guide:
What is Indirect Procurement?
Indirect procurement (or indirect spend) refers to the purchase of goods and services that do not become part of an organization’s final product or service. Generally, this means anything necessary for day-to-day operations like shipping, office supplies, IT software and support services, travel expenses, warehousing, facilities maintenance, utilities, and more.
By contrast, direct spend refers to purchasing the things that go into the products or services a company creates. For example, a book printing company would regard the procurement of paper stock, inks, binding thread/glue and any other raw materials that go into a book as “direct” spend.
Why is Indirect Procurement Important?
Two reasons: cost and risk.
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%.
Factors that drive up indirect costs include duplication, inefficiencies, maverick spend, automatic price increases, and automatic contract renewals.
A lack of focus on indirect spend means that most organizations are exposed to increased risk across those categories.
Direct and strategic suppliers are often subjected to weeks of due diligence, credit and legal checks, and ongoing monitoring in an effort to reduce risk. Yet typically, 15% to 30% of spend is only guided by policies that decentralized buyers 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.
How to Bring Indirect Procurement Under Control
There are several strategies for brining indirect spend under procurement’s control.
Leverage procurement technology
Not long ago, indirect spend was seen as too big, too complex, and too unwieldy to bring under any sort of meaningful control. Procurement teams had to be content with establishing policies and encouraging buyers across the business to follow them.
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.
Focus on change management
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.
Increase indirect spend visibility
Bringing all indirect supplier data into a single repository will enable you to spot trends, identify cost savings opportunities, and monitor for risks.
Address maverick spend
If you have serial mavericks in your organization who constantly ignore procurement processes, one of the most valuable things you can do is to have a chat with them to find out why. Reasons may include unclear processes, hard-to-use software, or a lack of awareness/education.
Indirect Procurement Mistakes to Avoid
At Una we’ve seen lots of inspiring success stories, but we’ve also seen a lot of mistakes made in indirect spend.
Here are six common mistakes to avoid:
- Downplaying the importance of indirect spend
- Failing to track indirect spend
- Not managing risk in indirect spend
- Neglecting indirect supplier relationships
- Failing to get the whole team engaged
- Trying to tackle indirect spend alone
How a GPO Can Help
Want to tackle your indirect spend but don’t know where to begin? Why not start with some massive cost savings?
A GPO will help balance your indirect procurement and reduce supplier risk while saving you money, time, and effort. This is achieved by leveraging billions in buying power to unlock savings for indirect categories including travel, office supplies, shipping, and more.
Contact Una for an obligtion-free chat about how we can help you master indirect procurement. You can also use our free cost savings calculator tool to see how much you could be saving by partnering with Una: