Indirect spend – the last free money on the table

By Ilija Ugrinic, Commercial Solutions Director at Proactis

Turbulence. Uncertainty. Instability. Words that have been used repeatedly to describe the challenging circumstances that businesses have faced over the last three years. And at the start of this new year, there are echoes of more ringing in our ears. Turmoil. Recession. Crisis. We’re entering yet another period where companies are being put under considerable pressure – both to be competitive and to fight for their place in the market, as well as to be good value for customers, and prove that they’re worth the hard-earned cash that their products and services demand.

During these times, part of a company’s worries can be that feeling of lack of control. With inflation causing prices to rise, and customers watching their wallets, confidence in business projections can falter. Afterall, there is only so much a business can pass higher costs on to their customers before they start to lose them altogether.

So, with the UK now entering recession, finance teams nationwide are turning their attention to finding out where savings can be made to streamline their business and increase its efficiency. But as they do so, there might just be one chronically underused tool in their arsenal that can help them achieve material results.

Indirect spend – otherwise known as indirect procurement – is an employee-driven spend that can be difficult to have oversight of as frequent low volume purchases, such as office pens and supplies, are made from different departments across the business, from a wide range of suppliers. What’s more – and perhaps what can contribute the most to the lack of interest in this area of business finance – indirect spend doesn’t directly influence future sales. It’s often only really paid great attention to when something goes wrong.

It can be one of those inconvenient realities for CFOs; it’s an essential spend, but with limited oversight and transparency as to how much is being spent, and when, reducing it can feel difficult to achieve. And as it can, for some businesses, make up a considerably smaller portion of a company’s outgoings than direct spend, it’s often dismissed as something that won’t have any sizeable impact on the bottom line. But estimates are that a mere 5% reduction in indirect spend can result in a 1-2% impact on the bottom line – a margin that would be significantly harder to achieve through increased sales and revenue. Moreover, data suggests that up to 25% of indirect spend costs can be avoided if the process is optimised.[1]

There’s great opportunity to be far more strategic with managing indirect spend. An overarching structure is what’s needed to monitor and evaluate where the spend goes. Then, to achieve efficiencies, it’s all about procurement teams negotiating good contracts and guiding people in the business to these contracts. Because unless there is a clear, automated process to guide purchasers to these cost-saving contracts, then the wider business will continue to buy from suppliers they have found themselves, which bypasses all the good work of the procurement team and compounds the challenges of tail end spend.

Implementing technology, and the decision-making and approval processes with it, can guide companies to the best value agreements and suppliers, reducing cost while also preventing duplicated spend. To get there, procurement teams need three things: sufficient support from within their organisation to make the changes they need; a clear guided buying process to lead purchasers to contracts negotiated by procurement; and the confidence that it is indeed possible to control buying behaviour.

So as pressures on finance teams mount to find savings in these difficult times, it might just be time to start to adopt a proactive approach to indirect spend. It’s time to stop underestimating its ability to boost the bottom line. Contrary to what many may believe, it can be managed effectively, and has strong potential to make significant savings. It needn’t be a messy area of the business.

Compared with some of the other, more painful, considerations of where businesses could look to reduce costs – from staffing restructures to salary cuts – optimising indirect spend just might be the effective, sustainable and pain free alternative that finance teams need.

[1] EY (2014) Indirect Procurement Optimisation – Unlocking areas of savings and value creation