The growth of indirect spend – and how to rein it in

The burden on European businesses to boost value and savings continues to pressurise finance departments. With differing business units and teams managing disparate supplier relationships via individual budgets, managing spending on goods and services not directly incorporated into a product being manufactured (indirect spending) is challenging.

Former McKinsey director Peter Kraljic was the first to point out that purchasing should become more strategic and start to mitigate supply chain risk, while enabling significant savings. While procurement has evolved from Kraljic’s model, it hasn’t been perfected. Recent Canon research identifies that 67% of European businesses feel indirect spend is only partially under control.

Checking suppliers

When only 34% of companies are able to describe their supplier relationship management as above average, it is clear that improvement is required.  But what can be done about it? Suppliers pose a challenge for businesses when it comes to spend management. In isolation, indirect costs associated with third party goods and services can appear insignificant, leading companies to underestimate their impact on profits when unmanaged. If this happens more than once, across different parts of the business, the poor management of multiple suppliers, risks spend duplication and ultimately non-compliance.

Keeping it compliant

While businesses’ indirect spend can lead to a whole host of inefficiencies, these can be scaled back. Cost overruns are most commonly caused by ‘maverick spending,’ or the violation of procedure by employees. For example, when employees contact suppliers directly and negotiate their own price of purchase, they should only have the power to submit a request with detailed specifications and allow the buyer to approve or reject the purchase on their behalf. While they may become frustrated with perceived over-regulating, sidestepping procedures can be a quick way to ensuring costs spiral.

While this sort of spending varies from intentional disregard of processes to simple purchasing errors, the issue can be huge. Having an approved list of suppliers and different P2P processes for different purchasing needs is essential to controlled, visible and budgeted spending.

The importance of collaboration

Businesses must ensure that necessary purchases are made with clear visibility of budgetary impact and via preferred suppliers. Effective P2P represents essential insight into the efficient and cost effective purchasing that supports controlled indirect spending. As P2P embraces automation, the mutual objective of controlling and ensuring visibility of spend is becoming a reality. Finance teams can use invoice information to pinpoint suppliers’ early payment discounts. In turn, procurement can use real-time visibility to check on spending practices, optimise supplier use and locate maverick spenders.

The indirect opportunity

To successfully manage indirect spend, businesses need to have a consistent approach aligned to business strategy. They need robust back office support to analyse what is being purchased and from whom. A visible indirect spend increases the capacity to comply, meet KPIs, mitigate risk, ensure supplier quality and move rapidly.

Ensuring that spend management becomes a strategically aligned and supportive approach requires intelligent technology usage, solid supplier relationships, collaboration, continual improvement and disciplined resource management. Introducing end-to-end P2P solutions, with their enhanced visibility and support for collaboration, enable businesses to spend less time managing P2P procedures and more on strengthening supplier ties, and ultimately growing their business.