Biggest Challenges Faced by Procurement Professionals in Indirect Spend Management
Most companies often focus their efforts on direct spend categories and place a low level of importance on indirect spend. However, indirect spend can make up a high proportion of third-party spend in most companies. Often overlooked, indirect spend management is gaining attention due to its ability to derive more value from their supplier spend […]READ MORE >>
Most companies often focus their efforts on direct spend categories and place a low level of importance on indirect spend. However, indirect spend can make up a high proportion of third-party spend in most companies. Often overlooked, indirect spend management is gaining attention due to its ability to derive more value from their supplier spend and further increase savings. Indirect spend management is not so straightforward and easy. Managing IT, MRO, logistics, utility, and travel requires a different kind of skillset and expertise from the procurement teams. If procurement teams are able to manage and take control over the indirect spend effectively, they can create more savings opportunities. So what are the barriers procurement professionals need to overcome to unlock new savings opportunities?
Controlling maverick spends
Maverick spends are purchases made outside of agreed contracts. Companies make many purchases out of their agreed contracts due to various reasons and circumstances. However, it can be detrimental to the organization as no contract means no legal protection and it can also impact the profit and contract fulfillment. Unmanaged spends can account for billions of dollars of ineffective and inefficient purchases in a large enterprise. Additionally, it also makes the organization vulnerable to procurement frauds. A major problem faced by the procurement professionals is the implementation of control measures to eliminate such maverick spends. Organizations struggle to regulate such spends as employees usually try to be efficient by using a ‘just get things done’ attitude. Also, procurement professionals often bypass the contracting system as it is laborious and time-consuming. At an age where agility is necessary, they cannot afford to waste time in excessive documentation. Additionally, sometimes employees can feel that they can find a better deal elsewhere than in the contract offers. It is essential to review HR policies and educate stakeholders of the detriments of unmanaged spend. A review of the P2P process and a proper spend analysis are also essential to put a stop to such maverick spends.
Lack of centralized control
A common misconception outsiders have about the organization is that it sees the company as a single entity. The truth is far from that, as they function with multiple departments with decentralized control. The problem with such decentralized control is that, when implementing indirect spend management, professionals often lack the knowledge of the scale of diversity within their organization. Each department is provided with their own budgets, and have measures and regulations to spend the budget where they need it. This again gives rise to maverick spends and purchases that are not centralized. Therefore, it becomes problematic to assess who is spending on what. To get on top of the indirect spend management, organizations should centralize their purchasing operations. It will not only help achieve economies of scale but also allow greater scrutiny of suppliers and their contracts. Additionally, it eliminates the practices of offering contracts based on each department’s convenience and ensures qualified suppliers are selected. Apart from its contribution in cost-savings, it also affects the non-price factors such as risk management, CSR initiatives, and supplier diversity.
To tackle the challenges arising out of indirect spend management, companies have turned towards automated procure-to-pay (P2P) processes. Such processes eliminate process errors, increase visibility of payments, and provide better control over indirect spend. Additionally, eProcurement, eInvoicing, AP, order lifecycle management, electronic payments, and supplier management are some tools used by the organization to increase visibility and control over their indirect spend management.