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 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.

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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 departments 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.

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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.

For more information on challenges in indirect spend management, maverick spends, and unmanaged spends:

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Challenges Faced by Procurement Professionals in Indirect Spend Management

Procurement professionals in indirect spending often encounter several challenges due to the unique nature of indirect goods and services procurement. Here are three common challenges they face:

Fragmented Supplier Base: Indirect spending covers a wide range of products and services, including marketing, facilities management, IT services, office supplies, and more. As a result, the supplier base becomes fragmented, with many vendors providing niche goods or services. It can be difficult and time-consuming to manage connections, negotiations, and contracts with many different suppliers. While making sure that the needs of the company are satisfied and cost savings are accomplished, procurement specialists need to rationalize and consolidate the supplier base.

Lack of Visibility and Data: In contrast to direct expenditure, where procurement experts frequently have access to particular data on quantities, requirements, and past purchasing trends, indirect spending can be difficult to see and lack standardized data. When data is dispersed across numerous departments and systems, it becomes difficult to track and analyze spending trends, spot potential for cost savings, and make wise decisions. To understand indirect expenditure and promote cost minimization, procurement managers require reliable spend analysis tools and data management procedures.

Stakeholder management and alignment: Indirect expenditure involves a number of parties from various organizational areas, each with their own objectives and preferences. In order to connect these varied interests with the organization’s overarching procurement strategy, procurement experts must manage these interests. It can be challenging to balance the demands of various stakeholders with the requirements of procurement laws and regulations. To successfully address these issues, effective stakeholder engagement, communication, and change management strategies are necessary.

Tips to improve indirect spending

Identify and Categorize Costs: Begin by categorizing your indirect costs into relevant categories, such as administrative, marketing, IT, utilities, and more. This will give you a clear overview of where your spending is going.

• Regular Expense Audits: Conduct regular audits of your indirect expenses to identify areas where there might be overspending or inefficient use of resources.

• Prioritize Expenses: Determine which indirect costs are essential for smooth operations and which ones can be trimmed or eliminated without affecting performance.

• Benchmarking: Compare your indirect spending to industry standards to identify areas where you might be over or under-spending. This can help you set realistic targets for improvement.

• Negotiate with Suppliers: Negotiate contracts with suppliers for better rates or discounts on services, products, or subscriptions that your business uses.