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Indirect spend (non-product related) often represents 20%-50% of the whole purchasing spend at a company. But many companies don’t really focus on this spend due to many reasons, e.g: lack of resources, lack of time and main focus on direct material spend.

After discussing with several companies the conclusion is that most mid – large companies would benefit from adding more focus on indirect material spend. A full time resource for indirect material spend would be a good investment, at least for the first year when many quick wins can be negotiated. But after a year or two the saving potential could be less.

Having one or two full time resources focusing on indirect material also requires an extremely broad skillset for those employees. You need to be able to have market- and industry knowledge about several commodities, e.g: IT, telephony, insurances, cars fleets, marketing, transportations, office suppliers, consultants, travel etc. Resources with this large skillset is very hard to find.

Outsourcing of procurement of indirect spend

One way to address the indirect spend is to outsource the procurement activities. But a company should not just decide to outsource without a thorough analysis if this is a good set up for your company.

Such analysis can be done in different steps:

  1. Do a spend analysis of your indirect spend: how much money do you spend on different categories and suppliers?
  2. Do an analysis of the potential value – how much money do you think you could save if you put a higher focus on your indirect spend? Divide into “on-time” activities and yearly savings
  3. Build a business case: would the savings motivate your own organisation for indirect spend or would it be better to outsource to reduce fixed costs and have a performance based business model?
  4. Evaluate the strategy:
    1. What would be the pros and cons from having your own procurement organisation vs. outsourcing the activities? E.g: savings, less focus on strategic spend, access to additional resources, fixed costs vs. variable costs, access to additional competence, etc
    2. What would be the pros and cons outsourcing your indirect procurement organisation vs. having it in-house?  E.g: savings, less focus on strategic spend, access to resources, fixed costs vs. variable cost, access to additional competence, etc
    3. Define and contact potential suppliers for procurement outsourcing
    4. Discuss with potential suppliers about their competence and also evaluate different business models like performance based pricing, fixed prices, etc.
    5. Discuss if the outsourcing business model gits your company’s culture?

Common pitfalls

  • Companies stay in status quo and have very low focus on indirect spend, this would probably mean higher procurement costs
  • Companies decide to hire a resources for indirect spend without doing their homework and business case. Maybe it would be more beneficial to outsource to an organisation which core focus is procurement
  • Companies decide to outsource too quickly. Maybe your indirect spend is very large and an in-house organisation is necessary to drive and implement different saving projects. Its important to evaluate what strategic focus you want to have on your indirect spend before acting.