When you control indirect spend more effectively, you immediately create more opportunities for savings. Even a single-digit reduction in annual indirect spend can lead to significant savings that boost your bottom line.
So what barriers must procurement people overcome before their businesses can access these potential savings?
There are two major obstacles.
The first is unmanaged (also known as ‘maverick’) spending, particularly when it involves relatively small, one-off transactions. Purchases that may seem nominal and insignificant in the grand scheme of things, but when looked at cumulatively add up to a substantial sum.
According to research by ProcureCon West, so intractable is the problem of unmanaged spending that procurement professionals consider it the biggest indirect spend management challenge (highlighted by 41% of respondents).
While unmanaged purchases may ‘only’ account for around two percent of overall indirect spend according to a Hackett Group study, this can equate to billions worth of inefficient, ineffective purchases in a large enterprise. Ultimately, this can lead to substantial procurement waste and put an organisation at risk of procurement fraud.
Even in the most controlled of business environments, it is impossible to completely eliminate the tendency for employees to go ‘off piste’ when it comes to spending corporate cash.
Generally, this isn’t an attempt to be subversive. Many would probably be happy to use approved suppliers, or products and services from an established catalog, but for some reason or another, they choose to use an alternative supplier, channel or process.
Often it’s because employees are actually trying to be as efficient as possible by applying a ‘just get things done’ attitude. That makes perfect sense, and it’s a laudable ambition. However, as is often the case with this unmanaged approach, costs inevitably increase, as does risk, and the quality of goods and services provided are often sub-optimal and don’t represent good value for the investment.
Unmanaged spending is also more likely to happen if procurement procedures are laborious and time-consuming. Especially in the modern world of marketing or IT, where agility is key. So, if budget holders ‘need something now’ they sometimes sidestep the procurement process to get what they need, when they need it.
For category managers, their mission is to discover why unmanaged spending is occurring in their organisation and then to educate internal stakeholders and implement a procurement process that works for them too.
Lack of Centralised Control
The second obstacle that organisations face in getting on top of indirect spend is lack of knowledge of its scale and diversity within their organisation. After all, if you can’t accurately assess what is being spent, on what and by whom, how can you manage it effectively?
In an attempt to establish a degree of control and understanding, some organisations now centralise their purchasing operations.
Aggregating spending like this helps achieve economies of scale as well as allowing greater scrutiny of suppliers and their contracts – vendor management was highlighted as a major challenge by 15% of respondents in the ProcureCon West survey. It also helps prevent incumbent providers being awarded new projects and contracts through sheer convenience, rather than because they are the most cost-effective and best-qualified provider.
A secondary benefit of centralised purchasing is that it also helps ensure non-price related factors, like risk management, supplier diversity and corporate social responsibility initiatives are seamlessly woven into an organisation’s fabric.
Indirect Spend Management Platforms
To bring greater order and clarity, more and more organisations are turning to digital platforms to help them streamline their sourcing and spend management, as this enables them to better monitor and measure their indirect purchasing performance.
Contact our Sourcing and Delivery Team today to discover how Maistro’s AI-driven technology & dynamic Marketplace can enable your team to get control of indirect spend and tackle unmanaged spending. You can also call us on +44 (0) 800 048 8664.