Indirect procurement: How to improve this crucial business function

Procurement

If your finance team is like most, a good deal of time goes into trying to control costs.

Written by

Belynda Cianci

Published on

June 12, 2022

October 26, 2022

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If your finance team is like most, a good deal of time goes into trying to control costs.

As the price of goods and services increases, the need to implement good budgetary controls becomes even more pressing.

Even a well-constructed budget can suffer cash leaks and poor utilization, especially with hard-to-track indirect expenses.

How can you ensure high spend optimization even on items that don’t neatly tie to a project? Fortunately, it doesn’t have to be difficult when you have the right tools.

Today we’ll cover indirect procurement—what it is, how to keep a handle on it, and where technology can help. By the end of this article, you’ll have the tools and knowledge needed to get overhead spending under control.

What is indirect procurement?

Indirect procurement refers to purchases of goods, services, or materials that are not directly tied to a product project.

These purchases often include products needed for general office operations. Some examples of indirect procurement include:

  • Office supplies, including paper, stationary, snacks, and coffee for general use
  • Facilities management and physical assets, including desks, chairs, decor, and furnishings
  • Equipment and peripherals, including computers, printers, copiers, and telecommunications equipment
  • General office services, including cleaning, utility maintenance, repairs, and recurring services like landscaping
  • Professional services and consulting costs

While these products and services are all necessary to the ordinary functioning of the organization, they cannot be tied to projects. Therefore, they cannot be tied to revenue generation. They're often classified as “overhead.” However, indirect procurement should not be confused with other spend categories such as salary, benefits, etc.

How is indirect procurement different from direct spend?

Indirect procurement is essentially the opposite of direct procurement. Direct procurement refers to purchasing materials or services directly tied to a specific project, grant, or manufacturing process. Whether or not they tie, they still have a significant impact on the bottom line.

Examples of direct procurement include:

  • Raw materials and components for manufacturing products
  • Direct purchasing products for resale or private labeling
  • Apps for business units tied to specific manufacturing projects

In many cases, indirect procurement is more difficult to track and control than direct procurement. Indirect procurement may involve higher license volume (for instance, when everyone in the office needs Slack), lower cost, and less stringent spending controls than the big-ticket items associated with projects or specific budgets.

To keep control of this type of spending, the indirect procurement function requires good process, including:

  • Standardized inventory management and supply chain management processes
  • An intake process for the approval and processing of purchase orders
  • A documented approach to supplier relationship management
  • Documented spend management policies to guide internal stakeholders
  • Process automation and digital procurement management that scales

Why indirect procurement is a critical part of business operations

Indirect procurement is often one of the most significant expense segments for an organization. It’s important to control these expenses, as even “good” expense control can consume up to 80% of gross revenue depending on the industry.

Because indirect procurement represents a large cost center for companies and cannot be directly tied back to revenue, controlling indirect procurement costs should be a top priority.

Strong spending controls can reduce the amount of cash going into indirect spending. It can also reduce some of the largest sources of indirect procurement costs, including maverick spending and invoicing issues.

How indirect procurement impacts SaaS buying

A large percentage of the software budget in an organization falls under indirect Procurement spending. Even small organizations rely on an average of 102 software tools and apps to run the business.

Because software budgets represent up to X percent of total spending with an organization, it’s vitally important to put good SaaS procurement practices in place to control costs. Some of the most common sources of SaaS waste spending include:

  • Duplicate contracts
  • Overlapping tooling
  • Orphaned subscriptions
  • Missed cancellation windows
  • Shadow IT purchases
  • Loosely negotiated contracts
  • Lack of volume price leveraging

Any one of the above conditions can lead to overspending on indirect procurement. A combination of these factors can cost thousands in annual spending unaccounted for and unmitigated.

Therefore, implementing specific controls for approving and purchasing software can significantly improve budget optimization across the company.

7 ways to improve your indirect procurement process

1. Document the procurement process: A formal and well-documented procurement process is the first step in controlling indirect spending. By establishing a repeatable process and documenting it, you can educate stakeholders, improve time-to-close, and track every purchase.

Documenting your procurement strategy can be as easy as creating an intake form to start the requisition process. Using a standard form allows stakeholders to collect all necessary information for the purchase in one place, which improves evaluation and negotiation.

2. Establish an approval workflow for purchases: Once a standard intake form is in place, establishing a roster of departmental approvers ensures that every purchase meets the financial and risk standards outlined by the organization. Reducing risk on the front end prevents excess spending and disaster recovery on the backend, an essential component of cost avoidance.

3. Align departmental planning: Getting your department stakeholders on the same page can save time and money, not to mention frustration. This allows department heads, finance, and procurement to engage in capacity planning and budget allocation in a systematic way to streamline spending. Bringing finance into purchasing conversations early in the process allows them to offer preliminary approval for purchases and engage in negotiation from an informed position.

4. Perform competitive analysis: It is often expensive and inefficient to go with the first or most recognizable supplier you encounter. When purchasing new software, adhere to a standard “three bids and a buy” Evaluation process. Seek out the key differences between suppliers, and identify areas where one vendor has a competitive advantage. Doing so ensures you maximize cost savings and purchase the best-fit software.

5. Centralize contract management: Often, the lion's share of uncontrol spend on software doesn’t happen at the negotiating table. Instead, as business conditions evolve and pricing changes, the price negotiated in the first contract term may become less competitive over time.

Additionally, poor contract management has the undesirable side effect of missed contract deadlines and unwanted subscription renewals. Centralizing and automating your contract management prevents many situations that lead to overspending over time.

6. Implement strategic sourcing: Streamlining your purchases using a preferred supplier list can strengthen supplier relationships, create savings opportunities, and improve contract terms. By working with a smaller number of suppliers, Companies may be able to take advantage of volume pricing, which brings down the cost per unit or cost per license for essential products and tools.

7. Perform regular pricing benchmarks: Keeping track of the supply chain and cost changes in SaaS software is a full-time job. In many cases, the pricing structure and service tiers of software subscriptions change from year to year. In some cases, it may be advantageous to perform or analyze pricing benchmarks to ensure you are getting a fair price for the software your company needs. Using current data allows you to make informed decisions about the budget allocation for new and renewed SaaS software.

How Vendr can help improve your procurement functions

Controlling indirect procurement spend when you buy SaaS software is a challenge, but it’s not impossible. With procurement software like Vendr, procurement teams can automate many time-intensive manual practices that lead to challenges and overspending, streamline their procure-to-pay function, and implement a better business process for their tech stack.

By creating good spending controls and taking advantage of technology, you can significantly improve budget optimization and ensure every software purchase undergoes a rigorous evaluation process. Once contracts are in place, automated contract management puts renewals on auto pilot.

Your teams will be fully informed on upcoming deals, and they’ll be able to negotiate using the most up-to-date and accurate SaaS pricing information available.

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