5 Ways to Tame Your Indirect Spend and Save Money
While many companies have clarity on direct spend — costs like labor and materials that directly allow you to create products and services — not everyone has a handle on indirect spend.
Indirect costs may not be a line item when calculating the ROI for a new product launch, for instance, but this spend can still add up. “Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, etc.,” explains The Next Level Purchasing Association, a procurement education provider. If companies can tame indirect spend, that can be an easy way to boost net profit. Yet many businesses have not been able to get a handle on this area.
In the retail industry, for example, indirect costs account for an average of 10-15% of sales, according to McKinsey. “[A]nd most retailers know that their indirect spending is far from optimized.” Fortunately, there are straightforward steps companies can take to tame indirect spend and save money. Five ways to do so include:
The first step to taming indirect spend is to know what this spend entails. This includes knowing both the total amount of indirect spend as well as the specific areas where this indirect spend goes. That way, you can make informed decisions about what to cut, shift, renegotiate, etc. To gain visibility, procurement and finance teams can use a combination of technology and process improvements.
With e-procurement or spend management software, spend data on all purchases made through the platform — including indirect ones — can be accounted for. From there, the technology can be used to analyze indirect spend and identify opportunities for savings. For example, you may find that indirect costs like subscriptions to software are starting to add up, yet perhaps you don’t need as many licenses as you once did. Having clarity on your exact indirect spend can then help you know what you need to tame. Companies can also improve visibility through process improvement. Gaining buy-in across organizations to follow procurement protocols, including how to submit purchase requests, can help finance and procurement teams gain the control they need to stay on top of indirect spend. Sharing some of the eventual savings with employees could be one way to gain this buy-in.
As you start to gain a better sense of your indirect spend, it’s important to closely examine all costs. Yet sometimes, businesses assume certain costs are fixed, even though questioning that spend could lead to savings. “Even retailers explicitly seeking to reduce indirect spending sometimes ring-fence certain cost categories as ‘not addressable,’ ” such as marketing or rent costs, notes McKinsey. However, there could be ways to negotiate these costs or at least plan for future reductions, such as by preparing to move when a lease ends. Some costs, like office phone subscriptions, may have been needed more in the past than they are today due to remote work. So questioning all indirect spend can help uncover areas ripe for reduction.
Questioning spend can lead you to wonder whether you’re paying the best price for indirect purchases. Instead of automatically purchasing the same items you have in the past, consider comparison shopping for all procurement. For example, when employees need to purchase tail spend items like office supplies, they should be able to view products from multiple vendors. Items like printer paper or ink might not have much difference in quality from supplier to supplier, so being able to comparison shop can help keep indirect spend down.
Some e-procurement systems can even automatically compare vendors to suggest low-cost products and services. That way, employees don’t have to spend so much time comparison shopping.
For times when comparison shopping is limited, or when you don’t have any suppliers ready to choose from, being able to easily solicit requests for quotations (RFQs) can help tame indirect spend. If you’re trying to compare cleaning services, for instance, and you only know the pricing of your current supplier, you may continue to use them out of convenience. Yet if you could quickly get quotes from multiple vendors, you could then choose the one that best meets your budget and service needs.
Leveraging technology can help, such as how some e-procurement or spend management systems can automate more of the RFQ process. That way you’re not spending so much time manually filling out forms. Or, you could turn to a procurement partner who has relationships with multiple suppliers already and can easily solicit RFQs for your needs.
Leverage Procurement Partners:
As mentioned, a procurement partner can have relationships in place to save you time and money for indirect spend. With some procurement partners, you can fully outsource functions like supplier sourcing, or you could work with a procurement partner on a more consultative basis.
In both cases, the expertise and scale of a procurement partner can often help companies find ways to reduce indirect spend. For example, a procurement partner might be working with multiple companies at the same time who use the same vendor. Instead of one company purchasing $10,000 worth of products from that vendor per year, perhaps the procurement partner purchases $100,000 from that supplier on behalf of 10 companies.
With this scale, the procurement partner then might build a strong relationship with that vendor and have increased leverage to negotiate better pricing. Or a procurement partner may simply know how to find lower-cost vendors due to similar experience working with other companies.
Start Reducing Indirect Spend to Increase Profit
By following these five steps, finance and procurement teams can start to reduce indirect spend, which can directly boost your bottom line. Working with an experienced procurement partner like GoProcure can help. We assist with strategic sourcing across both indirect and direct spend, using a proven tollgate process that typically generates 5-15% cost savings. Our e-procurement platform can also help you easily compare prices and solicit RFQs to get your tail spend under control.
Want to learn more about how you can tame indirect spend and save money with GoProcure? Request a free consultation with our team of experts today.