The development of procurement for supplies and services that are important to the business but aren't directly tied to production is often given less attention in companies and organisations. The procurement of things like office supplies, spare parts, maintenance, IT services, and IT equipment, in other words indirect procurement, is still treated almost as a given even today, and for precisely that reason significant sums of extra money can disappear into it year after year.
The total indirect procurement spend in Finnish companies is typically in the same order of magnitude as personnel costs, averaging around 14%. A company with €50 million in turnover, for example, may have €7 million in indirect procurement spend. Although the exact figure depends on the company's industry, size, and procurement maturity, this number is hardly far from the truth.
How big is 14 % of your company's turnover?
Do Any of These Indirect Procurement Challenges Sound Familiar?
- Your company completely lacks an overall view of indirect procurement. Purchases are made across the organisation through different processes, with different payment terms, and very individually.
- The sheer number of invoices is unreasonable. For example, 20 % of invoices may be for under 100 €, which shouldn't be coming in at all given the processing costs and the amount of clarification involved.
- It's unclear how much money slips into indirect procurement, because finance has no way to run a report without enormous manual effort or buying an analytics tool.
- The number of suppliers, meaning the number of companies invoicing you, has completely got out of hand, and the figure just keeps growing.
- A significant share of companies' indirect procurement is still done as maverick buying, in other words without an agreed process.
- Coding practices are wild west: direct and indirect purchases end up muddled on the wrong accounts, and everyone enters them slightly differently.
- The accounts payable data available adds little value, and the real information has to be found by going through individual invoices. Painfully labour-intensive.
- Your experts and office staff are spending their time on tasks outside their core expertise. Expensive and inefficient.
Breaking out in a cold sweat? Not to worry, there are solutions. But how can you actually manage this whole indirect procurement picture and even save money at the same time?
Indirect Procurement Plays a Central Role in Managing Costs and Profitability
In the current market environment, cost management has become more important than ever in company boards and executive teams. Various business efficiency programmes have come to the fore, particularly over the past year, and companies have woken up to actively seeking ways to reduce their costs across different areas. This drive for efficiency has led to closer scrutiny in procurement as well, including in indirect procurement.
Indirect procurement has a habit of being left in the background in business and procurement planning. It has often been handled with contracts that run year after year and with an enormous number of suppliers. Some occasional cost-efficiency workouts may have been done from time to time, but systematic management has been missing.
This lack of focus has meant that indirect procurement has accumulated extra costs over the years, which companies are now working to reduce. That is a sign of the right direction, even though management of indirect procurement is still at a relatively basic level in many large companies, given the challenging market conditions.
Bring In Governance Models and Continuous Monitoring
A real-life example: in a domestic Finnish company with around €50 million in turnover, there were 1,500 indirect procurement suppliers and 4,600 purchase invoices a year.
Whose hands can hold a picture like that together? Who carries the responsibility? This isn't a one-person show; managing indirect procurement as a process requires a shift in attitude and ways of working across the entire organisation.
Simply running tenders for indirect procurement and going after one-off savings is no longer enough. Alongside tendering and performance-based incentives, it's important to emphasise continuous monitoring of procurement and more active supplier relationship management.
At least quarterly monitoring and a systematic governance model are essential from leadership level down, so that lapses don't have a chance to develop. In the same breath, though, it has to be said that this requires capability, resources, and long-term work, all of which have been lacking from many organisations when it comes to indirect procurement for a long time.
Where to Start With Developing Indirect Procurement?
Is your company running on an "Everyone Gets to Buy" model? If so, your entire corporate culture needs to shift to reach a "Licence to Buy" model, with a clear process, ground rules, and even clearer incentives to act in the right way.
The whole indirect procurement picture has become very complex in many companies from the outset, which is why it can be difficult to get a clear view of the supplier base and the spend in the beginning, and it is therefore challenging to tackle the problem areas. Let alone a concrete development plan, which would need to be carried all the way through to practical implementation.
Change management plays a huge role, then: it's essential that the entire organisation understands that the aim is not to restrict rights but to free up people's time for what matters.
A Few Thoughts on Getting Started With Cost Management in Indirect Procurement
- Identify your company's own strengths and weaknesses; that way you know where to invest and what truly sits at the core of your business.
- Check how much money flows into indirect procurement in your company. The size of the spend may come as a surprise.
- Focus first on cost items you can actually influence. The money flowing into IT spend, property services, and marketing, for example, is easier to control than unavoidable costs like pension contributions, energy, and rent.
- Categorisation and the grouping of purchases are needed for indirect procurement as well, in exactly the same way you'd build a procurement plan for those important direct purchases.
- Manage your partners and look after the relationships, too. Just as you would on the direct procurement side.
- Be aware that going in with savings as the only goal often leads to one tender after another, while nothing in your operations really changes. You buy "more cheaply" for a moment, until you notice that a couple of years later you're paying more than before the tender.
- The business units do know their actual needs. Indirect procurement can be handled just as professionally without wasting excess money.
- Any one of us can be the buyer of our own indirect needs. It doesn't really matter who makes the purchase, as long as the tools, contracts, and groundwork are known within the procurement process.
- It's a very long road from purchase requisition to automated invoice matching, and the right capability can shorten it. Resources are available, either in-house or external.
