What is indirect procurement?
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In the intricate landscape of organizational procurement, the distinction between direct and indirect procurement plays a pivotal role in achieving operational excellence. Direct procurement focuses on essential components directly contributing to product creation, while indirect procurement manages behind-the-scenes support for seamless business operations. This guide delves into the nuances of indirect procurement, emphasizing its indispensability, outlining challenges, and providing actionable strategies for optimization.
What is the definition of indirect procurement?
Indirect procurement (another name commonly used is "indirect spend") encompasses the purchase and management of all products and services vital to general business operations, excluding those directly involved in production. Unlike direct procurement, which directly impacts the cost of goods sold, indirect procurement is the backbone of organizational productivity.
Examples of indirect procurement
Indirect procurement encompasses a wide variety of operating expenses and services that provide behind-the-scenes business support. Some examples include:
Facilities management and utilities:
- Electricity, water, heating, and air conditioning costs
- Office rentals, equipment leases, and maintenance contracts
- Building cleaning and waste management service
- Computers, phones, and other electronic device purchases
- Software subscriptions like Office 365 and Salesforce
- Business technology consulting services
Marketing and advertising:
- Event management agencies and convention center bookings
- Promotional products and branded merchandise
- Website design, media inventory, and SEM services
- Legal counsel, compliance services, and consulting fees
- Temporary labor, recruiting services, and training development
- Accounting, finance, and marketing freelancers
Travel and entertainment:
- Airfare, rental cars, hotels, parking, taxis
- Corporate credit card expenses and employee meals
Office supplies and miscellaneous:
- Coffee, snacks, kitchen supplies, cleaning items
- Printing paper, stationery, laptop bags, desk organizers
The categories are vast, but the concept is simple—if it doesn’t directly go into making a product, it qualifies as indirect spend ripe for procurement optimization.
Significance of indirect procurement:
Typically, Indirect spend makes up a substantial 45% of total organizational expenditures1. Centralizing strategic sourcing, employing analytics, and adopting e-procurement methodologies empowers leading companies to reduce indirect costs by over 20% 2, concurrently enhancing efficiency. Specialized roles such as Category Managers, Spend Analysts, Contract Managers, and Procurement Operations are dedicated to managing indirect spend, providing control and optimization.
Challenges and solutions:
Transforming indirect spend management isn't without its challenges. Common pitfalls include:
- Spend sprawl: Indirect spend encompasses a vast array of expense categories lacking large areas of overlap for consolidation opportunities.
- Manufacturing initiate purchases: Indirect procurement lacks an obvious centralized owner.
- Limited visibility: The high volume of low-value diffuse transactions makes gaining insights into who buys what from which supplier challenging.
- Maverick off-contract spending: Indirect procurement often suffers from ad hoc purchasing outside preferred vendor agreements due to fewer guardrails.
- Strategic direction challenges: Unlike with product components pricing, setting goals for indirect spend reduction spanning all categories requires deeper planning.
- Low average spends: Indirect suppliers often control smaller shares of wallet per category, limiting procurement’s influence in price negotiations.
- Frequent low-volume purchases: The breadth of goods and services lead to numerous high-touch small transactions demanding intensive resources to coordinate.
- Lack of recognized value: Businesses frequently underestimate the importance of strategically managing diffuse indirect spending.
- Driven by disjointed stakeholders: Indirect inputs cut across the entire enterprise from Legal to Marketing to Facilities, lacking coordination.
- Broad expertise required: Mastering negotiations for indirect categories like temporary labor and office supplies commands distinctly specialized experience.
However, adopting strategic frameworks can pave the way for success:
- Centralize sourcing decisions by appointing specialized lead buyers for various categories, channeling the majority of requests through dedicated procurement teams. Leading organizations, for instance, have strategic sourcing managers overseeing IT, marketing services, logistics, and corporate real estate categories to direct indirect spend through the Global Procurement Institute.
- Institute organization-wide purchase order policies to reduce off-contract spending and enhance control. For instance, companies may mandate that all purchase orders above a specified threshold go through their Procure-to-Pay system, with approved purchase orders populated before acquisition.
- Enhance visibility through analytics, utilizing spend analytics to identify savings opportunities and make informed, strategic decisions. Data visualization tools can help organizations compare rates offered by competing suppliers, thereby driving savings.
- Leverage preferred supplier programs to concentrate a significant portion of spend with a single vendor, ensuring better rates and reliable delivery. For example, a leading manufacturer consolidated office supply spend with a single national vendor partner, achieving significantly lower pricing through committed spend volumes over a multi-year contract term.
- Embrace e-procurement tools and p-cards to improve process efficiency by enabling electronic purchase orders and transactions through purchasing cards. Increasing P-card adoption streamlines reconciliation efficiencies.
- Train internal stakeholders through regular sessions to educate employees on indirect procurement best practices, reinforcing guidelines.
The proof is in the savings:
Indirect procurement holds the potential to substantially influence a company’s profitability, efficiency, risk management, and innovation. McKinsey suggests that optimizing indirect procurement strategies can result in a noteworthy 15–17% reduction in overall spend1. Additionally, a report from Vendr highlights that companies presently experience a loss of up to 20% in targeted savings due to maverick spending, a challenge that can be effectively addressed and controlled 2
Typical indirect procurement department roles
Leading organizations structure their indirect procurement teams with specialized roles such as
- Category Managers: Subject matter experts that create sourcing strategies for IT, facilities, marketing, travel, etc.
- Spend Analysts: Reporting specialists that extract, cleanse, categorize, and analyze spend data to uncover savings opportunities.
- Contract Managers: Draft and manage agreements with suppliers including negotiating terms and pricing.
- Procurement Operations: Ensures smooth purchase order and invoicing processing, logistics coordination, and supplier relationship management.
Indirect procurement technology enablers
Technology plays a pivotal role in driving efficiency, visibility, and control over indirect spending. Useful platforms adopted by leaders include:
- Spend analytics: Software like ProcureWare, GEP’s SMART or SAP Ariba offers data visualization dashboards to slice indirect spend from multiple dimensions like vendor, department, payment method, and category. This empowers insightful decision-making.
- Contract lifecycle management: Software like Icertis and Coupa enable centralized management of agreements with indirect suppliers, ensuring pricing compliance monitoring and discounted rate capture under deals negotiated by sourcing.
- E-procurement platforms: Online procurement software like BuyerQuest or Jaggaer streamline all stages of indirect purchase requisitions, purchase order and invoice processing on user-friendly interfaces accessible to employees across the organization.
- P-cards: Special purchasing cards provide enhanced visibility, control, and automation for indirect transactions compared to employee expense reports and invoices.
Effective metrics to track process improvements and savings capture include both quantitative efficiency stats as well as measuring spend influence enforcement. Some specific examples across measurement areas:
- Year-over-year changes in departmental operating budgets: Facilities management budget decreased from $5.2M last year to $4.6M this year due to vendor consolidation (-12% change)
- Variance to procurement benchmark targets: Marketing services spend was 18% above industry benchmark this quarter (Target: $3.1M Actual: $3.65M)
- Maverick spend as percentage of expenses: Legal fees paid outside of preferred provider agreements made up 35% out of total $2M legal expenses
- Percentage of spend through preferred agreements: 72% of 2022 IT hardware spending went through company's contracted electronics suppliers, up from 60% prior year
- Number of newly identified cost-savings opportunities: Spend analysis uncovered over $950K in potential savings from print management optimization (reducing printers/copies by 20%)
The road ahead: a call to action
As you embark on the journey to optimize indirect procurement, consider the following steps to solidify your organization's position at the forefront of efficiency:
- Continuous improvement: Treat indirect procurement optimization as an ongoing process. Regularly reassess your strategies, adapt to market changes, and refine your approaches to stay ahead of the curve.
- Collaboration is key: Foster collaboration between departments. Break down silos and encourage cross-functional communication to ensure that all stakeholders are aligned with the organization's procurement goals.
- Technology integration: Stay abreast of technological advancements in procurement. Regularly evaluate and integrate new tools and platforms that can enhance efficiency, streamline processes, and provide deeper insights into spending patterns.
- Supplier relationship management: Cultivate strong relationships with your suppliers. Open communication channels, negotiate favorable terms, and collaborate on innovative solutions. A healthy supplier relationship is instrumental in securing preferred pricing and reliable delivery.
- Employee engagement: Engage your employees in the procurement process. Provide them with the necessary training and tools to adhere to procurement guidelines. A well-informed workforce can contribute significantly to cost control and adherence to procurement policies.
- Benchmarking and best practices: Benchmark your indirect procurement performance against industry best practices. Learn from the successes and challenges of other organizations, and continuously strive to adopt and adapt proven methodologies.
Why indirect procurement excellence matters: a recap
Indirect procurement excellence isn't just a matter of cost savings; it's a strategic imperative for holistic organizational success. The benefits extend beyond the balance sheet:
- Operational resilience: Efficient indirect procurement minimizes disruptions to business operations, fostering resilience and adaptability in the face of unforeseen challenges.
- Strategic resource allocation: By optimizing indirect spend, organizations free up working capital, allowing for strategic allocation of resources to mission-critical activities that drive innovation and growth.
- Competitive advantage: Organizations that master indirect procurement gain a competitive edge. The ability to control costs, enhance productivity, and maintain strong supplier relationships positions them as leaders in their respective industries.
- Data-driven decision-making: The insights derived from analyzing indirect spending patterns empower organizations to make informed, data-driven decisions that positively impact the bottom line.
In the ever-evolving landscape of business, where every decision counts, mastering indirect procurement isn't just an option; it's a necessity. As you navigate this complex terrain, remember that the path to excellence is paved with continuous improvement, collaboration, and a commitment to leveraging the latest technologies and best practices.
Take charge and unlock the potential of indirect procurement to propel your organization toward sustained success. Explore the possibilities, elevate your efficiency, and strive for excellence in your procurement journey. The future is full of opportunities—seize them.
Enhance indirect procurement efficiency with Ramp
Ramp helps you get more indirect spend under management with automated procurement software that’s easy to adopt by the whole company. Ramp procurement includes features such as:
- Advanced AP automation: Benefit from unlimited invoice extraction using OCR technology, simplifying your accounts payable process.
- Diverse payment methods: Facilitate payments via check, ACH, same-day ACH, card, or international transfers in both USD and local currencies.
- Intelligent vendor management: Automatically track vendors, extract contract details, and access price intelligence for better decision-making.
- Customizable request forms: Tailor request intake forms to suit your indirect procurement needs, ensuring all necessary information is captured efficiently.
- Efficient PO management: Streamline your purchase order process with our easy-to-use PO management system.
Ramp's suite of tools is designed to optimize indirect procurement, ensuring you save time and money while maintaining high operational efficiency.
See how Ramp can help your business save.