Define and conquer your indirect spend
In any given company, there’s one category of spend, that usually flies under the radar and that no-one can really fully grasp. We’re talking about indirect spend, or indirect materials and services (IMS). If left unmanaged, it can become an umbrella for waste and inefficiency. In this article, we explain what is indirect spend, why it’s important to get it under management and where you should start to bring more spend under management.
What is indirect spend (IMS)?
Indirect spend or IMS is not a straightforward and simple category. Typically, it is a big mess of materials and services, that no one ever even tried to categorise, not to mention trying to manage its procurement processes and supplier relations.
Typical indirect materials and services are:
- Personnel services (temporary employees, training, consultants, auditors, legal services, recruiting, personnel transportation);
- IT materials and services (personal computers, servers, software development, customisation, maintenance, ERP);
- Facility materials and services (furniture, building maintenance, cleaning, disposal and recycling, security, catering services);
- Financial services (banking, insurance, leasing);
- Marketing materials and services (printing materials, advertising, translation);
- Travel services (air tickets, hotels, car rental, travel management);
- Telecom materials and services (cell phones, data connection, mobile subscriptions);
- Fleet management services (company car rentals, fuel).
Note, that some services would qualify as direct services if they’re a part of your product offerings for customers, e.g. after-sales and warranty services.
IMS is typically out of management radar because they think IMS spend is low compared to direct spend. In reality, they often don’t know how much spend is managed. That’s also due to the complex spend diversity so it’s not easy to grasp it.
Why it’s important to manage IMS?
Managing IMS is a question of cash flow control. Unmanaged procurement process is like leaving your company back door wide open. In sales you do the hard work to get cash in, but if your procurement is not managed, your cash is flowing out.
What happens if IMS is not managed:
- You don’t have supplier market touch which means you most likely purchase at higher prices than your competitors, who do manage their IMS.
- You spend more than you should - when anyone can charge expenses on company account, they buy nice-to-have stuff more freely.
However loyal suppliers and responsible colleagues you might have, they tend to take advantage of the situation. Your suppliers will never come to your door to offer discounts voluntarily. But it might change once you tell them you plan to start a RFQ.
Any company focuses on having direct cost calculation in order to get precise price for their own production. But if IMS is not managed, general cost increase can go unnoticed (or at least noticed with a delay) and the profits start to slip away.
IMS usually comes into the management focus during hard times, when company profits are suffering and management is turning every rock to find cost savings. You shouldn’t wait until times get rough to peek under the hood of your indirect spend. Global corporations and best-performing companies have almost 90% spend under management which also includes indirect spend.
Defining spend under management (SUM)
Keeping an eye on your spend under management can be a valuable KPI, but all the data has to be looked at as a whole and in-depth. The most commonly used formula for determining spend under management (SUM) is the following: managed spend/total enterprise spend = % of spend under management.
The key term in this formula is “management” - which happens to be highly subjective. The word “management” means different things to different organisations and every organisation needs to define their own.
Here we’ve outlined the basic criteria to consider when creating a SUM definition for your organisation:
- “Management” indicates a clearly defined procurement process, approved by management, and stated in procurement policy.
- All stakeholders are aware of the process and use it on a daily basis when running procurement activities.
- The process is reviewed at regular intervals to ensure compliance and find areas for improvement.
- The entire buying process is visible. This includes (but is not limited to) planning, requisitioning, RFPs, negotiation, approval, contracting, PO, invoicing, delivery, and data management.
Indirect spend shouldn’t be a boundless mess that no-one even tries to manage. But before you can bring spend under management and start using the data as a powerful Procurement KPI, you need to establish a definition that can be adopted on an organisation-wide level. Regardless of your preferred definition, it should be clear that managed spend is dealt with according to an established process.
When you begin reporting the percentage of spend under management, you can preface it with a clear definition. Only then you can move on to what really matters: how to bring more spend under management.
READ MORE: 5 steps to bringing spend under management.
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