Most established companies have the same modus operandi, reduce cost without impacting revenue. Historically this has been achieved by implementing ERP systems and reducing Input Costs, but a changing digital landscape and the availability of cloud computing has opened up a whole new realm of cost reduction: Indirect Spend.
According to Hackett Group 20-50% of company spend can be attributed to indirect spend. However, a recent survey conducted by Deloitte found that 70% of CPOs identified Indirect Spend Management as an area that required significant improvement. If Indirect Spend makes up such a substantial part an organization’s expenditure why is it often overlooked? The purpose of this article is to highlight some of the challenges of Indirect Spend and suggest possible solutions.
Issue 1 | When Growth Occurs Quickly Indirect Spend is often overlooked. Most smaller organizations start with the mentality of trusting their employees to spend the company money as if it was their own. This mentality is unfortunately not always scalable because as a company grows and opens new departments and new locations communicating what has been bought and for how much becomes more and more difficult. Often the breaking-point that leads an organization to reevaluate its indirect spend is the realization that 4 different departments are buying the same item from 3 different suppliers at 5 different prices. A effective indirect-spend management tool breaks down communication barriers and allows the consolidation of purchasing to a smaller number of predetermined Vendors.
Issue 2 | Organizations often lack the data and tools to track and analyze Indirect Spend. We have all heard the mantra “you get what you measure” and as any accountant will tell you this also applies to Indirect Spend. If I were to ask you how much your organization has spent on cleaning services this year would you be able to give me and answer? Would you be able to tell me what would be a reasonable amount and what would be over budget?
An indirect spend management tool allows an organization to set budgets for specific spend categories within multiple departments. Furthermore, because the tool allows transparency into exactly what is being purchased real-time tracking give the decision makers within the organization a snapshot of the organization’s finances.
Issue 3 | No knowledge of best practices. Building a process to manage Indirect Spend can be a difficult undertaking. Because the purchases consist of a large number of small transaction the process is unique. Many things need to be taken into consideration such as Approval Routing, Spending Thresholds, Purchase Order Management and Invoice Reconciliation. A good spend management tool will employ Industry experts and be built with best practices in place.
Due to all of these challenges many organizations used to hire expense consultancy groups to help reduce Indirect Spend. As mentioned at the start of this article, there now exists a number of Cloud based tools which are more affordable, more scalable and much more user friendly. Which begs the question what factors should be considered when selecting a cloud-based spend management tool? It is important to choose a tool that is forward thinking and will be able to grow with your organization, that is user-friendly and provides a native mobile app and that takes a customer first approach.