The purchase of goods and services can be split into two primary procurement domains:
- The Strategic Core purchases that enable an organisation to produce their product or service (called Strategic Spend by many organisations)
- The non-strategic products and services that need to be procured for individuals to carry out their job function. (called Indirect Spend by many organisations)
These domains, by their very nature, cause a divergence within Procurement. With significantly different needs and challenges associated with the two domains. Plus, very different spend profiles.
Many organisations tried to harmonise their processes to address both domains. Introducing automation as a means to “force” the organisation to conform across both Direct and Indirect spend to one automated process.
Others simply took the view that the Indirect domain is too complicated. Better outsourced, so they can focus on automation for their strategic purchases and supply chains.
In addition, both of these approaches often involved large consultancy projects to analyse data spend patterns. Seeking savings and purchasing efficiencies.
This article proposes that Indirect Spend requires a significant and separated level of focus and automation to ensure that the organisation is cost efficient over time. Proposing that the right level of investment can save significant sums, not just on the goods and services purchased, but also on the automation and consultancy projects themselves.
Gartner uses the term “appropriate technology” as a key pillar for any organisational change. Ask yourself the question, “do you have an appropriate technology solution for Indirect Spend?”
2: The unusual nature of Indirect Spend
Indirect spend can cover areas such as marketing goods, uniforms, apparels, office furniture, temporary labour, services, utilities or paper.
Some areas, such as utilities, can be managed directly and characterised in the same way as a strategic purchases. Applying procurement resources to establish suitable contracts.
However, others are more unpredictable in their nature and purchase points (needs) are spread throughout an organisation. Often RFQs are required to specify the requirement or request specific variations. Purchases may be of a one off nature or may be frequent. In either case spend levels in a 12 month period could be high, when consolidating purchases across the organisation.
For example, the purchase of branded goods for use in marketing may occur in offices spread across the globe. Each purchase requirement (at the office level) of relatively low value. However, consolidating purchases for the organisation makes this spend significant to negotiate with suppliers.
Typically, we find that management of Indirect Spend is not handled well in organisations. Spend coverage being low and automation ineffective in dealing with the complexity of the process. Resulting in unnecessary transactional activities of Procurement and the users who have the need for the product or service. Plus, more importantly, poor decisions being made that missed cost saving opportunities or impacted the organisations brand image.
We hear again and again the range of Indirect spend (excluding utilities) per annum described by organisations as somewhere between x and y. Where the difference between x and y is in $100m’s. A typical saving of 15% per annum applied to this “unknown” spend, on just $100m of this spend, is $15m straight to the bottom line. Or, if your organisation is much smaller spending only say $5m per annum a saving of $750k per annum can be realised that would cover any licensing and implementation costs. Ensuring a bottom line impact in excess of $500k per annum.
3: Indirect Spend Automation is Different
Automation for Indirect Spend is different. That is why we focused on procurement divergence as the theme for this article.
Automation for Indirect Spend is not focused on the Procurement function and Procurement processes themselves. It is focused towards enabling the end user, with the product or service need, to make a purchase. The Procurement part of this automation is one of the overseer of the process and establishing the approved supplier base accessible through the system.
It is also necessary, with Indirect Spend automation, to be able to "dip your toes in the water". Indirect Spend, by its nature, does not lend itself to a broad ranging and complex automation solution; one that is shrink wrapped and intended to cover a wide range of capabilities.
To finance a wide scope solution, where fundamental organisational transformation is involved for Indirect Spend, is prohibitive in terms of ROI, without contemplating the costs of adapting these systems to truly address Indirect Spend. It is also inevitable, that with these systems, people will avoid using them if at all possible: “too complex, too heavy on process, not user intuitive, built for Procurement not me, useless for buying paper” are all descriptions we hear of these systems.
Automation of Indirect Spend has to be flexible to be able to refine policies and processes, without the need for dramatic and fundamental organisational change. Adjusting them as needed to seek a way to mature them. Gradual change and introduction in the Indirect domain is more likely to get traction, than seeking a fundamental organisational deployment and transformation.
From a user perspective, the automation has to make life easy and be very light on process steps. For example, a solution that simply reduces the number of clicks in the process is important. Think of the competition to this automation: If it is easier for the user to buy from an online catalogue or pick up a phone the automaton will be ignored.
A simple RFQ process will also help in user adoption with those users who have changing requirements – Marketing for example. If this RFQ process can be simplified and they can quickly receive three quotes through an automated process why would they not use the system?
The automation of the approval process is also essential. At the local office level some of the purchases may be of very low value. Any approval overhead would be a barrier to adoption. This either needs to be automated to allow low value items to be purchased or made simple for a manger to instantly approve (rather than using his personal or corporate credit card.) Keeping the purchases within the system will ensure spend levels are monitored. With a significantly higher level of oversight on control on spend when compared to use of credit cards and expense sheets for both local management and Procurement.
Strong Analytics is essential in the Indirect Domain. In fact the ability to build your own reports is becoming the norm. Although having pre-built reports is useful, typically users and Procurement professionals have very specific needs and requirements for reporting. Using dedicated BI systems, as part of the solution, will become standard practice in our view.
Analytics is Procurements tool to explore and analyse the vast amounts of data that will be gathered. Comparing and contrasting spend across the organisation. Seeking efficiencies and cost savings, with real time data available at your fingertips. For the user analytics is a means of breaking down their spend and more effectively managing their budgets.
Finally, Indirect spend solutions need to lend themselves to integration. Typically organisations have invested in systems to support direct spend, systems to support their financial processes and supply chain automation systems. Integration into other systems is a key characteristic of an Indirect Spend platform. In fact an ability to leverage an external system, in preference to its own functionality, is a positive attribute of an Indirect platform. Allowing you to focus your automation on user needs, as opposed to duplicating Procurement or Financial systems functionality you already have.
4: Establishing Indirect Spend automation
Automation on Indirect Spend requires a different implementation approach.
Focusing more on the users of the system to engage and introduce them to the benefits to them. Communication is essential and should involve wider communication throughout the organisation to those who may not be regular users of the system. Making them aware how they can progress any requirements that they may have.
Procurement should drive how the system is rolled out to the organisation, which categories of spend are included and how new innovative capabilities are managed into the organisation.
5: Can automation cover all Indirect Spend - 100%?
The straight answer is no. Our experience of this automation is that high percentages of spend can be covered, up to 80% of Indirect Spend, however there will always be spend that just does not fit into a procurement based automated process. This spend may be better covered through more dedicated systems. For example, expense claims and travel may benefit from dedicated systems that link into your Indirect Spend platform or go directly into your financial systems.
This coverage is not an issue. If your Indirect Spend is over $10m, and you cover just 40% of the spend with your automation, then you will see a return in excess of $400k per annum.
Plus, the wider organisational efficiencies in purchasing Indirect goods and services; visibility of the spend across the organisation; and your ability to be able to answer that question “what is the value of your Indirect Spend” with more accuracy at any point in time, are all key factors for making a specific automation decision for Indirect Spend.
If you would like to learn more or want to engage with Claritum to discuss how we can help you automate your Indirect Spend domain then please feel free to reach out. Contact Us.
6: Related Articles
- Opportunity Cost of Transactional Activity in Procurement
- Why does Procurement buy anything?
- White Paper Download: 7 ways to transform eProcurement adoption
See our customer case studies on Indirect Spend automation