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THE

INDIRECT
SPEND
Dare to strategize
Barbara Lauer

suppliers

the long tail


(indirect spend)

80%

20%

spend

spend

20% suppliers

80% suppliers

The dare: Make visibility into your


indirect spend a corporate priority
The mission: Elevate indirect spend to
the next level of strategic management
The opportunity: Deliver visibility
into indirect spend to drive value and
maintain compliance

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THE DARE:
MAKE VISIBILITY
INTO YOUR
INDIRECT SPEND
A CORPORATE
PRIORITY

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THE DARE: MAKE VISIBILITY INTO YOUR INDIRECT SPEND A CORPORATE PRIORITY

It has become a classic procurement


practice: focus your time, resources
and strategic attention on the bigspend categories and suppliers.
Direct material, advertising, strategic consulting,

volume of contracts through their organizations. They

financial audit and outsourced services command the

want to manage and negotiate better rates and achieve

most attention because the other niche categories and

tighter compliance with both financial and regulatory

suppliers only account for 20 percent of your total spend.

controls. And they believe that more attention to indirect

Yet focusing on the 80 percent (known as the Pareto

spend and the multitude of suppliers in those categories

Principle) has left a management oversight gap.

can yield savings without distracting management

The Aberdeen Group recently reported that 70 percent

attention from compliance or strategy.

of procurement executives cite the indirect spend as a

At the same time, procurement teams face two realities.

top focus for controlling and reducing cost. Procurement

First, the corporate functions themselves have become

executives know that indirect category management now

leaner; second, the systems designed for supply chain

presents a significant opportunity for cost management,

management and financial control no longer paint a clear

gross profit and margin growth. Add the need to comply

picture of the indirect spend.

with SarbanesOxley requirements and the strategic


importance of indirect spend multiplies which also

These two issues put time pressure on procurement

increases the workload for procurement organizations.

teams. They have less time to focus on strategic initiatives

More procurement groups now seek to drive a larger

because they must manage compliance requirements

70%

of procurement
executives cite the
indirect spend as a top
focus for controlling
and reducing cost

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and suppliers of low-value transactions. Without the staff,

demand environment, every expenditure counts toward

tools or expertise to manage the vast number of indirect

driving differentiation and controlling cost. As such,

categories and suppliers, many procurement teams cling

whether a company has always managed their supply

to the Pareto model. They put in place large strategic

chain efficiently, with expense management to the

contracts with 20 percent of the supply base to address

decimal point or not, all companies must innovate to add

80 percent of the budget. Yet the resulting feeling of

visibility to and manage the indirect spend.

control and visibility is a myth: left on the table is the


orphaned 20 percent, also known as tail spend, which
could be aligned with better suppliers, managed to
compliance or used more strategically.

To succeed in managing the indirect spend, every


company needs a consistent approachaligned with
the business strategy. They need robust back office
support processes to understand and analyze what is

In this still-new century, companies are caught between

being purchased and from whom. A visible indirect

the lack of resources and a desire for a wider variety of

spend multiplies the companys capacity to comply, meet

suppliers. They dont have the bandwidth to manage

internal standards, mitigate risk, ensure supplier quality

every aspect of spend, yet they want access to the

and move with speed.

breadth-of-service suppliers that can help differentiate


their products or services. In an ever-fluctuating market

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THE mission:
ELEVATE INDIRECT
SPEND TO THE NEXT
LEVEL OF STRATEGY

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THE MISSION: ELEVATE INDIRECT SPEND TO THE NEXT LEVEL OF STRATEGY

Companies recognize that they need


to advance their management of the
indirect spend categories.

Clear visibility and insightful data analytics present a

First, in the HCMWorks survey, nearly 75 percent of the

significant opportunity for procurement to take a more

respondents report that they had little to no visibility or

strategic approach.

insight into their firms indirect expenditure.

In 2012, HCMWorks conducted a survey of C-suite


executives in enterprises with revenues of more

Companies need real-time information about their


indirect spending to drive true value.

than $1 billion. They report that for every dollar/


pound/euro that is placed under management of the

Second, enterprises must determine how to establish

procurement department, the average enterprise sees

efficient indirect procurement processes without taking

a benefit (cost savings) of between 6 and 12 percent.

on unnecessary risk, increasing cost or sacrificing


market presence or impact. Just as important as risk and

Proactis reports that for the average company,


a 5 percent savings on tail spend can be the

managers that they can easily access and retain access to

equivalent of a 10 percent increase in net profit.

quality resources, especially talent.

Yet why do most companies continue to struggle with


harnessing their indirect spend? They dont approach the
indirect spend as a whole, so they dont have the clear
visibility essential to financial and strategic excellence.

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cost management, is the ability to assure operational

Procurement organizations must solidify indirect


sourcing practices that make sure they are not
bottlenecks to accessing needed talent and
resources. At the same time, they must honor the
mandate to maintain cost and risk compliance.

Third, around the world companies are scrambling to


embed more sophisticated technologies to enable
real-time procurement practices, improve supplier
management and capture data that can be analyzed from
infinite viewpoints. Yet they dont have enough resources
to manage the process. And many technology options

Procurement organizations must leverage the


appropriate technology to capture, measure,
analyze, and report information that helps to
optimize the supply base and provide greater
strategic value to the organization.

are not yet sophisticated enough to provide the right


level of details to achieve compliance, manage
suppliers and deliver value.

INDIRECT SPEND

PARETO PRINCIPLE

LONG TAIL

TALENT GAP

Purchases of goods and

Also known as the

The 20 percent of a

The skills gap resulting

services that are not

80/20 rule, it holds that

companys procurement

from fewer resources

directly incorporated

80 percent of outcomes

spend that is spread

with critical in-demand

into a product being

can be attributed to

out amongst 80 percent

skillsets entering the

manufactured or a service

20 percent of the causes

of the organizations

workplace than leaving the

being delivered.

for a given event.

total supply base, also

workplace. Causes can

known as tail spend.

include growing demand


for certain skillsets (for
example, technology
skills), high rates of people
retiring with certain skills,
and lower rates of college
graduates majoring in
certain disciplines.

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THE opportunity:
DELIVER VISIBILITY
INTO INDIRECT SPEND
TO DRIVE VALUE
AND MAINTAIN
COMPLIANCE

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THE OPPORTUNITY: DELIVER VISIBILITY INTO INDIRECT SPEND TO DRIVE VALUE AND MAINTAIN COMPLIANCE

Companies continue to buy


indirect services without truly
embedding a set of companywide standards or controls.
Procurement groups may not even be involved in the

Compliance problems multiply.

selection or purchase of services outside projects labeled

The company pays higher-than-market rates for

strategic or that fall below certain spend thresholds. In


some cases, engagement managers follow their own

the services retained.


Lack of standards for defining a project or what it is

priorities and business needs, judging suppliers by

meant to deliver results in no link between the quality

standards defined outside of procurements business or

of the outcome and the cost.

category strategies.

Supplier history is most likely not being recorded, so


future sourcing decisions are made in the dark.

These engagement managers often find procurement

Project over-runs are last-minute surprises.

processes and controls cumbersome, so with a bit of

Late payments abound because suppliers do not

ingenuity, they find ways to avoid them especially

understand the invoicing process.

if they structure projects and budgets to fall beneath


thresholds established by procurement. In far too many

Procurement strategy has a critical role to play in

other cases, engagement managers may be unaware

reducing organizational cost, ensuring compliance and

of procurement processes and innocently bypass

risk mitigation, enabling access to key resources, and in

them altogether.

improving GP. Procurement groups that are equipped


to manage every transaction aggressively as a strategic

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The downside is significant. In the absence of a holistic

element, not just one event in and of itself, gain a leg up

approach to managing the indirect spend, there are

in everything from cost containment to securing the best

several negative consequences, including the following.

talent and resources available, while mitigating risk.

There are many levers along the spectrum for maximizing

visibility, compliance and optimization and you have

value of an enterprises indirect spend: standardized

a custom strategy that aligns with your business and

project scoping; supplier selection and management; rate

operating goals.

benchmarking; sourcing strategy; supplier performance


and optimization; consumption management; and

Moving your indirect spend management from an

volume leverage. Address them in an isolated fashion

administrative burden to a strategically aligned approach

and you get isolated improvements. But holistically

that supports the business and contributes to GP will

approach indirect spend levers within three areas spend

require a disciplined approach with dedicated resources.

Indirect spend management


value continuum
Supplier Optimization &
Price Alignment 35%
Price benchmarking
Bid recommendations
Volume discounts with market share
Supplier performance measured

RFx 510%
Manage consumption
Drive competitive tension
Price negotations
Optimize talent supply chain

return

SOW Administration 12%


Streamline processes
Visibility
Compliance
Invoice/milestone management

value
% saving will vary by company, strategies, and total spend

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THE OPPORTUNITY: DELIVER VISIBILITY INTO INDIRECT SPEND TO DRIVE VALUE AND MAINTAIN COMPLIANCE

You should take three actions.

First, optimize processes. Establish standard processes

Beyond optimizing procurements own performance

for Statement of Work development, supplier

through new tools and focus, its essential to

on-boarding, contracting, invoicing, and payment

communicate the positive results of these enhancements

to ensure compliance.

to your internal stakeholders. Show them how spend


visibility will help them make better supplier choices.

Second, optimize value. Centralize your services


procurement to gain greater control of what, when,
where, and how budget is spent, and to attain better
oversight of tactical and niche spend that is often highly
administrative and overlooked.
Third, optimize the supply base. Engage vetted suppliers
that can and are ready to deliver at the right price when
you need them. Measure supplier performance and
leverage technology to provide insightful data analytics
for better decision-making.

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Reduce the time spent for both stakeholders and


procurement on administrative tasks. Most of all,
demonstrate that procurement is a resource to them
for uncovering, evaluating and using suppliers that
will add value to their work.
All of this is within the realm of possibility. The proper
indirect strategy, technology and processes can propel
the 20 percent indirect tail spend into a tangible
competitive advantage.

Need to re-evaluate
your approach on
Indirect Spend?
Consider the following:
1

What is your current process for managing indirect

spend categories? Is it effective?


2

What are the challenges your procurement

Do you know how many changes in scope and


budget happen within your current SOWs?

organization faces in applying standards for

Do you know what your suppliers provide and what


you spend on their individual SOWs?

sourcing, compliance and budgets?


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3

How many suppliers by category of spend are used

How do you measure supplier performance for


short-term, project-based SOWs?

to serve your indirect needs?


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4

What is your company policy on the dollar threshold

Do you validate your suppliers compliance within


contractual requirements (e.g., insurance)?

required to gain approval from procurement?


How many SOWs/POs are being issued that fall
under the threshold?

10 How do you communicate with your internal


stakeholders about procurement processes
and compliance needs?

Have you standardized your SOW process,


including templates?

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References:

HCMWorks(2012). 2012 Survey Results- Indirect Services


Procurement: The Roadmap to Success (Released May 2012)
Available at: http://www.hcmworks.com

Proactis(2012). White Paper: Tail-Spend Management: How to


Squeeze Savings from the Most Fragmented 20%
Available at: http://www.kineticis.com.au/white-papers/proactis/
tail-spend-management-how-to-squeeze-savings-from-the-mostfragmented-20/

http://www.kellyocg.com/uploadedFiles/Content/Knowledge/Report_
Content/Talent_Supply_Chain_Management_Readiness.pdf

http://www.sdcexec.com/article/11063801/in-procurement-thereis-a-difference-between-direct-and-indirect-spend-and-the-bestorganizations-know-it

http://www.procurementleaders.com/blog/my-blog--guest-blog/
is-it-time-to-outsource-tail-spend

http://www.sig.org/newsletter.php?id=5823

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For more thought leadership go to talentproject.com

About the author


Barbara Lauer is Director of Services Procurementfor the Contingent
Workforce Solutions team of KellyOCG. She consults with clients across the
globe to help them improve management of their Statement of Work (SOW)
spend through process, supplier and rate optimization. Barb is a Subject
Matter Expert in the management and sourcing of service providers and is
responsible for the architecture and solutions design, implementation, delivery and overall
customer satisfaction of Statement of Work (SOW) and RFX management solutions aligned with
clients business strategy. Ms. Lauer has more than 20 years of procurement experience having
worked in positions of increasing responsibility managing both direct and indirect categories
within the Automotive, Consumer Products and Manufacturing industries. She has set strategies
and purchased across the following indirect categories: contingent labor, consulting, professional
services, manufacturing services, capital projects, MRO, travel and training. Barbara was named a
2014 Pro to Know by Supply & Demand Chain Executive magazine.

About KellyOCG
KellyOCG is the Outsourcing and Consulting Group of workforce solutions provider Kelly
Services, Inc. KellyOCG is a global leader in innovative talent management solutions in the areas
of Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Contingent
Workforce Outsourcing (CWO), including Independent Contractor Solutions, Human Resources
Consulting, Career Transition and Executive Coaching, and Executive Search.
KellyOCG was named in the International Association of Outsourcing
Professionals 2014 Global Outsourcing 100 list, an annual ranking of the
worlds best outsourcing service providers and advisors.
Further information about KellyOCG may be found at kellyocg.com.