CATEGORY MANAGEMENT

6 tips to improve your indirect spend

management
Indirect spend may account for between 25%-40% of your company’s total spend. Learn
how you can improve your indirect spend management.

TELL ME MO RE

Updated: Oct 28, 2022

Indirect procurement spend is the sourcing of goods and services not

directly related to the manufacturing of products. Indirect spend refers to
the goods and services that support, maintain, and develop business
operations.

However, managing indirect procurement is complex: more suppliers to

manage, decentralized purchasing, a large number of stakeholders, varying
maturity levels, and a higher potential for maverick spend.

Indirect categories often have a greenfield of sourcing opportunities, the

potential for consolidation, and untapped cost savings. So don't give up!

In this blog, we'll share 6 tips on how to improve your indirect spend
management.

1. Indirect spend visibility

2. Know your spend categories

3. Know your stakeholders

4. Indirect sourcing plan

5. Key performance indicators (KPIs)

6. Indirect spend forecasting

Examples of indirect spend

Indirect spend categories depend on your industry and the nature of your
business. It may account for between 25% -40% of your company’s total
spend.

Indirect categories include:

Marketing

Communications

Human Resources

Facilities

Security

Utilities

Office supplies

Travel expenses

Professional services (insurance, legal, and consulting)

Challenges in indirect spend management

 g p g

Managing indirect spend can be challenging, and requires different skills

and tools than direct. Indirect spend often receives less attention from
CPOs because of its complexity.

The main difficulties with indirect spend are:

Weak adoption of spending policies.

Lack of spend visibility and data accuracy.

Incorrect spend classification that does not reflect the business categories.

A large number of suppliers and stakeholders.

Scattered budgets and purchase decision-makers.

Change resistance that can be seen as lacking stakeholder buy-in and

compliance.

Maverick spending can lead to lost saving opportunities, contract leakage,

and conflicts.

Disorganized procurement team that does not support and guide internal
stakeholders.

Interpersonal relationships and organizational fit between the teams can

make or break a supplier relationship.

Read here more examples of why spend analysis projects fail.

6 tips to improve indirect spend management
So, here's our advice for managing indirect spend.

1. Gain indirect spend visibility

The first step in managing indirect spend is spend visibility. You need to be
able to see the big picture as well as slice and dice the data to the smallest
level of detail.

Gather and combine multiple datasets and sources. AI and machine

learning can help in tracking, analyzing, and automating the various steps
in the classification and categorization of indirect spend.
2. Know your categories

Get to know your supply markets and available suppliers. Business

stakeholders may provide you with in-depth market knowledge.

Know who the key suppliers are in each sub-category or commodity group
to achieve better contract terms and develop solid supplier partnerships.

Ensure your spend taxonomy reflects your business categories. When your
taxonomy is relevant, it is easier to untap consolidation opportunities and
benefit from economies of scale.

3. Know your stakeholders

Procurement often comes in with a cost savings, compliance, and risk
mitigation agenda. What if you started the discussion with how you can
help your stakeholders succeed and achieve their business goals?

Prove the value of your contribution with hyper-relevant data and timely
insights. Build trust and share your knowledge.

Analytics tools help you find actionable insights from your data on a sub-
category, function, and location level. Spend insights help find patterns on
which to base sourcing decisions and supplier selection. Share your spend
analysis with relevant stakeholders and welcome their input.

The process of getting stakeholders engaged should look something like

this:

1. Start early--engagement is key to sourcing and contracting success.

2. Understand their business goals and terminology.

3. Invest time in building relationships and understanding their challenges.

4. Know your spend data in preparation for discussions.

5. Share success stories with the business.

4. Create an indirect sourcing plan

Document spend analysis findings and insights in a strategic sourcing plan.
Define your category goals and the steps you need to take in order to get
there. Engage your stakeholders in the planning so you will have their
management buy-in.

When everyone understands the big picture and goals, it’s easier to follow
pre-agreed rules and processes too.

Some guidelines and policies are needed to manage and optimize indirect
spend. Align and agree on purchase policy with the category stakeholders.

Investing in dedicated support and educating a user community ensures

support for achieving category goals and delivering more value to the
business.

5. Set key performance indicators (KPIs)

Develop KPIs that support your category goals. KPIs are designed to help
you reduce risk and maximize value for money.

For example, measure how well a supplier meets their contractual

obligations (compliance against specifications, on-time delivery) or how
well your categories perform against ESG targets (co2 emissions, share of
audited spend).

The goal is to reduce the total cost of ownership (TCO) of all indirect
spend and improve the procurement ROI.

6. Employ indirect spend forecasting

Forecasting spend involves combining historical spend information with
demand planning and economic and business intelligence data.

Forecasting is used to make strategic spend decisions and ensure future

profitability.

Supply chain disruptions, inflation, or a key supplier choosing another

client over you can be difficult to predict. Real-time data enables you to
reach and adapt to changes.

When you have your spend data in one place, it’s easier to turn insights
into action that make an impact.

Read our 6 steps to measure real savings for indirect spend

 m
o .c o
s ie v

Photo by Nick Fewings on Unsplash

Jasmiina Toikka
Jasmiina is a Head of Content Marketing at Sievo with broad
expertise in procurement and category management.
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