Even well-run organisations are sneakily robbed by indirect procurement spending. Since indirect expenditure isn’t related to a client, product, or project, procurement specialists find it tougher to track. All organisations can profit from indirect spend management with the right tools.
This guide provides advice on managing indirect cost and answers issues regarding this important category, including:
- How is indirect procurement defined?
- 5 most popular indirect procurement categories
- Management of indirect procurement challenges
- Managing indirect spend categories
- Tips for better indirect spend management
How is indirect procurement defined?
Indirect procurement involves obtaining items and services not directly related to product production but nevertheless critical for corporate operations. Direct spend can be linked to production, client services, and billable project expenses, but indirect procurement supports daily operations. It’s often a business’s biggest expense and hardest to control.
Five most common indirect spend types
Common indirect procurement categories account for 15–30% of overall expenses for most firms. Managers may oversee category spending in larger companies to maintain competitive pricing and strong contracts.
Events and travel
Since employee travel and events are rarely tied to a product or project, they represent a major indirect spending source for companies. Companies incur indirect travel and events charges like:
- Airfare
- Transport by ground
- Food subsidies
- Hotels
- Conference fees
- Catering costs
- Trade show space
- Promotional products
Effective travel expense management is crucial to spend management.
Overhead
Corporate overhead includes indirect costs like:
- Rent
- Utilities
- Facilities management
- Pro services
- Consulting fees
- Administrative costs
- Salaries
- Insurance and taxes
- Service outsourcing
The company’s financials usually segregate overhead from operating expenses. It has numerous fixed costs, but without procurement clearance and supervision, they may be hard to track.
Supplies
Supplies purchases typically include common products like:
- Office supplies and stationery
- Equipment and media for printing
- Cleaning supplies
- Workplace furnishings
- Computer accessories
- Consumables
Communication and software
Subscriptions, licencing, equipment, and phone systems contracts cost organisations a lot on software and communication tools.
Software licences on corporate cards can lead to unmanaged spending because credit cards and expense reports make price and renewal information difficult to track. In particular, when the firm owner linked with the original contract or purchase quits or changes responsibilities, unused licences or programmes quietly renew, leak cash, and impair profitability.
Marketing and Ads
Brand and product recognition, consumer loyalty, and promotional methods are included in marketing and ad budgets.
Marketing procurement costs and fees include:
- Paid ads
- Designing and hosting websites
- Market research costs
- Sponsorship expenses
- Content creation PR agency costs
Advertising focuses on specific activities like TV, online, and print ads. To succeed, marketing and advertising involve services and supplies, most of which are indirect costs.
Management of indirect spend challenges
The nature of indirect purchase makes management difficult. Fortunately, the organisation can manage many of these elements.
Businesses must overcome these obstacles to improve indirect procurement cost-efficiency:
Lack of approval process: A strong purchase approval process simplifies indirect expense tracking. It checks purchases for policy compliance and identifies expenditure trends, price inconsistencies, and quality issues.
One survey found that over 50% had experienced platform fraud in the past two years. Redundant purchases, out-of-contract spending, dangerous vendor agreements, and procurement fraud are hard to spot without proper approvals. Finance and management can cut waste and stay compliant with an efficient interdepartmental approval procedure.
Undocumented policies: Buyers have no guide without a clear purchase policy. This complicates buying decisions and denies the finance team expenditure management capabilities. When staff have the right procedures for buying, companies can prevent costly procurement concerns.
Maverick spend: Maverick spend, sometimes known as “rogue” or “shadow” spending, is buying outside a company’s policies or without approval. Rapid spending without visibility into the transaction, vendor source, or procurement cost is common.
Maverick spend on corporate cards, expense reports, and auto-renewing subscriptions is hard to regulate. Some employees may not realise their purchase is unauthorised. In others, they may bypass approved suppliers to boost profits.
Out-of-policy spending wastes discounts, overspends on emergency purchases and delivery, and raises costs. Accountants struggle to reconcile these transactions, wasting time and productivity.
Redundant vendor relationships: Multiple departments or locations using identical vendors to buy the same commodities might reduce leverage and product quality. Uniforming purchasing to decrease product SKUs and vendor count increases savings and negotiation power, but it requires a single procedure. Procurement management systems are the most efficient way to streamline indirect spending across departments and locations.
Managing indirect procurement categories
The finest procurement process allows end users and buyers to easily submit requests, rapidly navigate a well-designed approval procedure, and instantly assign fulfilment and payment to accounts payable.
1. Develop and describe the buying process
Proper procurement and strategic sourcing begin with a systematic process. Document and formalise every purchase or contract stage. It doesn’t need to be complicated, but it should enlighten stakeholders on how to meet their needs, give them tools and forms to make informed decisions, and provide progress information to guarantee a smooth purchase.
The following steps create or improve a purchasing process:
- Define the process’s scope and purpose to set goals like reducing maverick spend and assuring quality.
- Identify departmental approval stakeholders. Directors, legal, IT, security, finance, and executives may be involved. Contract value often affects approvals. Direct management permission may suffice for modest contracts or petty cash purchases. Larger contracts over a certain dollar amount may require further permission and research.
- Create a central intake form or buy requisition for purchase orders. Create a workflow for stakeholder approval, vendor selection, and accounting/finance payment processing.
- Review the purchase process regularly to assess efficiency and ensure it includes all procurement aspects.
Communication is key to procurement policy success
Once developed, explain the new policy to the organisation regularly and promptly to inform stakeholders and how it affects purchasing. Point out changes to purchase requests, stakeholder approval, vendor selection, and accounting/finance payment processes.
Give teams simple access to buy documentation with clear guidelines. A central database or wiki improves procedure documentation and reduces errors.
2. Centralise spend data
Centralising spend data simplifies tracking and understanding sources. For this, firms should collect data from all relevant sources, such as:
- Financial records
- AP reports
- Company cards
- Reported expenses
- Contracts with vendors
Centralised data streamlines budgeting, forecasting, and sourcing and payment procedures and enhances spend visibility. It increases the likelihood of spotting suspect or unusual purchase activity.
3. Analyse spending
Centralising data allows organisations to evaluate spending patterns. Find superfluous SKUs, unneeded or maverick spend, and process improvements to cut waste.
Spend analysis reveals vendor contract and internal policy violations and allows correction.
Spend analysis should include multiple perspectives:
- Total spending by location
- High-volume, recurring purchases
- Similar SKU purchases (e.g., battery brands)
- Average department or business unit spend
- Budget differences between localities
- Rental and equipment cost adjustments locally
These lenses provide greater context for spend analysis and better decision-making.
4. Simplify vendors
Streamlining vendor relationships reduces administrative overhead for contract management, invoice processing, and other vendor-related tasks, optimising procurement costs.
Since organisations may build deeper relationships with fewer vendors, it improves supplier relationships. Greater bargaining power could lead to better terms, discounts, and lower prices.
Fewer vendors improve spend data visibility, making cost tracking and savings identification easier. Monitor vendor performance against terms and conditions and supplier compliance with requirements is simplified.
5. Make negotiations stronger
Centralising procurement and simplifying the vendor pool helps organisations become better preferred vendor customers. Every vendor has a stronger negotiation position and can negotiate better prices and terms due to volume.
A smaller vendor list simplifies every accounting phase. Fewer vendors mean fewer monthly invoices and improved visibility into department and location spending by category or vendor. This improves benchmarking and lets procurement track vendor performance and compliance.
Tips for better indirect procurement management
Backup your most important items.
Despite improving since the COVID-19 pandemic began, supply chain management difficulties still plague every organisation. For mission-critical commodities, the best procurement teams create three or four backups to meet demand amid delays or shortages.
Identify your most crucial items and create a business continuity strategy if your frontline vendor has sourcing issues.
Buy in quantity.
Businesses buying in bulk often save money on individual items. Hospital nitrile gloves are an example. These inexpensive things are essential to doctor’s offices, dentists, and other healthcare practitioners’ daily operations. For volume discounts and protection against shortages and delivery delays, buy these items in bulk. Bulk procurement assures stakeholders receive the right, high-quality products and saves time and money locating similar things in case of an issue.
Think about procurement software
Most organisations need tools to manage deal flow and scale as procurement functions become more complicated. Order.co automates the purchasing process from intake to payment.
