What is indirect procurement and why your company should care

Projected to grow by an estimated 7 percent per year globally, indirect procurement provides an often overlooked opportunity for companies to save time and money. When companies use digital solutions to “revolutionize” indirect procurement, McKinsey estimates cost savings of 15 to 20 percent. This provides a huge opportunity for companies to invest in their longevity and improve their bottom line. 

What is indirect procurement?

Indirect procurement (also known as indirect spend) is the goods, services, materials, and supplies that are needed for an organization to run everyday, but are not included in a company’s final product. Indirect procurement ensures teams have the tools and services they need to succeed in their jobs. For example: office equipment, SaaS and information technology, employee development tools, and marketing and advertising expenses.

What is direct procurement?

Direct procurement includes goods and/or services essential for an organization to create their product. Anything related to an organization’s end product or service can be categorized as direct procurement if it eventually finds its way to the consumer. Since these items are necessary to create the product, direct procurement is usually a strategic process that involves analysis, forecasting, negotiation and constant vigilance, usually by a dedicated and centralized team. 

How can a lack of oversight into indirect procurement affect your business?

Because indirect procurement is often viewed as “behind the scenes,” there tends to be less structured governance policies. However, leaving indirect spend unchecked leads to operational inefficiencies, unoptimized budget, and compliance issues. It ultimately cuts into a company’s bottom line and results in costly mistakes.

One of the biggest challenges with indirect spend is that it covers a broad spectrum of purchases made on an as needed basis. Because of this, it’s often decentralized and harder to track. Here are a few issues that pop up when indirect procurement is left unregulated: 

• Lack of cost optimization.
  • Procurement teams lack visibility into contracts and indirect spend. Without this visibility, procurement teams are left without a process to easily track and find benchmarking data, leaving them unprepared for negotiations.
  • Shadow spend can increase. Without an easy process to request the tools and services they need, employees may purchase SaaS or other items without company knowledge. And without company backing and lacking the information they need to negotiate effectively on behalf of the business, these purchases can lead to incomplete, inaccurate, or overpriced contracts. 
• Lack of operational efficiency 
  • Without a process to track, control, and analyze indirect spend, procurement and IT teams waste large amounts of time searching for accurate and timely contract and spend data; time that they could spend on more strategic initiatives.
  • With employees buying whatever SaaS they want, whenever they want, employees become spread too thin across too many apps, leaving teams working in silos and inhibiting effective collaboration. Without the right tools to succeed, teams operate inefficiently, affecting overall company timeline, success, and revenue.
• Risk and compliance issues
  • In 2023, the average SaaS portfolio reached a high of 371 apps, indicating large amounts of SaaS sprawl and redundancy. If a company does not know what a team or employee is buying, businesses open themselves up to unnecessary third-party risks, causing headaches down the line for not just procurement, but finance, IT, and legal 

What can a company do to ensure visibility into indirect procurement?

Understanding indirect spend allows companies to identify savings opportunities, negotiate better terms with suppliers, eliminate wasteful spending, and reallocate valuable time and resources to more strategic projects and goals. By implementing a process to gain visibility into all indirect spend, a company gains the power to make informed decisions regarding the entire organization. In doing so, a company can ultimately improve its long term resilience and growth. 

Organizations usually have existing processes in place for direct procurement. Indirect procurement, however, tends to be decentralized, with multiple internal stakeholders. It’s important to take a cue from direct procurement and work to centralize the process and data to ensure visibility between them. 

By investing time in creating a single source of truth for both direct and indirect spend, companies can create an accessible process that benefits all stakeholders in the procurement process. In fact, 85% of procurement leaders believe that “business users would comply with procurement processes if their companies offered intuitive, self-serve technology,” according to a 2023 survey. To achieve this, a company needs a centralized portal — with customizable intake forms — to allow employees to submit role-based requests. This allows stakeholders to make informed, holistic, decisions around purchasing, management, and renewal. 

Automated approval workflows can also aid in the process. Once something is requested, all stakeholders in the procurement process (Finance, IT, Legal, etc.) can work together to ensure a purchase is necessary, compliant, and falls within budget. The ability to track all spend, provides a company with a source of truth to aid in forecasting, budgeting and strategic planning. This can reduce costs and benefit all key stakeholders. It can also help with strategic planning for ongoing and future negotiations. 

Often overlooked in favor of direct procurement, visibility and actionable automated processes for indirect procurement provide opportunities for companies to optimize spend and invest previously wasted time into more strategic initiatives. By gaining control of indirect spend, companies are able to gain insight into and cut excess and redundant spend. They can be prepared and informed before they sit down at the negotiation table. And they can be proactive in risk management, all while empowering employees to access the tools and resources they need to contribute to the company’s longevity and success.