Is indirect spending out of control?

By Rachel Griffiths, Business Process Consultant, Canon UK

The pressures facing European businesses to deliver more value and further savings has put a sharp focus on the finance department and its approach to outgoings. With different internal working groups, business units and teams all often managing disparate supplier relationships paid for by individual budgets, understanding the landscape of indirect spend within a business can often represent a challenge. Management of indirect spend can be an even bigger task.

It was the former director of McKinsey, Peter Kraljic, who first identified the need for purchasing to play a strategic role within a business over and above its traditional position as a manager of the supply chain. Today, procurement is generally recognised as a function enabling significant commercial savings alongside its management of supply chain risk. But while the procurement function has evolved from Kraljic’s model, it hasn’t yet been perfected. Recent Canon research found that a staggering 67% of European businesses claim to have indirect spend only partially under control. Most worryingly, 7% of business admit that they do not have their indirect spend under control.

Supplier and demand

Supplier management is often one of the biggest challenges facing businesses when it comes to spend management. While indirect procurement costs can sometimes appear insignificant in isolation, organisations can underestimate their overall impact on the bottom line when they remain uncontrolled and unmanaged. One supplier working under this model is a problem. Given that most businesses have more than one supplier, a poor management strategy can put the business at risk of non-compliance and spend duplication.

Across Europe, just one in three (34%) companies judge their management of supplier relationship as above average while 21% admit that this a potential problem area. Vast improvements are clearly needed.

Eliminating the Mavericks

Inefficiencies and cost overruns in indirect spend are problematic for many organisations. ‘Maverick spending’, when employees violate company policies and procedures in the procurement process, must be avoided if the issue is to be extradited. While employees can grow frustrated at over-legislated procurement processes, when these procedures are sidestepped, costs can quickly spiral out of control.

While ‘maverick spending’ varies – from an intentional disregard for the defined procurement processes to simple purchasing errors made without adhering to previously negotiated purchasing terms –  the issue can be a big one. The selection of suppliers is a long and complicated process but one which is essential to building an organisation based on controlled, visible and budgeted spending.

Collaboration is key

These factors are bringing the inextricably linked Purchase to Pay (P2P) processes of finance and procurement closer together. This link holds one of the crucial keys to managing organisation-wide indirect spending. As P2P embraces automated processes, technologies and digital networks that enable closer collaboration between finance and procurement, the departments’ mutual objectives of managing, controlling and ensuring visibility over spend come closer to reality. Accounts Payable (AP) also has a role to play. AP, for example, will use the information contained within invoices and related documents to identify opportunities for early payment discounts from suppliers and mitigate both financial and supply risk.

Conversely, unmonitored supplier programmes that are allowed to remain unchecked can quickly become ineffective and detrimental to the bottom line. A well-developed indirect spend strategy can create a strong impact to the company’s profitability. The fact that 67% of businesses claim to have indirect spend only partially under control demonstrates the extent of the opportunity for businesses to drive cost reductions in this area. Ultimately, businesses need to ensure that only necessary and appropriate purchases are made; that they are made with clear managerial visibility of the impact on budget; and that they are made with preferred suppliers whenever possible. An effective P2P function represents the essential insight into efficient and cost effective purchasing required by businesses to finally gain control of indirect spending.

The indirect opportunity

The introduction of end-to-end P2P solutions, with their inherent enhanced visibility and process collaboration, could enable businesses to spend less time managing P2P procedures and more time strengthening ties with suppliers.

To succeed in managing indirect spend, every company needs a consistent approach – aligned with the business strategy. They need robust back office support processes to understand and analyse what is being purchased and from whom. A visible indirect spend multiplies a company’s capacity to comply, meet internal standards, mitigate risk, ensure supplier quality and move with speed. If European businesses are able to allocate more time to building supplier relationships, introduce more collaborative initiatives and investigate what tools are available to support continuous improvement. Transitioning indirect spend management from an administrative burden to a strategically aligned approach that supports the business requires intelligent usage of technology and a disciplined approach to resource management.

Rachel Griffiths has had more than 20 years’ experience in the UK and Australia in Accounts Payable and Shared Services management for companies such as Hutchison Telecoms, Philips Medical Systems, Vodafone, and Australand. Her career has seen her specialising in driving process improvements, increasing customer service and creating high performing teams.

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