Procurement is famous for our terminology – it is perhaps the one area where we’ve mastered the fine art of marketing. The labels "direct" and "indirect" spend are a perfect example. Direct spend materials are eventually sold to the customer, and therefore they are essential. Very important. The management of direct spend determines the size and health of the corporate top line. As a result, procurement may or may not have access to manage direct spend categories. After all, it is "direct" – direct from the business to the consumer without taking a detour through procurement.
Indirect spend is all other addressable spend. Indirect spend categories are not usually the stuff of MBA dreams, but most people are willing to concede that a business can’t operate effectively without a steady supply of "not for resale" products and services. Since it is poor business to overpay for anything, procurement has always had steady (if staid) work managing indirect spend.
The division between direct and indirect spend has been solved for a long time. It hasn’t been seriously revisited since the acceptance of cloud computing or everything-as-a-service delivery models changed the enterprise spending landscape. Would anyone today make the case that technology spend is unimportant? Not a chance. And unless you work for a tech firm, technology counts as indirect spend. The profile of indirect spend is long overdue for a makeover.
According to the Oxford English Dictionary, indirect means “not straight; not following the shortest way.” Maybe the time has come to make indirect spend take the shortest way. After all, spend is spend, and a large profit margin is just as critical as a large top line. Can we make the case that indirect spend is just as significant as direct spend?
Indirect Spend is Prime for Self-Guided Buying
What could be more direct than facilitating a single line between a consumer and their supplies in a B2B setting? Self-guided buying makes that possible by using technology to allow distributed buyers (i.e. non-procurement employees) to find and qualify suppliers for purchases that are not currently covered by online catalogs via an eProcurement platform.
Not only does guided buying make the management of indirect spend more direct, but it also allows procurement to say yes rather than no far more often. Procurement gains the opportunity to build relationships with critical internal stakeholders by facilitating purchases instead of road-blocking them, and we can do it without sacrificing our contributions to governance and compliance.
Indirect Spend Delivers a High ROI
One of the easiest things for procurement to overlook is "net savings," which looks at the cost of our time and effort in pursuit of negotiated savings. Plenty of the indirect sourcing projects that we run end up breaking even or even running in the red because of the time required for procurement resources to source them. Those categories of spend are ideal for B2B marketplaces. In a "best of both worlds" scenario, procurement can use online marketplaces to satisfy an expansive range of indirect product and service needs – without the delays and costs of a full sourcing project.
The good news about B2B marketplaces is that they have been maturing at the same rate as indirect spend. They are not only convenient and efficient source of supplies, but they can also be used to satisfy demand far beyond laptop cords and labels. According to a recent McKinsey article, B2B marketplaces are now able to facilitate the delivery of complex services. The fact that they can be fully integrated with Source to Pay (S2P) platforms reduces risk and maintains procurement"s need for spend oversight.
Indirect Spend IS Operational Efficiency
Indirect spend may not have that "direct to consumer" or "top line" swagger, but very few organizational processes can operate efficiently without it. If every dollar of direct spend has to take a detour or experiences a delay because of an indirect spend management requirement, the enterprise will stop functioning. Period.
This is the surprising thing about indirect spend. It has the dubious honor of being "less important than direct spend" but marketing can’t work without laptops, sales can’t work without the right CRM, and shareholders and stock owners will look away if the bottom line swells out of control. The top line may be a headline, but the bottom line is…well, the bottom line. The more efficiently procurement can deliver against indirect spend requirements of all kinds, the more efficient the whole operation will be.
The shortest path between two points is a straight line, and procurement has a huge opportunity before us to make sure indirect spend takes the "shortest way." That might mean a straight line through self-guided buying or a B2B marketplace, but at the end of the day, if we can shorten those lines, we can increase savings, efficiency, and stakeholder regard all at the same time.