Overcoming Three Key Barriers to Optimising Indirect Spend
We know that tackling tail spend is a good way to control costs. But getting control of indirect spend is often easier said than done. In this blog, we're going to explore three key barriers to optimising your tail spend.
Compared to direct costs, where there is arguably more room to drive down costs through strategic sourcing partnerships, getting your myriad sources of indirect spend into line can be a bit like herding cats. It’s no wonder, when you think about it.
Indirect spend suffers from three major characteristics that can act as significant barriers to optimization. The first, and potentially most obvious, is the vast number of service providers and suppliers involved, particularly in the long tail of indirect spend.
Range of Providers
Whereas your direct spend might be mostly focused on a reduced number of suppliers, for example for key manufacturing components or raw materials supplies, in the realm of indirect spend you have to deal with a range of providers for just about everything.
This immense diversity leads to the second major barrier to indirect spend optimisation: complexity.
Not only do you have to deal with multiple providers for multiple products and services, but the number of channels and stakeholders involved is greatly increased compared to direct procurement.
Finally, there is the fact that much of indirect purchasing is devolved to branch or department level. Facilities Management or catering, for example, are usually sourced locally and can vary widely in terms of cost and quality.
These three factors make it very hard to reduce indirect spend through classic cost-reduction measures such as volume purchasing or competitive bidding.
Nevertheless, there are still things you can do to improve the situation
Specifically, there are several types of cost-reduction opportunities on both the demand side and the supply side of the purchasing equation.
The demand-driven opportunities are to eliminate demand, review your purchasing requirements, reduce demand frequency, consider alternative ways of filling needs, encourage re-use, simplify products and services, and reduce your portfolio range.
On the supply side, meanwhile, you could consider consolidating spend, re-negotiating contracts, re-tendering, leveraging low-cost sourcing, increasing compliance contracts and rationalising your supply base.
A relatively easy way to achieve much of this is by putting your indirect procurement through a single system, such as the Maistro Platform, which can offer standardized contracting and competitive bidding without limiting service providers.
As depicted in our recent whitepaper, firms that use digital to manage tail spend can cut their annual expenditures by 5% to 10%, on average. Maistro clients regularly achieve savings of between 10% to 15%.
The key here is understanding the potential that tail spend has. You will always recognise 0% savings in an area where you are not actively trying to achieve savings. To quote accountancy firm EY, “Although indirect procurement costs are sometimes considered as ‘fixed’ and much more inflexible than salaries and bonuses to manage, they are one of the few areas in an organization that still provides ample opportunities to reduce costs.”