What Is Indirect Spend, and How Does One Manage It?
“WE PAY HOW MUCH?!”
The story is the same at most companies. Chief executive officers (CEOs), chief financial officers, and other C-suite executives decide that it is time to take a closer look at what they pay for the goods and services required to keep their businesses running, and are often shocked at the excessive costs they are paying. Mostly these costs are in areas that have not been closely managed in the past, ranging across categories such as office supplies, telecommunications, insurance, and marketing materials. Indirect spend—spend not tied directly to the creation of a finished product or service—can make up 40 percent or more of an organization’s total expenses.
THE TYPICAL SCENARIOS
All too often, oversight of most expenses is left to the group that owns the budget: finance, human resources (HR), administration, or marketing. The problem is, the stakeholders who manage the spend category or signed the original agreements were probably not hired based on their ability to manage costs or budgets and have little or no formal training in procurement or strategic sourcing.
As management comes to this realization, a knee-jerk reaction soon follows. Regardless of the product or service category, their immediate gut reaction is that the cost is too high. The executive team issues a mandate: Reduce costs, in any way possible. To complicate the matter, the executive team usually issues a goal that has no basis ...