Ignoring indirect spend costs organisations significant savings.
Without categorised spend there is no way to see where the money goes.
Contracts and preferred suppliers make it possible to steer on spend.
Fixed indicators show how much spend is genuinely under management.
Organisations often pay little attention to indirect expenditures as the need is not seen or perceived. Significant savings potential is then lost for these expenses. When an organisation does decide to actively start this, they often struggle to know where and how to begin. In this blog, John Schouten, Director Product Management at ISPnext, discusses the five steps to increase Spend Under Management within organisations.
Increasing Spend Under Management or establishing a savings program begins with gaining insight into spending. Without a thorough understanding of your expenses, it’s not possible to prepare a sound strategic plan to meet your objectives. Begin by analysing your direct and indirect expenses while giving special attention for the following components:
TypeThe above insights reveal the extent to which spending is actively managed, monitored and optimised. This together constitutes the current Spend Under Management situation and is expressed as a percentage of addressable expenditures. Answering the above questions is often a daunting task in its own right. This is especially true when working in multiple countries or with multiple entities and multiple ERP systems. Delivering this via a spreadsheet is a nearly impossible task. Completeness of spending is exceptionally important, making categorisation an essential process. In categorisation, distinguish between main and subcategories, such as the main category of IT costs with subcategories of hardware and software.
The above insights reveal the extent to which spending is actively managed, controlled and optimized. This together constitutes the current Spend Under Management situation and is expressed as a percentage of addressable spending. Answering these questions gives you a clear starting point for improvement.
In practice, the agreements made for indirect expenditures are limited by contracts. Still, this is an important step for increasing Spend Under Management and realising savings. Establishing a contract is one thing but it is always accompanied by its effective use within the organisation. Due to the diversity in expenditures, it is important to provide the entire organisation with low-level information on who the contract/preferred suppliers are, which product range is purchased and under what terms and conditions goods and/or services are provided. In short, how do you ensure that a well-negotiated contract does not disappear into the desk drawer of the Procurement department? The answer is to centralise procurement processes.
By centralising the procurement role of indirect expenditures, it becomes possible to work with preferred suppliers, goods and services. As an organisation, of course, you can also determine the degree of centralisation since it is not possible in every organisation to have certain goods and services provided by the same suppliers. For example, suppliers may not be able to deliver to all the countries present. In addition, not every entity has the same type of procurement.
An important aspect in centralising procurement processes is digitisation. By digitising, authorising expenditures becomes easy and can be ordered quickly in accordance with desired procurement. This also provides insight into the commitments made and allows intervention in expenditures that are labelled as unnecessary or undesirable.
“Without a thorough understanding of your expenses, it’s not possible to prepare a sound strategic plan to meet your objectives.”
Performing previous steps increases Spend Under Management. However, it is also important to monitor progress and make adjustments as needed. If a supplier is chosen with the lowest price, delivery conditions may not be optimal, so the lowest price may not always be the best price. Define KPIs and set the standard for each KPI. If the standard for delivery reliability, for example, is not met, enter into discussions with your supplier.
With the steps outlined, it becomes possible to increase Spend Under Management to achieve cost savings, minimise risk and operate more efficiently. The above process must be continuously monitored and is never finished. It is therefore important to secure this as a standard process in your organisation, so that expenses receive the necessary attention and a broad approach to process optimisation begins to emerge.
In the blog entitled, "Why organisations often leave the potential of indirect procurement untapped," you can read about why expenses and processes are so difficult to manage in practice.