Indirect Procurement Explained

Every business that deals with sourcing vendors and making purchases uses the process of indirect procurement in various ways. Depending on an organization’s size and complexity of purchases, the indirect procurement process can have strong consequences on a company’s spend management and total revenue. As the use of professional services and digital software tools has risen in the past few years, the practice of optimizing indirect procurement methods is taking focus.

How is indirect procurement handled? What’s the difference between direct and indirect procurement? And what can you do to ensure the highest revenue for your business without sacrificing the quality of goods and services you will be purchasing?

What Is Indirect Procurement?

The indirect procurement process optimizes purchasing any items used to maintain day to day operations; typically goods and services not directly related to manufacturing a business’s product output.

Indirect spend takes up only a portion of the overall procurement function (with many professionals citing 15% to 30% of total revenue coming from indirect sources). Nonetheless, its importance has increased significantly in recent years.

Indirect costs have been rising as many organizations began selling virtual goods and services over manufactured products. This trend has prompted management groups to focus more on indirect procurement optimization.

Examples of Indirect Procurement

Indirect procurement examples include:

• Office supplies
• Capital expenditures for office equipment and general computer hardware
• Travel expenses
• Marketing services 
• Human resources 
• Professional services 
• Outsourced services 
• Software licenses 
• Rent for facilities
• Utilities, maintenance, and repairs

Office Supplies

Office supplies aren’t used to directly produce a product and, therefore, are classified as indirect procurement. Some companies pre-screen vendors and let employees buy office supplies from these authorized companies. Some specialized procurement software and purchasing cards with employee limits handle the purchasing of office supplies and other indirect maverick spend items without needing to issue expensive purchase orders through the procurement department. 

Capital Expenditures for Office Equipment and General Computer Hardware

Indirect capital expenditures require an approved purchase order and should be included in the company’s annual capital budget. 

Routine indirect procurement like buying accounting department computers usually doesn’t require a formal capital expenditure justification analysis if a new hire is approved or a broken computer replacement is required. 

Travel Expenses

Travel expenses that aren’t directly related to manufacturing products are considered indirect procurement expenses. Often employee expenses are reimbursed through submission of an expense report or charged to controlled corporate spending cards. Travel includes airfare, rental cars or Uber/Lyft fares, lodging, standard mileage reimbursement, and meals. 

Marketing Services

Marketing services, as a type of indirect procurement, include advertising, freelance writers, SEO and social media experts, marketing agencies,  and influencers. Businesses also use in-house marketing employees to perform marketing duties. 

Human Resources

Recruitment, onboarding, and training expenses fall into the category of indirect procurement. 

Professional Services

Businesses often use professional services firms. For example, legal firm expenses, CPA firm audit and tax fees, and advisors and consultants are included in the professional services type of indirect procurement. 

Outsourced Services

Companies may outsource IT and accounting as forms of indirect procurement. For example, medical offices often outsource billing. 

Software Licenses

SaaS subscriptions are a type of indirect procurement that may proliferate as maverick spend. Some specialized software products help your company perform SaaS spend management for its subscriptions to determine duplicate SaaS subscriptions, subscriptions no longer used by terminated employees, spend totals by software type, and contract expiration and renewal dates. 

Rent for Facilities

Rent expenditures for office and warehouse facilities are considered indirect procurement. 

Utilities, Maintenance, and Repairs

Utilities, maintenance, and repairs required to run a business are indirect procurement items. 

Distinguishing Direct and Indirect Procurement

The distinction between direct and indirect procurement is an important one to make since, while both work towards more cost-effective spending, they still fulfill different functions.

Direct procurement teams largely deal with buying the raw materials needed to manufacture the goods sold by the firm. You’re ultimately buying items that you later sell to the end consumer after some processing. These direct materials differ immensely depending on what the company outputs. Examples of direct procurement include:

• A restaurant ordering vegetables, meats, and beverages
• A laptop manufacturer buying motherboards, hard drives, screens, and keyboards.
• A fashion brand might source cotton, silk, and fabrics.

Exact differences between direct and indirect spend are:

• Company policy. Direct purchasing typically occurs over a centralized management team and a rigid budget. Indirect purchases are often decentralized, focused on the smaller parts of the business with their own unique needs and approvers. A formal approach to indirect procurement is necessary to prevent inefficient or rogue spending.
• Inventory management. Through demand forecasting and supply chain management, mapping out direct purchases is relatively straightforward. You order just enough to avoid a costly surplus while preventing shortages. By contrast, indirect sales are naturally made on-demand and can be challenging to plan out in advance.
• Supplier relations. A company with an enduring product line is likely to use the same suppliers to manufacture those items. The vendors you make direct purchases from are thus long-term, resulting in mutual understandings regarding expectations, contract terms, and delivery schedules. By comparison, indirect transactions are short-term, and you pick suppliers based on price efficiency and short-term benefit.
• Management focus. Administrators allocate varying amounts of the budget towards direct and indirect expenses. Industries like manufacturing have most of their attention and funding on direct purchases, whereas service-based companies rely on indirect.

In the past, direct spend took up almost all the attention of administrators because it had direct implications on the bottom line. Today, however, we’re starting to see a greater focus on indirect procurement, and a mixture of the two is the best approach for real-world business processes.

Direct and indirect procurement are also starting to merge together in recent years with the advent of the service economy. Many businesses today sell as-a-Service software products or operate mostly online, which means making a lot of “indirect” purchases produces rather direct results. Either way, knowing the two types helps you better understand what indirect procurement includes and deals with.

Finance and Indirect Procurement Responsibilities

Not all companies will have a dedicated procurement team. Often, the role of procurement and making purchases falls under the finance team. Those responsible for indirect procurement business operations must do more than just find the lowest price. They create an indirect procurement strategy. Indirect procurement functions can include reworking internal operations to lower the number of needed purchases and building strategic relationships with suppliers for more favorable contract terms.

What you generally need is an understanding of your supplier base, supply chain, and overall business goals. Combined with modern tools and eProcurement solutions, you’ll be able to achieve a high return on investment. Aim to have the following mindsets during your journey:

• Cost control. Aiming for the lowest price isn’t always the best option. Negotiate with suppliers or even consider changing vendors entirely. You can also bundle together purchases for bulk discounts or adjust the specifications of the products you order to lower prices.
• Willingness to automate. Process automation has matured as a field in modern business, but those same companies statistically do not invest in eProcurement solutions as often as they should.
• Corporate social responsibility, CSR. This consideration requires that indirect procurement decisions face the same social responsibilities expected of the company. Doing so upholds the organization’s reputation.

Overall, expect the procurement team to create value for the internal stakeholders, whether they are internal customers, administrators, or suppliers.

What Skills Do These Procurement Professionals Need?

With a wide variety of purchases day-by-day, indirect procurement processes can become complicated and broad. Procurement professionals should have an understanding of:

• Supplier relationship management. This can include selecting vendors, negotiating terms and conditions, and other related tasks.
• Category management, a strategy where category managers consolidate similar products and services needed throughout the company for maximum price efficiency.
• Support for multiple subsidiaries. Not only are there dozens of business units contributing to indirect expenditure, but they also might be from different nations.

For corporations operating in multiple regions, indirect procurement activities should be handled at a local level, as local professionals understand the culture, laws, and contacts relevant to the area.

How Do Indirect Procurement Processes Save You Money?

Indirect procurement processes boost revenue by:

• Reducing maverick spending. An official process will help to identify maverick spend, or spend that’s unaccounted for, and allow you to make appropriate changes.
• Consolidating purchases. Consolidating the demand for similar purchases not only simplifies bookkeeping but also might open the door for bulk discounts.
• Cleaning up the supplier base. Not all vendors will give you a positive experience. Robust supplier relationship management can weed out less reliable vendors and ensure you receive a consistent consumer experience.
• Deploying automation. Software solutions are largely replacing many of the manual aspects of procurement, reducing human error. Data collection is a benefit here, as finding savings opportunities and making informed decisions is easier when you have the right information.

The Advantages of Indirect Procurement

Indirect procurement advantages are not limited to cost savings that boost business profitability.

Advantages of indirect procurement include:

• Cost savings
• Visibility into business spending
• Greater supplier availability
• Ongoing supplier performance evaluation

Cost Savings

To achieve cost savings, implement procurement best practices and automation. 

Your company’s indirect procurement processes can include better control of maverick spending without requiring purchase orders for low-cost routine items from pre-approved suppliers with approved pricing. Procurement automation systems give you better PO and contract management to review opportunities for renegotiation of price, volume discounts, and payment terms, including early payment discounts.

Visibility into Business Spending 

Modern procurement automation systems with AI features help you capture spending by vendor, by procurement category, and in total, analyze trends and anomalies to make decisions and improve control over spending for better cost management. 

With automation for the procurement business function, you centralize documents, including contracts and POs. Your business can use a unified procure-to-pay system with ERP integration and AI-driven analysis.

Greater Supplier Availability 

Whereas direct procurement vendors are often specialized in providing one type of raw materials, businesses can select from a larger pool of competing suppliers when buying items or services through indirect procurement. This gives them a negotiating advantage and the ability to find quality providers for their business needs. 

Ongoing Supplier Performance Evaluation

Specialized procurement software helps you with vendor scoring to retain only the best vendors and make plans to obtain replacements. Vendor evaluation includes on-time delivery, quality of items provided, financial stability, and price competitiveness. 

The Challenges of Indirect Procurement

Working with service-based purchases is already a different process entirely from purchasing manufacturing materials, so indirect procurement teams need to have their own dedicated approach. Some possible challenges are:

• Sheer scale. From large contracts with dozens of suppliers to the hundreds of spend categories, there can be a lot on your plate at any given time.
• Low visibility. Approvers aren’t always involved from the beginning or kept in the loop throughout. This can cause bottlenecks and lead to missing information.
• Controlling spend from the start. With various purchase requesters and approvers, it can be hard to see the big picture and know where necessary spending is occurring. Streamlined processes help to create both visibility and control.

With the right preparation, any company can realize the benefits of indirect procurement, build better contracts with suppliers, and empower better purchasing environments. Let’s get into the strategies and best practices to do so.

Procurement Strategies and Best Practices

Working towards this key business process is about more than just achieving savings; it also aims to prevent overspending, increase visibility and control, improve facilities management, and provide better supplier and vendor management.

What are the key differences between a successful indirect procurement approach and an ineffective one?

Aim For High Spend Visibility

The reason so many purchasing processes are inefficient is that they’re fragmented and usually made without comprehensive approval from the organization. When you increase visibility into financial activity, you’re opening the door for procurement optimization.

Clean Up All That Data

Inconsistency is a prominent challenge for indirect spending. All that on-demand spending comes in many formats and from many different departments. In order to make sense of it all, data management practices help clear up the clutter, make data analytics more consistent, and pave the way for transparency.

Practice Strategic Sourcing

Start by looking at your contracts to find ways to save with strategic sourcing. Then, collaborate with suppliers to make those savings a reality. Align your efforts with the overall goals of your company and create your own standards to compare your performance against.

Rework Your Supplier Base

Tying into sourcing strategies, much of your work deals with negotiating new contracts, facilitating positive communication with suppliers, and monitoring vendor performance. Money should be spent ethically and sustainably.

Educate Staff on Indirect Procurement

Since employees are ultimately the ones making these purchases, the procurement team should focus on educating everyone in the company about the new policies in place. What steps are you taking to boost procurement efficiency, and how can individual employees help?

Software solutions designed for indirect spend management often have guidance and other resources for employees to train themselves on the implementation of these new policies. This process is known as “change management.”

Make your new policies clear and understandable. The more difficult it is to comply, the slower the results will be.

Working With the Finance Department

Procurement and finance have interlinking responsibilities. Spending performance can be analyzed through collected financial data to give you context for future strategic procurement practices. Life for AP is also easier when procurement and finance are synced and on the same page.

Consult a Group Purchasing Organization (GPO)

Commonly used in the healthcare industry, GPOs aggregate demand from multiple companies and use that total purchasing volume to leverage bulk discounts with distributors. They can also reduce supplier risk and save you time and effort in finding potential vendors to work with.

Take Advantage of Digital Tools

Software and automation have already empowered businesses to become more productive, and the same holds true for cloud eProcurement solutions for the modern purchasing process. Automation procurement and purchasing software will help you actualize your new strategy by reducing human error, creating much needed visibility, and providing you with more accurate spending data analytics.

Accessible dashboards for data analysis can show off your cost savings and beneficial partnerships to upper management, as well as giving you more direct control over your spending. Such a dashboard also makes it easier for anybody both within and outside the procurement team to contribute.

Pitfalls And Common Mistakes To Avoid

Indirect procurement optimization can’t occur when you don’t have experienced team members and a modernized software-based approach. But even with a strong foundation, avoid making these common mistakes during negotiations with suppliers.

• Don’t rush to make a decision. Vendors who know that you don’t have many other viable options will naturally raise the stakes. Make all the concessions you need from your preferred choice first before revealing your decision.
• Hide your budget. Suppliers know how to maximize their own side of the deal, so don’t reveal to them your total budget and consequently reduce your ability to negotiate more favorable terms.
• Get the timing on your side. A vendor can also use timeframes to its advantage. For instance, you might need to close a sale before the end of a current quarter. Don’t reveal this information during the meeting either to avoid giving leverage.

FAQ

Summing It Up

Indirect procurement relates to items your business purchases that are not included in the product or service provided by a business, which is called direct procurement instead. Examples of indirect procurement are business facilities costs, utilities, and maintenance, office supplies, capital expenditures, employee travel expenses, outsourced services, and SaaS subscriptions. 

Procurement management automation systems streamline workflows, automate processes, and reduce fraud risks and errors to help your business efficiently achieve its goals and better control indirect procurement and direct procurement. You’ll have better supplier and vendor relationships. 

Achieve cost reduction, make better deals with vendors, and gain the best competitive advantage you can get from indirect procurement today when you use the best procurement solutions for your business needs. Explore more to get started with an eProcurement solution.