Key steps in achieving cost excellence in indirect spend

Companies seeking greater transparency and control over their spending in indirect categories should prioritize three main areas of action. In the following sections we set out the most important opportunities to improve the way indirect spending is managed and conclude each section with suggested KPIs that companies can adopt to measure their progress.

1) Centralize and collaborate

Procurement is traditionally a central function, and for good reason. Centralizing the company’s procurement activities helps to ensure processes are as simple and standardized as possible and keeps lines of accountability clear. This approach brings valuable scale benefits in categories where global or regional purchasing is feasible, such as logistics and IT, as well as maximizing the benefits of procurement expertise in setting product and service specifications, vetting potential suppliers and running an effective tendering process. Another key advantage of centralizing procurement is to take advantage of procurement’s expertise in conducting negotiations with potential suppliers. Negotiations should follow a well-structured, transparent process and should incorporate input from all the teams involved to set agreed parameters and objectives. The principles of game theory can be applied to refine the company’s strategy for the negotiation process.

In some situations, however, procurement centralization is not practical. In categories such as facilities management local service providers dominate, and so procurement will need to be managed locally. In areas such as legal services country-specific provision is essential.

In designing indirect spending processes, companies should aim to centralize wherever possible while recognizing that in some categories, spend must be managed by people on the ground. In these cases, it is important to put in place effective means of collaboration between local and central teams so that the benefits of the company’s global procurement experience and skills are not lost. The key consideration is to recognize and manage the trade-offs that are inherent in trying to centralize procurement.

In optimizing the procurement process between central and local decision-making, priorities should include a clear governance framework that embeds collaboration between procurement specialists, wherever they are based, and local operational experts. Processes designed in this way will be most effective in supporting the organization’s primary goals of efficiency and profitability. They can also help to foster a corporate culture in which cost-saving initiatives are prioritized.