Indirect procurement

Indirect procurement is the sourcing of all goods and services for a business that enable its activity. Or looking at it another way, the goods and services classified under the umbrella of indirect procurement are commonly bought for consumption by internal stakeholders (business units or functions) rather than the external customer or client. Indirect Procurement categories include, but are not limited to:

• Marketing related services (media buying, agencies)
• Professional Services (consultants, advisers)
• Travel Management
• IT related services (hardware, software)
• HR related services (recruitment agencies, training)
• Facilities Management and office services (Telecoms, furniture, cleaning, catering, printers)
• Utilities (gas, electricity, water)
• Consumable (Grease, Oil etc.)
• MRO (Maintenance repair operation)
• Capital Goods (Plant & machinery)
• Fleet Management

The overarching classification of ‘Indirect’ can vary from business to business and increasingly the distinction between what is a ‘Direct’ cost and an ‘Indirect’ cost can become blurred when looking at such expenditure items as Fleet and Transportation.

Overview

Organizations with a clear definition of ‘Direct’ Procurement (often called Goods for Resale, primary procurement, common goods procurement or core procurement) have spent decades engineering their primary supply chain – ensuring:

• Goods for resale (GFR) margin is at or above industry standard
• Risk is kept to a minimum
• Long term supply has been assured with preferred suppliers
• Relationships have been built and developed over time
• Processes have been engrained into the core business
• Senior executives and Board members acknowledge the value of the supply chain in light of business objectives.

'Indirect’ procurement (often called Goods Not for Resale, non-core procurement, non-common procurement or enabling spend), compared side-by-side with direct procurement is often seen as less strategic and less valuable – research conducted by NelsonHall, in association with Proxima ^[1] found that 53% of Senior Executives from FTSE 100 businesses expressed low satisfaction in the value indirect procurement brought to their organization.

Indirect vs direct procurement

Research conducted in association with Supply Management ^[2] found that all businesses have indirect procurement. The research also found that indirect procurement is unambiguously different from direct procurement in that it has smaller average supplier spends, more suppliers, maverick spend and a more complex stakeholder environment than directs.

Indirect procurement requires a different balance of disciplined processes and technology, engagement with stakeholders and diverse expertise across a range of suppliers. Overall:

• Within the indirect supply market there are hundreds of categories, all of which require deep knowledge to procure effectively. Also, there are tens of thousands of suppliers, all who invest heavily in selling to a buyer – for large contracts it is common for a supplier’s account management team to be larger than the entire Procurement function it is selling to.
• Given the relatively high turnover of indirects, it’s also common to see large numbers of low monetary value transactions being carried out, frequently
• There are thousands of stakeholders (internal and external), all with knowledge about their area but need Procurement’s support. This in turn means that Procurement must act as an internal advisor, influencing functional decision makers and budget holders about their spend
• Indirect procurement professionals do not actually have any mandate over internal stakeholder’s budgets.

Managing indirect expenditure effectively requires a huge variety of skillsets – which can change from one week to the next. Skillsets such as:

• A broad range of category expertise
• Change management
• Influencing, engaging and advising various stakeholders across the business (from senior executives down)
• Facilitation, negotiation and supplier management
• Data analysis (turning raw data into business insights and intelligence)
• Technological know-how

References