Some procurement executives believe that “spend is spend” regardless of whether it consists of direct materials or indirect spend. In reality, the indirect procurement of services is a different universe compared to the direct side. The organizational culture and landscape on the indirect side has many nuances that do not exist on the direct side. The procurement executive will therefore need to traverse the waters of indirect spend with unique strategies to ensure success.
Common characteristics of indirect procurement
The first step for any change agent is to identify the key internal stakeholders and map out the distinctive terrain of indirect spend at that specific organization. There are some common characteristics within indirect procurement that tend to be present in most companies or organizations.
The indirect spend has often been historically decentralized and often quite siloed throughout the organization. For example, on consulting spend stakeholders often believe that their consultant is the only one who has the content knowledge in their area of expertise. The same consulting company may have multiple contracts with the same company, but a dispersed approach often leaves stakeholders unaware of the ability to aggregate spend. IT services is another example of an arena with a dispersed spend. Different segments of the same company may have their own IT services to address their specific needs.
Many internal stakeholders have been accustomed to calling the shots, which often includes the selection of vendors and terms of those agreements. They are often are reluctant to turn over that autonomy. A new strategy whereby there is centralization or aggregation often leaves the internal stakeholders fearful that they will be left with poor choices, unmet needs and ineffective vendors.
Since each internal stakeholder may have their vendor of choice, the organization is often left with a large array of vendors and a challenging task of vendor consolidation.
For a cell phone manufacturer, it can be clear that you can only have one or two glass manufacturers for the touch screen. On the indirect side, internal stakeholders often don’t see the need to reduce or streamline the number of vendors.
Vendors often have a vested interested in keeping the spend dispersed across an organization. A dispersed spend can keep the price inflated at a high level. In many cases a vendor may never have reduced their pricing, because none of the internal customers have made a request for more competitive pricing.
Choosing a strategy
Once a procurement executive has a clear sightline to the indirect spend at their organization, he or she will need to use innovative strategies to aggregate it and ultimately achieve significant savings.
Mandates on using procurement contracts or blanket agreements rarely work. Creating a mandate usually creates a dynamic whereby the procurement executive becomes a Don Quixote fighting futile battles with poor results. There are common approaches that a manager needs to use to achieve cost savings regardless of the variations that may exist within their specific company.