Succeeding in the World of Indirect Spend
Direct and indirect spend in procurement is the sourcing and purchasing of materials, goods, or services necessary for internal use. 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.
- Identify aggregate spend through spend analytics. The first step is often develop spend analytics by category across the organization. This can be a useful tool in the early dialogue with internal stakeholders.
- Involve stakeholders at the beginning. Internal stakeholders are often more willing to comply with contracts if they have been part of the strategic sourcing initiative from the start. A leader’s initial efforts should be thought of as diplomatic effort of building bridges rather than a tactic of strong arming stakeholders through coercion or persuasion. An important initial step is to form committees of stakeholders throughout the organization. It is wise to work collaboratively within these groups to establish criteria over vendor selection for all future sourcing initiatives. Internal stakeholders also need to be part of the initial RFP/RFQ bid process.
- Present spend analytics to stakeholders. Many internal stakeholders never have been presented with objective spend analytics. If these analytics are shared combined with focus on a broad range of goals of vendor performance and reliability, the internal customer will often become a more active participant in this transformational change within the arena of procurement.
- Presenting value to aggregating spend to stakeholders. As mentioned, it is advisable to present some of the spend analytics to the internal customers. However, executives should not use the spend analytics or cost driven model as the sole motivating factor for aggregating spend or negotiating savings. Internal stakeholder are often more concerned about vendor performance, reliability and on-time delivery rather than just cost. A change agent needs to present a compelling case that adds value to sourcing initiatives in ways other than just cost reduction and saving money. An easy to use eProcurement system is one concrete example of value beyond just cost savings on the road to aggregation of spend. Internal customers also need to see the favorable results of vendor savings on their unit’s P & L.
- Rate of change. Procurement executives often are overzealous or unrealistic about the rate of change that is possible around indirect spend aggregation within an organization. It is virtually impossible to get all of the internal stakeholders on board at the very beginning. A judicious selection of the most willing and early innovators can pave the way for success by demonstrating success to reluctant participants. It is vitally important to be patient with internal stakeholders but so passive that the status quo never changes.
- Building change through consensus and not persuasion. If the executive sees the procurement initiatives as a collective and collaborative process in which everyone has input, it can change the group dynamic from one of coercion or persuasion to one of building consensus. The collective group can often bring about a far greater change than the sole efforts of one individual.
- Using a strategy of marketing to internal stakeholders. Wise strategists use an approach of reaching out to stakeholders as internal customers and not captives. Any wise marketer first will listen to the needs of their customers and then design a way to approach those needs based on their capabilities. A procurement leader should market the broad range of strategic sourcing and procurement capabilities to all of the internal customers.
In summary, a procurement executive will be successful in the aggregation of indirect spend and reduction of cost if he or she sees the process as a gradual journey. There will only be transformational change if the internal customers join the journey and become willing and active participants.
About the Author: Steven Lutzer is the president of Lutzer Global Inc., an executive search firm that specializes in procurement, strategic sourcing and supply chain management. Lutzer had a 20-plus year career in supply chain management and global sourcing before founding Lutzer Global. For more information, please visit www.lutzerglobal.com.