Indirect procurement may be
shrugging off its ‘paper clips and printer paper’ reputation, but are
organisations managing these spend categories to their full potential, ask
Simon Rycraft and Jan-Fokke van den Bosch
By Simon Rycraft and Jan-Fokke van den
Bosch
“The procurement of indirect goods
and services – do you mean paper clips, printer paper and temps?”
“We just don’t have time. The spend
isn’t big enough to justify the effort. It’s maybe 20 per cent of our
third-party spend.”
“We already have indirect goods
under control. We’ve been sourcing office supplies for years.”
Supply
chain professionals have all heard these types of comments when discussing the
benefits of managing the procurement of indirect goods and services more
rigorously and systematically. But indirect procurement is not what is used to
be.
Today
far more people recognise the importance of indirect procurement. Indirect
spend includes complex goods and services such as IT, marketing and
advertising, facilities management, maintenance, repair and operation, and
professional services. It typically accounts for 60 per cent of third-party
spend in non-manufacturing companies, more than 90 per cent in the financial
services industry and sometimes 50 per cent of spend in manufacturing organisations.
But recognition is only the first step to improvement. While many companies do
a good job of sourcing paper clips, far fewer manage complex indirect spend
categories with the attention that the potential benefits demand.
To
identify how leading organisations are managing the procurement of indirect
goods and services, we conducted the 2010 Indirect Procurement Survey, Higher Visibility, Greater Expectations. It is the second in a tri-annual study that we started in 2007. Participants
included procurement executives from 94 multinational companies who between them
manage a combined global indirect spend of nearly $134 billion (£87 billion).
Respondents completed a questionnaire spanning six areas for the successful
management of indirect spend: influence, automation, organisation structure,
tools and techniques, benefits measurement and key performance indicators
(KPIs).
The
results present a mixed picture. But there are some interesting findings
especially when analysed against the 2007 results.
First,
procurement organisations are increasing their influence within their
companies, building stronger internal relationships and boosting their
performance. An increasing number of C-level leaders see the contribution of
indirect procurement to financial results (cost reduction and revenue growth),
risk avoidance and value creation. The benefits can be substantial. As one
leader said: “In our business unit the CPO for indirect goods and services has
the same delivery targets as the CPO responsible for direct materials.”
Yet
some optimistic or aspirational predictions from the 2007 survey were not
fulfilled, or took place more slowly than expected. For example, the move
toward outsourcing indirect procurement has been far slower than anticipated.
Respondents in 2007 expected outsourcing of operational indirect procurement to
move from 10 per cent to 40 per cent by 2010. The actual figure is 14 per cent.
Furthermore, the outsourcing service providers of choice are not business
process outsourcing giants such as IBM and Accenture, but category-specific
managed service providers with a narrower mandate.
In
the 2007 survey, the largest single group of respondents (45 per cent) reported
a mixed centralised-decentralised indirect procurement organisation with
responsibilities split along function or category lines. Furthermore, 44 per
cent expected that model to prevail in 2010. However, that has not been the
case: the most successful model has been a different one. Measured by realised
benefits, the leading model was a central-led indirect procurement organisation
with collaboration across business units. Users of this model achieved savings
greater than 10 per cent over the past two years in 47 per cent of categories.
In
another surprising finding, indirect procurement organisations are leaving
money on the table by neglecting their most sophisticated tools. Rather than
using advanced data analytics techniques such as predictive modeling to deliver
highly useful future insights, indirect procurement groups are merely analysing
data to track historical trends.
Showing
management the money – or benefits tracking – also remains a problem for
procurement organisations. Simply put, they do not control where the savings
go. One participant commenting on the CFO’s response to the benefits reports
explained: “Even in our strongly financial-driven company, budget-holders still
decide what they want to do with the funds created through sourcing their
indirect products and services.” However, without strict reporting and
governance structures in place, the savings are often used in unintended ways.
What
companies track and report illustrates what they value. More than two-thirds of
respondents measure such financial and internal KPIs as addressable spend,
identified savings and addressable categories. But less than half include
compliance management metrics such as spend integrity or accuracy and supplier
commitments, scorecards and reviews. This data, of course, helps the
realisation and sustainability of identified benefits and also informs future
supplier selection and negotiations.
In
short, indirect procurement organisations have significantly more value to
contribute, a message reinforced by the insights from every section of the
survey.