When the economy gets tighter, direct costs are normally the immediate object of CPOs’ attention. However, with previous rounds of cost cutting already having taken away most of the ‘business fat’, the muscle and bone that’s left can’t be removed, no matter how surgically, without doing damage to core products and services.
So, with this particular cash cow milked dry, CPOs are realizing they have to target indirect costs, something management consultancy and professional services firm, Accenture, estimates could yield first-year savings of as much as 20%.
In many large organizations, indirect spend is currently so poorly managed that such improvements are pretty much achievable without breaking sweat.
Of course, the opportunity to bear down on indirect costs has always been there. It’s just been ‘hidden in plain sight’ by the reluctance of CPOs to take on what they see as the messy task of trying to control the countless transactions that make up indirect ‘tail end’ spend.
Why bother confront this particular can of worms, when lumps can much more easily be knocked out of direct costs?
Creating a Culture of Spend Optimization
Even those that are managing indirect spend effectively could still go a step further, by implementing spend optimization programs that expand “the culture of savings to the rest of the organization through a combination of people, process and technology”, as consultancy Aberdeen Group puts it.
In other words, this means thinking about procurement not just in terms of how budgets are being spent, but whether there is a better alternative at a lower price, or whether that money should be spent on particular goods or services at all.
One reason indirect costs are so difficult to control is that they are often dispersed across multiple divisional budgets.
So, an essential first component of effective spend optimization is to identify savings opportunities through an in-depth analysis of different indirect categories. Without such a review, BearingPoint suggests 10-15% of potential savings will be missed.
While indirect costs add up collectively, they can also be significant in themselves. For example, Xerox estimates that in a large enterprise office printing costs can consume as much as 3% of annual revenue.
However, you could approach this cost strategically by deciding to create a paper-free office. Introducing digital invoicing alone could save you over $500 on each bill sent out, according to Inside Supply Management Magazine.
Regulating what can be printed and when, and buying hardware and consumables could also help turn office printing into an almost completely unnecessary expense.
The same cost elimination approach can also be applied to external services such as marketing, IT, facilities management and professional services.
Here savings could be achieved through more widespread competitive bidding or greater supplier consolidation – is there a good reason to the same items from multiple sources, for instance?
Similarly, you could renegotiate supplier’s terms, alter purchasing patterns to qualify for discounts, review delivery costs, buy only from agreed catalogues, reduce stock levels or choose lower specification items.
Similarly, as part of a spend optimization program, you could revise your replacement strategies, avoid ad hoc purchases through better management, train staff better in cost effective purchasing, computerize buying processes and generally make better use of technology.
Indirect spending patterns often become entrenched because they follow the line of least resistance. In other words, it always seems much easier to keep on doing what you have always done, particularly if you think your options are limited.
If you use traditional sourcing methods, discarding long established, trusted suppliers and taking on the time-consuming task of searching for ‘optimal alternatives’, certainly won’t be one you want to take on lightly.
However, when you procure the services you need through innovative online marketplaces the whole process becomes very much easier.
By using blur for instance, not only do you have the opportunity tap into a global pool of pre-vetted suppliers with exactly the skills and products you are looking for, but you can also achieve costs savings of up to 30% on an order-by-order basis.
As a CPO looking to cut indirect procurement costs, an online Indirect Spend Management Platform can rapidly propel your organization towards savings targets.
Contact a Procurement Solutions Consultant today to learn more about how blur’s Indirect Spend Management Platform can enable your organization to achieve significant savings.