Direct and indirect spend management has never been easy. In the days of paper-based procurement, tracking and evaluating spend was a labor-intensive process. Despite the antiquated ways of the past, Digitalist Magazine reports procurement executives are overly hesitant when it comes to embracing new technologies such as spend management software. Though more than half of global Chief Procurement Officers (CPOs) seeing analytics as important, less than one-third are using analytics technology and less than 5% had serious automation in place.
With today’s cloud-hosted central repositories already mainstreamed, it’s easy to track spend. All it takes is a solution devoted to gathering that data from the system. Most e-Procurement software gives supervisors the power to pull real-time reports and analyze their current practices for areas to improve. It seems like an obvious area to implement new technology, but let’s break it down so it is easy to understand. Let’s look at how both direct and indirect spend management is going high-tech.
Direct & Indirect Spend Management Solutions
Spend management is an umbrella term that includes three main areas of spend:
- Visibility – transparency of information across platforms
- Analysis – evaluation of current practices and procedures
- Process – efficiency of managing spend in an organization
Managing these three areas of spend is a key way that procurement departments can proactively identify areas of improvement, savings opportunities, and optimize buying power.
Direct vs. Indirect Procurement Spend
Sourcing executives are particularly interested in the difference between direct and indirect spend. Direct spend in procurement means expenses that are directly related to the manufacture of the final product in question. This includes raw materials, parts, and services that contribute directly to production.
Indirect spend in procurement is all the sourcing of peripheral goods and services that allow an organization to function in a business capacity but that do not contribute to the final product. Examples of indirect spend include office supplies, staff development, marketing budgets, staff travel expenses, IT, and site-related expenses like utility bills.
In either case, out of control spending will have a negative impact on the organization. For sustainability and growth, data from analyzing both direct and indirect spend can improve visibility as well as drive corporate performance. The end goal is cost savings in both the short- and long-term.
High-Tech Direct and Indirect Spend Management
We analyze both direct and indirect spend by first collecting, cleansing, classifying, and analyzing procurement data. We want to find areas to lower costs, improve buyer-supplier relations, and increase the efficiency of processes and interactions. After the basics, there are advanced spend analysis services that use the same baseline information. This info gathering is a real baseline exercise for direct and indirect spend management.
This is where technology comes in. Today’s tech allows us to do something that we could never do in the past: e-Procurement systems automatically record all activity within a system. Every interaction, every request, every PO, every authorization, and every timestamp along the way is collected.
Through integration, an e-Procurement platform can gather data from adjoining platforms. We call this spend visibility. It’s the ability to transparently see all relevant data and its sources. Some common sources of increased visibility are:
- enterprise resource planning (ERP) tools
- general information from ledgers
- purchase orders (POs) from procure-to-pay platforms
- supplier data from reverse auction software
- RFX/e-Tendering platforms
- digitized contract management
- other e-Procurement solutions
Data-Driven Spend Analysis
When you zoom out from a single platform to look at the integrated system as a whole, the answers to difficult questions become obvious. How often do we buy this product? How much do we pay on average? Do we always get what is promised? How does our spending compare to last quarter? Last year? Last decade?
When we slice and dice the data, we get to benchmark our specific procurement processes. We have the ability to assess the organization with common spend analysis but also with customized metrics that are relevant to our specific organization. We can look at spend by commodity, total expenditure by supplier, maverick buying levels by department, material price changes, best contract negotiators in the organization, and much more.
The best part of high-tech spend management is that we no longer have to work off of hunches. We don’t have to guess at how many people are involved in the purchase of a single commodity. The computer system records exactly who was involved, how many touch-points they had, and how much time each employee spent on this specific instance of procurement. With such clean data, supervisors gain a clear picture of how to organize internal resources for organization-wide efficiency.
Do you want to understand today’s tech-based direct and indirect spend management on a deeper level? Download ProcurePort’s white paper Spend Analysis – Leveraging Technology to Translate Data into Sourcing Intelligence and read more today.
