The director of facilities management came storming into my office one day.
He demanded that I get off the telephone and immediately assign a purchase order to an excavating company he was working with. When I tried to slow down the process a bit, he called me over to a window to see the backhoe operator ready to dig up the clogged sewer line leading to the company cafeteria. I asked him for the cost of the work. He shouted, "who cares?" and ran to get the project underway.
And in many companies, that is the issue with indirect spend: Who cares?
What's the difference between direct and indirect spend?
Direct spend is the primary role of the procurement department in manufacturing and other industries. It is essentially the buying of materials for resale, either directly or for use in manufactured products.
Indirect spend is all of the support products and services a company needs: IT products, facilities management (including leases and capital construction), corporate travel, marketing, and even healthcare and employee benefits. The amount of indirect spend can equal or surpass that of direct purchases.
Bringing indirect spend back to the forefront
In many traditional procurement departments, indirect spend is often an afterthought, with maintenance, repair, and operating (MRO) purchases assigned to the rookie or underachieving buyer. In many cases, the majority of indirect spend is in control of those with little or no procurement or contract management experience.
That's the source of disparity between direct and indirect spend at most companies.
Buyers with direct spend responsibilities may wrestle suppliers to the mat to extract the last few pennies from a commodity. At the same time, the company’s new marketing coordinator is signing an open-ended supplier agreement with a web-development firm, locking in high prices for low service for years to come.
Suppliers know the difference. Often, they will work directly with these unofficial buyers and bypass formal procurement standards and processes in order to secure a better deal.
But there are three things that procurement departments can do to break down internal barriers and increase their control of indirect spend.
1. Enforce fiduciary responsibility
Procurement professionals, through the laws of agency, have the fiduciary responsibility to spend their company’s money ethically, fairly and wisely. Company agents are the only ones authorized under Uniform Commercial Code standards to obligate the company to suppliers. This obligation should include all company expenditures, no matter the category.
Some companies with a comprehensive understanding of the enormity and diversity of their purchases — as well as the potential cost savings — have embraced the holistic approach to purchasing by appointing managers and staff to manage indirect spend. But others leave it up to department heads to establish and manage their own business relationships, bypassing procurement altogether in management-endorsed maverick spend.
These days procurement seems to have been swallowed up by the expansion and importance of supply chain management. Expanding our rightful role into indirect spend helps us gain our identity back.
Those supporting indirect spend have the opportunity to engage in a whole new scope of suppliers, products and services.
2. Gain expertise in new categories
The procurement professional comes into the indirect category with foundational business skills, including contract management, negotiation, intellectual property, project management, financial analysis and an understanding of company procurement policies.
Those supporting indirect spend have the opportunity to engage in a whole new scope of suppliers, products and services. There is a learning curve with indirect commodities, especially those traditionally controlled by non-procurement staff. But it is often interesting work that offers valuable professional and career experience.
Learn as much as you can about your new commodity responsibilities.
3. Practice internal customer service
Actively participating in indirect spend opens up a new frontier for the procurement department, providing access to areas of the company that have been traditionally off-limits to buyers.
You may see a range of reactions from both peers and suppliers:
- Some colleagues controlling indirect spend may welcome your involvement and procurement expertise, which will relieve them of an uncomfortable burden.
- Others may resist, claiming that procurement slows down the process by enforcing policies or examining existing contracts and relationships.
- A few may not want to relinquish their sense of power from working directly with suppliers.
- Meanwhile suppliers used to dealing with their non-procurement related contacts may set up their own set of roadblocks.
Still, working in these new areas exposes the procurement department to the entire organization. As you work with other departments — marketing, human resources, finance, food service, property management, and even the executive suite — show your value with excellent customer service.
This story was first published in our Procurement Weekly newsletter. Sign up here.