What Is Indirect Procurement? Indirect Procurement vs. Direct Procurement

Tackling the opportunity cost of projects and maintaining cash efficiency is key to upholding profit margins. Sometimes, though, you can’t tie spending to projects or billable activities. This is called indirect spend, and it has a significant impact on your business. 

To truly get the most opportunity out of every dollar, you must control both direct and indirect buying. But optimizing indirect spend is easier said than done. Often, organizations put out a general mandate to “cut spending” and hope for the best. 

But there are better ways to achieve cash optimization in every category of spend. Doing so requires the right policies and processes for stakeholders, well-managed vendor relationships, and strong spend management tools. 

This article covers everything you need to know about direct and indirect forms of spend:

• The differences between direct and indirect buying 
• The challenges of monitoring and controlling indirect buying
• How technology helps control direct and indirect buying

Download the free tool: Procurement KPI Tracker Template

The differences between direct and indirect buying

Indirect procurement is the practice of acquiring goods or services from external vendors that support a company’s general operations. It is not the same as direct procurement, which is purchasing directly tied to a product or service. Instead, indirect procurement covers purchasing for administrative and overhead costs meant to support operations. 

Indirect procurement includes general items and expenses commonly used in the day-to-day business environment, including: 

• Office supplies and consumables
• Furniture and equipment
• Computers and peripherals
• Facilities services like cleaning and maintenance
• Overhead expenses like software
• Travel and incidental expenses
• Tradeshow and marketing spend

The primary purpose of indirect procurement is to ensure that team members have the equipment, supplies, and services needed to succeed at their jobs. Indirect procurement might occur within a vendor agreement (for instance, a paper supplier delivering copy paper) or through individual staff purchases (such as field reps expensing meals and travel costs). 

Regardless of the source of the spending, indirect procurement is often one of the largest expense categories for businesses and the most in need of strong budgetary controls. 

The differences between direct and indirect buying

Direct spend refers to purchasing goods or services directly related to production, manufacturing, or billable work. Examples of direct procurement include products, raw materials, and services needed to drive production.

Indirect buying — sometimes referred to as overhead expenses or tail spend — involves buying goods or services that are not directly necessary for manufacturing a product but are needed for running day-to-day operations. These purchases may be transactional or managed through a well-negotiated contract.

Indirect buying often refers to smaller sum and less individually impactful purchases, such as:

• Office and administrative supplies
• Consumables for store locations (e.g., cleaning supplies)
• Facilities management costs
• Professional services
• Travel and hospitality
• Incidental expenses
• Small, one-time purchases and "spot buys"

The key differences between direct procurement and indirect procurement have implications for procurement managers. Knowing which category a particular item falls into ensures purchasing decisions strategically align with organizational objectives. 

With direct buying, it is important to analyze risk factors such as delivery times and pricing structures. Alternatively, with indirect buying, it’s typically more important to ensure cost-effectiveness.

Organizations need to manage both categories of spending effectively to maximize value. For example, certain methods, such as reverse auctions, can lower costs on direct items by reducing prices through competitive bidding. On the other hand, volume-based purchasing or pre-negotiated contracts reduce costs on high-volume repetitive purchases of indirect items like office supplies.

Indirect procurement is more challenging to manage than direct procurement, but the strategic value of doing so is significant. Addressing the individual challenges of indirect spend helps organizations balance risk and efficiency.

Tool

Procurement KPI Tracker Template

Download our free Procurement KPI Tracker Template today to monitor essential procurement numbers and demonstrate value in your procurement strategy.

Download the free tool

Common challenges in indirect buying management

Although indirect buying deals with low-dollar purchases, it often makes up a large portion of the total expenses in a company. It’s also the category of spending that offers the most opportunity for improving cost controls. 

Several common factors make implementing good spend strategy and strategic sourcing difficult. By their very nature, indirect purchases are more likely to slip through the cracks when they occur, only to show up as an unwelcome surprise on month-end or quarterly close reports. Fortunately, for every challenge in tracking and curbing unnecessary spend, there are solutions to make the process easier and deliver more favorable results.

Procurement professionals face five significant challenges when it comes to reducing indirect costs. 

1. No indirect procurement policy

Without proper spending policies in place, indirect buying quickly gets out of control. Optimizing budgets is more difficult, and redundant spending, inaccurate or incomplete contracts, and poorly negotiated prices are more likely. Without formal policies, tracking, monitoring, and implementing corrective measures that ensure indirect buying stays reasonable is challenging.

Companies that craft well-defined spending policies manage both direct and indirect costs more effectively. The best policy blends flexibility with oversight, creating safeguards for acceptable costs. At the same time, these policies offer internal buyers the autonomy to review and select the items and tools that work best for them.

2. Poor spend visibility

Transparency in the procurement processes is essential to managing spend. Without visibility into indirect buying, companies lose a significant portion of their budgets to inefficient or unnecessary purchases. Visibility into procurement and indirect buying is essential to properly manage expenditures and reduce organization-wide costs.

Lack of visibility also decreases compliance practices. Without visibility, there’s no way to ensure employees follow the company policies mentioned above. Since these potential pitfalls can seriously affect the bottom line, initiating measures to increase the level of spend visibility within your procurement practice is vital. Using technology to centralize procurement transactions allows finance and accounting teams to capture all relevant data and eliminate blind spots in the procurement process.

3. Maverick spend

The practice of sourcing goods outside the standard procurement process poses a considerable challenge for organizations looking to keep costs down. Without knowledge of all procurement decisions, businesses invite unnecessary third-party risks, making departments more likely to exceed budgets. Considering that indirect spend may represent 20 to 40 percent of business revenue, getting more of it under management must be a top priority for businesses.

Unregulated spend leads to decreased oversight of expenditures and diminished transparency into the rationale behind purchasing decisions. It makes tracking expenses and ensuring employees adhere to spending policies challenging.

Ultimately, uncontrolled maverick spend costs businesses money and leverage. When organizations fail to operate within their allocated budgets, it becomes harder to weather unexpected financial scenarios. It also reduces borrowing power, interferes with supplier relationship management, and creates uncertainty in financial reporting. 

Building a well-documented procurement process, implementing approvals, and creating spend visibility helps curb maverick spend, so every transaction complies with spend policy.

Tool

Procurement KPI Tracker Template

Download our free Procurement KPI Tracker Template today to monitor essential procurement numbers and demonstrate value in your procurement strategy.

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4. Inadequate spend analytics

Without spend analytics, businesses miss opportunities to improve cash flow and optimize spend on indirect buying. Spend analytics allow companies to gain insight into the full scope of their purchasing activities, such as the types of products they buy, the partnerships in their supply chain, and the contract performance of those relationships. The info generated through spend analysis enables businesses to assess their financial health better and create more accurate forecasts for future spending.

Effective spend reporting increases cost transparency across the business, improving cost management and procurement decision-making. It allows companies to identify areas where ROI and cost savings could be improved. Implementing stronger systems for capturing and analyzing all aspects of the company’s spending activities enables greater control over budgeting and ensures operations stay competitive and compliant.

5. Lack of procurement KPIs

Establishing key performance indicators (KPIs) is essential to effective procurement and cost management. Without tracking spending metrics, companies are at greater risk of overspending or missing out on savings opportunities.

By establishing clear and measurable objectives with specific KPIs, businesses better evaluate their purchasing practices against a predetermined set of criteria, highlighting areas where they can improve. This data is integral for developing strategies that maximize value and procurement performance while managing costs.

Properly executed KPIs create an environment for continuous improvement within an organization’s procurement process, which drives efficiencies across the entire enterprise. By leveraging KPIs as part of a comprehensive cost management strategy, businesses enjoy greater visibility into past trends and financial health over time to ensure that resources are always allocated effectively and efficiently.

5 Top KPIs for tracking indirect procurement performance

To understand the improvement in the indirect procurement process, it’s important to monitor relevant metrics over time. While there are many KPIs for procurement performance tracking, these five offer the most comprehensive look at the routine functioning within your procurement process.

1. Spend under management

Spend under management measures the total amount of spending under the finance and procurement teams’ control. It’s expressed as a percentage of total spend across direct, indirect, and services spending. The more spend controlled within a procurement policy, the more control the company has over spend efficiency, cost controls, and suitable business cases for spending. Spend not under management may be classed as maverick spend. 

2. Cost per invoice

This metric measures efficiency in terms of how much it costs to process a single invoice. It is important for measuring the performance of procurement processes, as it can help identify areas where spending might be excessive or where more efficient purchasing practices could be employed. 

3. Supplier lead time

Supplier lead time is the duration between purchase and delivery, reflecting procurement and supply chain efficiency. Measuring this KPI is crucial for supply chain optimization, ensuring timely product availability. This metric increases in importance when companies struggle with delays. Nearly 60 percent of respondents to a 2022 Deloitte survey reported shipping delays as having the biggest impact on manufacturing. Reducing supplier lead times increases speed to market and improves the resilience of your procurement practice.

4. Compliance rate

Compliance rate measures a vendor’s ability to adhere to regulations and policies for both internal and external entities. This metric helps identify instances of non-compliance, which helps identify areas of third-party risk exposure. Third-party vendor issues such as data breaches, incidental or intentional fraud, or regulatory violations can have potentially costly consequences for the buyer.

5. Procurement ROI

Procurement return on investment (ROI) measures how effectively a procurement process produces cost savings or other benefits. Procurement ROI helps buyers determine if their efforts yield the desired financial results, such as cost savings from competitive bidding, reduced spend through optimized purchasing cycles, and increased efficiency by streamlining processes. This is a strong metric for examining the overall performance of the procurement cycle, from supplier identification to contract completion. 

How a proactive indirect procurement process saves money

Lowers costs: A strategic procurement process reduces costs by consolidating purchasing to a small list of suppliers. Decreasing the vendor pool typically increases purchasing volume with each vendor, opening the door to volume discounts and other incentives. The strategic approach facilitates closer relationships, resulting in better repayment terms and discounts over time.

Eliminates maverick spending: Maverick spend, also called rogue or shadow spend, happens when employees make unauthorized purchases outside company policies. Implementing strategic procurement processes helps the finance team track and audit expenses, increasing visibility. Clear guidelines for approved suppliers and products ensure policy compliance and cut unnecessary costs. A detailed process also speeds up procurement and eliminates the conditions that lead to out-of-policy spending in the first place. 

Creates strategic partnerships: A strategic procurement process helps businesses build supplier relationships beyond a transactional arrangement. Strategic sourcing with a select number of preferred vendors ensures quality standards, increases compliance, and opens the door to more competitive prices. Businesses that establish partnerships with their supply chain also enjoy more flexible contract terms and get more support from vendors when issues or obstacles arise. 

Increases market speed: Strong procurement makes many business activities more efficient, providing a competitive advantage. In many cases, strategic supply partners are more consistent and reliable than transactional vendors, with faster fulfillment and better response times for issues or delays. The increased speed, accuracy, and support mean businesses can move unhindered and get to market faster.

Improves productivity: Fully mature procurement processes rely on automation and workflows for efficiency. These features mean there’s less manual labor involved in sourcing, purchasing, and fulfilling orders. For procurement teams and individual users, automation and workflows save hundreds of hours of manual or repetitive activities. Those hours are free for higher-level tasks, resulting in better productivity and faster business results.

How procurement software improves indirect buying management

Visibility is often the most difficult challenge in managing indirect buying. Procurement software like Order.co uses automation to bring every purchase into focus and make compliant spending and approval easy. 

Spend management software allows procurement teams to support internal stakeholders while gaining control of the buying process. It creates a functional, end-to-end procurement process that includes sourcing the right products from key suppliers, automation workflows to streamline approvals, and reporting for trends and key metrics like cost savings, cost reduction, and category management. 

Using Order.co, procurement professionals implement a well-supported procurement strategy with advanced features, such as:

• Role-based guidelines and limits for each buyer based on category, department, location, and job role 
• Automatic line-level coding for more accurate reporting of both direct and indirect buying
• Strategic sourcing through preferred suppliers using a curated, dynamic catalog 
• Centralized purchase order creation, order processing, contract information, and payments to reduce errors and duplication 

Order.co makes it easier than ever to gain and maintain visibility into your spending, even as your procurement function scales. To see the platform in action, schedule a demo of Order.co today.