The Complete Guide to Indirect Procurement Categories

Indirect procurement spending has a sneaky way of sapping cash from even the most well-run businesses. That’s understandable since indirect spending isn’t tied to a specific client, product, or project, so it’s harder for procurement professionals to track. However, correctly managing indirect spend has significant benefits for all organizations — they just need the right tools. 

This guide shares information and tips for getting more indirect spend under management and answers questions about this impactful category, including:

• What is indirect procurement?
• The five most common indirect procurement categories
• Challenges in managing indirect procurement
• How to manage indirect spend categories
• Tips to manage indirect spend categories more effectively

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What is indirect procurement?

Indirect procurement is the process of sourcing goods and services not directly related to the production of a product but still necessary for the functioning of the business. Where direct spend can be tied directly to activities like manufacturing, client services, and billable project expenses, indirect procurement serves day-to-day operations. It’s often the most significant expense in a business and, therefore, the hardest to control. 

The 5 most common indirect spend categories

Most businesses spend up to 15 to 30 percent of total expenses on common indirect procurement categories. In larger organizations, managers may administer spending on an individual category to ensure competitive pricing and strong contracts.

Travel and events

Employee travel and events are often a significant source of indirect spending for organizations as they are not often linked to a specific product or project. Companies incur a range of indirect travel and events costs, including: 

• Airfare
• Ground transportation
• Food stipends
• Hotels
• Conference fees
• Catering costs
• Trade show space
• Promotional items 

Managing travel expenses effectively is an essential component of overall spend management.

Overhead

Business overhead is the indirect costs of running a business, including items such as:

• Rent
• Utilities
• Facilities management
• Professional services
• Consulting fees
• Administrative costs
• Salaries
• Insurance
• Taxes
• Outsourcing services

Overhead is typically accounted for in the company's financials as a separate category within operating expenses. Although it includes many fixed costs, they may be difficult to track and control without a procurement approval and management process.

Supplies

Supplies purchasing often includes everyday use items, such as:

• Stationery and office supplies
• Printing equipment and media
• Cleaning supplies
• Office furniture
• Computer peripherals
• Consumables

Software and communications

Organizations spend considerable money on software licenses and communication tools, including subscription fees, licensing costs, equipment charges, and phone systems contracts. 
Software licenses on corporate cards often become a source of maverick or unmanaged spending, as credit cards and expense reports make it hard to track pricing and renewal information. This is especially true when the business owner associated with the original contract or purchase leaves an organization or changes roles, resulting in unused licenses or programs that quietly renew, leak cash, and reduce profitability.

Marketing and Advertising 

Promotional budgets for marketing and ad costs include creating brand and product awareness, developing customer loyalty, and providing promotional strategies. 

Examples of marketing procurement include various costs and fees include:

• Paid advertising campaigns
• Website design and hosting
• Market research expenses
• Sponsorship costs
• Content creation
• PR agency fees 

Advertising is usually more narrowly focused on specific activities like television commercials, online ads, and print advertising. Both marketing and advertising require an investment in services and materials to execute a successful campaign, and most of these expenses fall under indirect costs.

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The Procurement Strategy Playbook for Modern Businesses

Download the ebook to learn how to modernize your procurement strategy and realize the benefits of tech-enabled procurement.

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Challenges to managing indirect spend categories

The nature of indirect procurement presents challenges for managing it successfully. Fortunately, many of these factors are within the organization’s control. 

Here are some common challenges businesses must overcome to establish more cost-efficiency in their indirect procurement:

Lack of approval process: Working with a robust purchase approval process makes tracking spending on indirect expenses easier. It ensures every purchase falls within policy while helping identify spending trends, price discrepancies, and quality issues.

Over 50 percent of respondents to one survey reported they’d experienced platform fraud in the previous 2 years. Without formal approvals, it’s challenging to catch redundant purchases, out-of-contract spending, risky vendor agreements, and procurement fraud. An effective interdepartmental approval process helps finance and management reduce waste spending and maintain strong security and compliance. 

Undocumented policies: Without a documented, well-communicated purchasing policy, buyers have no reference for how to do things correctly. This makes buying decisions more challenging and robs the finance team of the tools needed to manage spending. Organizations can proactively avoid costly procurement issues when employees have the proper guidance and process to make purchases.

Maverick spend: Also called “rogue” or “shadow” spending, maverick spend is purchasing outside a company’s established policies or those made without approval. This type of spending often happens quickly and without visibility into the purchase, the vendor source, or the total procurement cost.

Maverick spend is challenging to manage, as the transactions happen on corporate cards, in expense reports, or as part of auto-renewing subscriptions. In some cases, employees may be unaware that their purchase is unauthorized. In others, they may attempt to improve the bottom line by circumventing the company’s approved suppliers. 

Out-of-policy spending leads to higher costs through loss of discounts, waste spending, and overspending on emergency purchases and shipping. These transactions are difficult to reconcile during the accounting process, leading to excess research time and loss of productivity.

Redundant vendor relationships: When multiple departments or locations use similar vendors to procure the same goods, it can result in a loss of leverage and product quality. Unifying purchasing to reduce product SKUs and limit the number of vendors used creates more savings opportunities and stronger negotiations, but it requires bringing together purchasing under one process. Streamlining indirect spending through a procurement management system is the most efficient way of managing the process across every department and location.

How to manage indirect spend categories

The best procurement process makes it easy for end users and buyers to initiate requests, quickly route them through a well-crafted approval process, and automatically pass the fulfillment and payment work to accounts payable (AP). 

1. Build and communicate the purchasing process

Well-managed procurement and strategic sourcing start with a formal process. Create a document outlining and formalizing the steps required for every purchase or contract. It doesn’t need to be elaborate, but it should inform stakeholders on how to get their needs met, give them access to the tools and forms to make informed decisions, and provide progress information to ensure the smooth completion of a purchase.

The following steps help form a new purchasing process or refine a current one:

1. Define the scope and purpose of the process to determine its goals, such as minimizing maverick spend and ensuring quality control. 
2. Identify the stakeholders involved in the departmental approval process. This could include direct managers, legal, IT, security, finance, or executive stakeholders. In many cases, contract value determines the extent of approvals. For small contracts or petty cash purchases, direct manager approval may suffice. Additional approval and research may be required for larger contracts over a preset dollar threshold. 
3. Set up procedures for creating purchase orders, such as a central intake form or purchase requisition. Establish a workflow for obtaining approval from stakeholders, selecting vendors (if applicable), and coordinating with accounting or finance for payment processing. 
4. Review the purchasing process regularly to evaluate efficiency​​ and ensure it covers all aspects of procurement.

Why communication is essential to procurement policy success

Once established, communicate the new policy to the organization consistently and promptly to ensure all stakeholders know about the changes and how they affect purchasing. Highlight changes regarding creating purchase requests, obtaining approval from stakeholders, selecting vendors, and coordinating with accounting or finance for payment processing.

Give teams easy access to documentation with clear guidelines for every purchase. Documentation through a central database or wiki helps prevent mistakes and confusion around procedures.

2. Centralize spend data

Centralizing spend data makes it easier to track and understand the sources of spend. To achieve this, companies should consider collecting data from all applicable sources, such as:

• Finance records
• AP reports
• Corporate cards
• Expense reports
• Vendor contracts

Centralized data improves spend visibility, encourages efficient budgeting and forecasting, and reduces issues within the sourcing and payment processes. It improves the chances of detecting suspicious activity or outliers in purchasing processes.

3. Conduct spend analysis

With data successfully centralized, organizations can conduct spend analyses to gain insight into spending habits and patterns. The goal is to look for opportunities to reduce costs while maintaining quality. Identify redundant purchases or SKUs, unnecessary or maverick spend, and opportunities to streamline processes to reduce waste spending. 

Spend analysis also identifies non-compliance with vendor contracts or internal policies and enables corrective measures. 

When conducting spend analysis, look at spending from several perspectives: 

• Location-based total spending
• High-volume and repeat purchases
• Similar SKU purchases (for instance, several brands of common items like batteries)
• Average spend by business units or departments 
• Budget variances between separate locations
• Localized adjustment for fixed costs (such as rent and equipment costs)

Analyzing spend through these lenses creates more context for analysis and better information for decision-making.

4. Streamline vendor options

Streamlining the number of vendors an organization works with helps optimize procurement costs by reducing administrative overhead associated with contract management, invoice processing, and other vendor-related activities. 

Additionally, it allows for more effective establishment of supplier relationships, as organizations can develop deeper relationships with fewer vendors. This could result in better terms, increased discounts, and reduced prices due to greater bargaining power. 

Furthermore, having fewer vendors leads to greater visibility into spend data, making tracking costs easier and identifying areas for savings. It simplifies the process of monitoring vendor performance against terms and conditions as well as supplier compliance with regulations.

5. Strengthen negotiations

Centralizing the procurement process and streamlining the vendor pool enables organizations to become better customers to their preferred vendors. This strengthens the negotiating position for every vendor and unlocks options for better pricing and terms based on increased volume. 

A slimmer vendor list makes every step of the accounting process easier. Fewer vendors result in fewer monthly invoices and better visibility into how departments and locations spend within each category or with each vendor. This increases benchmarking opportunities and allows procurement to monitor vendor performance and compliance goals closely.

Ebook

The Procurement Strategy Playbook for Modern Businesses

Download the ebook to learn how to modernize your procurement strategy and realize the benefits of tech-enabled procurement.

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Tips for managing indirect spend categories more effectively

Establish backups for your most critical items

While steadily improving from the early days of the COVID-19 pandemic, supply chain management issues still present challenges for every organization. The most effective procurement teams build redundancy into the procurement process for mission-critical items, sometimes creating relationships with three or four backups to meet demand during delays or shortages. 

Identify the most important items to your organization and establish a plan to maintain business continuity if your frontline vendor experiences sourcing challenges. 

Practice bulk purchasing

Often, the per-item price of an item drops considerably when organizations buy them in bulk. One example is nitrile gloves in medical facilities. While these items aren’t expensive, they are critical to the successful daily operation of doctor’s offices, dentists, and other healthcare providers. Consider bulk purchases of these items to reduce costs through volume discounts and act as an insurance policy against shortages and shipping delays. Bulk buying ensures stakeholders have the exact, high-quality products on hand and avoids extra expenses and time spent sourcing similar items in the event of an issue. 

Consider procurement software

As procurement functions grow in complexity, most organizations need tools to manage increasing deal flow and promote scalability. Procurement software like Order.co streamlines and automates the purchasing process from intake to payment. 

Manage indirect spend categories automatically with Order.co

Procurement solutions make it easier to see your spending, track trends, and bring unnecessary costs under control without adding more manual processes. 

Order.co gives organizations all the tools and visibility needed to create a dynamic and automated workflow for every purchase, including:

• Budget and individual spending guidelines that keep purchases within policy
• Purchase requests that automatically route through an established approval process with full visibility for stakeholders
• Quick sourcing of backordered or out-of-stock items through other high-quality vendors using an algorithmic suggestion system
• Automatic general ledger (GL) coding that ensures every purchase is correctly represented in financial reporting 
• AP process automation that allows accounting to pay for items electronically and consolidate the payment process into a single monthly payment across multiple vendors
• A system that uses transaction data to track supplier performance, item pricing, spending trends, and total cost/value of procurement

If you need a scalable way to overcome the most pressing indirect procurement challenges, schedule a demo of Order.co today.