by Joe Payne, Vice President, Professional Services
With global economic conditions continuing to deteriorate, many companies are searching for ways to improve their overall profit picture. In a down economy, improving sales takes a back seat to cost reduction, and organizations shift their focus to reducing headcount and shutting down facilities. However, market leaders know that competitive superiority lies ineffectively managing all contributors to the bottom line – including indirect procurement costs.
In the scramble to increase revenue and streamline operations, indirect spend is often overlooked or only looked at as a last resort. Although indirect spend is often viewed as a small piece of the overall spend pie, substantial savings can be derived from managing it effectively, in some cases even more so than payroll or raw material costs. The reason for this is simple. Since indirect spend is not usually seen as core to the business function, categories are often managed in an ad-hoc, unstructured way by administrative staff, IT, or marketing, whoever the spend impacts most directly. But these people are not necessarily trained in purchasing and negotiating, and managing indirect spend is certainly not their primary role. So despite all the best intentions, the inefficiencies creep in over time.
Best-in-class companies, the market leaders, are going to look at all of their business processes to find ways to maintain an edge and create an advantage over the competition. The leadership team for those types of companies know and understand the value of managing indirect spend, and know that a well-planned initiative with appropriate high-level sponsorship can generate significant cost savings that drop right to the bottom line.
There are 3 steps that companies can take to begin the process of effectively managing indirect spend:
First, they can create a roadmap. By taking a look at the general ledger, they can discover who their top suppliers are, and what “buckets” the various types of spend fall into, such as IT, administrative, marketing, facilities services, and so on. Then categorize the data and prioritize project areas based on the amount of spend, the possibilities of consolidating suppliers, and how long it’s been since any given category was examined in a formal way for cost-saving opportunities.
The next step is to develop a strategic plan. Assemble project teams, making sure that stakeholders and end users who use the category and work with the suppliers on a daily basis are adequately represented. A high-level management sponsor should set expectations for close collaboration and set appropriate savings targets.
Finally, you need to develop a plan to ensure discovered savings are actually realized. So many initiatives of this type fail, or obtain lack-luster results, ecause the project lead wrongly believes that a project is over after a contract is signed with a new supplier (or an improvement is made with the incumbent). But without ongoing compliance monitoring, inefficiencies creep back in. Have the team meet periodically to review contract and service level performance, and make sure the team lead has authority to make decisions and implement changes. Make realized cost savings part of that team’s yearly objectives, even to the point of considering awarding bonuses based on results. Reward the team for their accomplishments, and positive change will happen easily.