Indirect spend reduction can have a direct effect on the bottom line

23 September 2011

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23 September 2011 | Angeline Albert

A 5 per cent reduction in indirect spend can translate to 1-3 per cent impact on the bottom line, reports the Everest Group.

The research firm published the findings in its report, Optimizing Indirect Spending, which addresses the importance of maximising savings opportunities from indirect spend.

Indirect procurement spend accounts for nearly 40 per cent of overall spend for a typical organisation. The group’s estimates found even a 5-10 per cent reduction in indirect spend can translate to a 1-3 per cent bottom line impact, which it describes as “significant under any economic context, let alone the tough current climate”.

The report highlights four different strategies for success – internal procurement, partial internally driven procurement, partial externally driven outsourcing or comprehensive outsourcing.

Everest said: “Comprehensive options offer greater value creation potential but are also more challenging to implement than partial options. It is important to look holistically at all the different options and analyse different scenarios before reaching a conclusion – the right first step is a precursor to future success.”

The report said choosing the internal procurement route involved centralising the indirect procurement function across business units and geographies and developing internal shared services.

Partial internally delivered outsourcing could involve internal sourcing, complemented by external staff and consultants. The report stressed the importance of implementing spend analytics, e-sourcing technology or procure-to-pay (P2P) technology, when choosing this route.

Partial externally driven outsourcing could involve outsourcing parts of P2P processes, such as day-to-day purchasing and catalogue management. It could also involve outsourcing parts of sourcing-focused activities such as spend data management, category management and vendor management.

The fourth strategy is a comprehensive outsourcing route where a third party delivers the procurement function for indirect categories.

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