Why organisations often leave the potential of indirect procurement untapped

For decades, organisations have focused on reducing costs. Whereas the costs of product-related purchases (such as equipment and raw materials) are often well controlled and monitored, non product related purchases remain a vastly different situation. Many organisations struggle with managing and controlling this secondary spending stream. In this blog, John Schouten, Director Product Management at ISPnext, discusses the four reasons why these expenses and processes are so difficult to manage in practice.

1. Diversity

Secondary procurement, also known as non product related (NPR) spend or indirect procurement, unlike direct strategic procurement, is not invested solely in the Purchasing Department. With secondary purchasing, there are several budget holders and all employees within an organisation are so-called spenders. Anyone can place orders, unauthorised or otherwise, on behalf of the organisation. Consider IT expenses, expenses for ordering office supplies, facility items such as cleaning services or having marketing promotional materials printed. These are just a few examples of diversity in the procurement process that often require a different approach and process. This translates into a multitude of purchasing category types, number of transactions such as invoices (70% - 85% of the total) and number of suppliers (60% - 80% of the total), known as tail spend.

2. Consciousness

On average, tail spend comprises only 20% to 30% of total spending and receives less attention within organisations. For product-related procurement, agreements are established with preferred suppliers in contracts, systems are modified and processes are put in place to secure and control most of the purchase value and the biggest high-risk items. An inefficient process and less grip on tail spend is seen as part of the job or remains entirely unnoticed. Spend under management is low in this area with numerous risks, such as unwanted liabilities or unnecessary purchases at prices not agreed and negotiated in advance. Other important risk factors are the limited control of legality, as well as the possibility of committing fraud. Several studies show that the Procure-to-Pay process has the highest fraud rate. Not surprising when you consider that the flow of money and goods is so closely tied to this process. Trust is good, but checking is better. 

“An inefficient process and limited grip on tail spend are often overlooked, with little spend under management and numerous risks.”

- John Schouten, Director Product Management | ISPnext

3. System landscape

Due to the diversity of expenses, there is no unified system that can manage all such expenses and requirements, let alone integrate with online stores. An ERP system is present in most organisations but is only satisfactory for primary procurement and not for secondary procurement. You may also be interested in our blog: "An ERP is not suitable for the procurement role." The lack of a centrally organised solution, which is also user-friendly, encourages unauthorised and unwanted orders. Economies of scale and savings related to central purchasing also remain missed opportunities. Inefficiencies also continue to exist in the processes because the front end (such as contracts and purchase orders) are not recorded, allowing limited automation of subsequent processes such as invoice processing.

4. Resistance

Resistance to change is experienced in most organisations. This is no different when addressing ordering behaviour within an organisation. Employees feel less freedom and more administrative burden. Given limited awareness and possible resistance to change in cultural principles and acquired rights, conscious action is often not made of savings in indirect expenditures. Therefore, such an implementation is more of an organisational change than merely a software implementation. 

Conclusion

This blog has addressed the four reasons why the indirect procurement function is often unused within organisations. Despite the fact that many savings can be realised by applying strategic sourcing, establishing efficient processes and reducing risks, professionalising secondary sourcing are often left untapped. In the next blog, "How to increase Spend Under Management," we will discuss the potential of procurement software and how to leverage this for indirect expenditures. 

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