THE INDIRECT SPEND Dare to strategize BARBARA LAUER
THE LONG TAIL (INDIRECT SPEND) SUPPLIERS 80 % 20 % SPEND SPEND 20% SUPPLIERS 80% SUPPLIERS
THE DARE: Make visibility into your indirect spend a corporate priority THE MISSION: Elevate indirect spend to the next level of strategic management THE OPPORTUNITY: Deliver visibility into indirect spend to drive value and maintain compliance 03
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THE DARE: MAKE VISIBILITY INTO YOUR INDIRECT SPEND A CORPORATE PRIORITY 05
THE DARE: MAKE VISIBILITY INTO YOUR INDIRECT SPEND A CORPORATE PRIORITY It has become a classic procurement practice: focus your time, resources and strategic attention on the bigspend categories and suppliers. Direct material, advertising, strategic consulting, financial audit and outsourced services command the most attention because the other niche categories and suppliers only account for 20 percent of your total spend. Yet focusing on the 80 percent (known as the Pareto Principle) has left a management oversight gap. The Aberdeen Group recently reported that 70 percent of procurement executives cite the indirect spend as a top focus for controlling and reducing cost. Procurement executives know that indirect category management now presents a significant opportunity for cost management, gross profit and margin growth. Add the need to comply with Sarbanes Oxley requirements and the strategic importance of indirect spend multiplies which also increases the workload for procurement organizations. More procurement groups now seek to drive a larger volume of contracts through their organizations. They want to manage and negotiate better rates and achieve tighter compliance with both financial and regulatory controls. And they believe that more attention to indirect spend and the multitude of suppliers in those categories can yield savings without distracting management attention from compliance or strategy. At the same time, procurement teams face two realities. First, the corporate functions themselves have become leaner; second, the systems designed for supply chain management and financial control no longer paint a clear picture of the indirect spend. These two issues put time pressure on procurement teams. They have less time to focus on strategic initiatives because they must manage compliance requirements 70 % of procurement executives cite the indirect spend as a top focus for controlling and reducing cost 06
and suppliers of low-value transactions. Without the staff, tools or expertise to manage the vast number of indirect categories and suppliers, many procurement teams cling to the Pareto model. They put in place large strategic contracts with 20 percent of the supply base to address 80 percent of the budget. Yet the resulting feeling of control and visibility is a myth: left on the table is the orphaned 20 percent, also known as tail spend, which could be aligned with better suppliers, managed to compliance or used more strategically. In this still-new century, companies are caught between the lack of resources and a desire for a wider variety of suppliers. They don t have the bandwidth to manage every aspect of spend, yet they want access to the breadth-of-service suppliers that can help differentiate their products or services. In an ever-fluctuating market demand environment, every expenditure counts toward driving differentiation and controlling cost. As such, whether a company has always managed their supply chain efficiently, with expense management to the decimal point or not, all companies must innovate to add visibility to and manage the indirect spend. To succeed in managing the indirect spend, every company needs a consistent approach aligned with the business strategy. They need robust back office support processes to understand and analyze what is being purchased and from whom. A visible indirect spend multiplies the company s capacity to comply, meet internal standards, mitigate risk, ensure supplier quality and move with speed. 07
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THE MISSION: ELEVATE INDIRECT SPEND TO THE NEXT LEVEL OF STRATEGY 09
THE MISSION: ELEVATE INDIRECT SPEND TO THE NEXT LEVEL OF STRATEGY Companies recognize that they need to advance their management of the indirect spend categories. Clear visibility and insightful data analytics present a significant opportunity for procurement to take a more strategic approach. executives in enterprises with revenues of more than $1 billion. They report that for every dollar/ pound/euro that is placed under management of the procurement department, the average enterprise sees a benefit (cost savings) of between 6 and 12 percent. a 5 percent savings on tail spend can be the equivalent of a 10 percent increase in net profit. Yet why do most companies continue to struggle with harnessing their indirect spend? They don t approach the indirect spend as a whole, so they don t have the clear visibility essential to financial and strategic excellence. respondents report that they had little to no visibility or insight into their firms indirect expenditure. Companies need real-time information about their indirect spending to drive true value. Second, enterprises must determine how to establish efficient indirect procurement processes without taking on unnecessary risk, increasing cost or sacrificing market presence or impact. Just as important as risk and cost management, is the ability to assure operational managers that they can easily access and retain access to quality resources, especially talent. Procurement organizations must solidify indirect sourcing practices that make sure they are not bottlenecks to accessing needed talent and resources. At the same time, they must honor the mandate to maintain cost and risk compliance. 10
Third, around the world companies are scrambling to embed more sophisticated technologies to enable real-time procurement practices, improve supplier management and capture data that can be analyzed from infinite viewpoints. Yet they don t have enough resources to manage the process. And many technology options are not yet sophisticated enough to provide the right level of details to achieve compliance, manage suppliers and deliver value. Procurement organizations must leverage the appropriate technology to capture, measure, analyze, and report information that helps to optimize the supply base and provide greater strategic value to the organization. INDIRECT SPEND PARETO PRINCIPLE LONG TAIL TALENT GAP Purchases of goods and Also known as the The 20 percent of a The skills gap resulting services that are not 80/20 rule, it holds that company s procurement from fewer resources directly incorporated 80 percent of outcomes spend that is spread with critical in-demand into a product being can be attributed to out amongst 80 percent skillsets entering the manufactured or a service 20 percent of the causes of the organization s workplace than leaving the being delivered. for a given event. total supply base, also workplace. Causes can known as tail spend. include growing demand for certain skillsets (for example, technology skills), high rates of people retiring with certain skills, and lower rates of college graduates majoring in certain disciplines. 11
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THE OPPORTUNITY: DELIVER VISIBILITY INTO INDIRECT SPEND TO DRIVE VALUE AND MAINTAIN COMPLIANCE 13
THE OPPORTUNITY: DELIVER VISIBILITY INTO INDIRECT SPEND TO DRIVE VALUE AND MAINTAIN COMPLIANCE Companies continue to buy indirect services without truly embedding a set of companywide standards or controls. Procurement groups may not even be involved in the selection or purchase of services outside projects labeled strategic or that fall below certain spend thresholds. In some cases, engagement managers follow their own priorities and business needs, judging suppliers by standards defined outside of procurement s business or category strategies. These engagement managers often find procurement processes and controls cumbersome, so with a bit of ingenuity, they find ways to avoid them especially if they structure projects and budgets to fall beneath thresholds established by procurement. In far too many other cases, engagement managers may be unaware of procurement processes and innocently bypass them altogether. The downside is significant. In the absence of a holistic approach to managing the indirect spend, there are several negative consequences, including the following. the services retained. meant to deliver results in no link between the quality of the outcome and the cost. future sourcing decisions are made in the dark. understand the invoicing process. Procurement strategy has a critical role to play in reducing organizational cost, ensuring compliance and risk mitigation, enabling access to key resources, and in improving GP. Procurement groups that are equipped to manage every transaction aggressively as a strategic element, not just one event in and of itself, gain a leg up in everything from cost containment to securing the best talent and resources available, while mitigating risk. 14
There are many levers along the spectrum for maximizing value of an enterprise s indirect spend: standardized project scoping; supplier selection and management; rate benchmarking; sourcing strategy; supplier performance and optimization; consumption management; and volume leverage. Address them in an isolated fashion and you get isolated improvements. But holistically approach indirect spend levers within three areas spend visibility, compliance and optimization and you have a custom strategy that aligns with your business and operating goals. Moving your indirect spend management from an administrative burden to a strategically aligned approach that supports the business and contributes to GP will require a disciplined approach with dedicated resources. INDIRECT SPEND MANAGEMENT VALUE CONTINUUM Supplier Optimization & Price Alignment 3 5% Price benchmarking Bid recommendations Volume discounts with market share Supplier performance measured RFx 5 10% Manage consumption Drive competitive tension Price negotations Optimize talent supply chain SOW Administration 1 2% Streamline processes Visibility Compliance Invoice/milestone management RETURN VALUE % saving will vary by company, strategies, and total spend 15
THE OPPORTUNITY: DELIVER VISIBILITY INTO INDIRECT SPEND TO DRIVE VALUE AND MAINTAIN COMPLIANCE You should take three actions. First, optimize processes. Establish standard processes for Statement of Work development, supplier on-boarding, contracting, invoicing, and payment to ensure compliance. Second, optimize value. Centralize your services procurement to gain greater control of what, when, where, and how budget is spent, and to attain better oversight of tactical and niche spend that is often highly administrative and overlooked. Third, optimize the supply base. Engage vetted suppliers that can and are ready to deliver at the right price when you need them. Measure supplier performance and leverage technology to provide insightful data analytics for better decision-making. Beyond optimizing procurement s own performance through new tools and focus, it s essential to communicate the positive results of these enhancements to your internal stakeholders. Show them how spend visibility will help them make better supplier choices. Reduce the time spent for both stakeholders and procurement on administrative tasks. Most of all, demonstrate that procurement is a resource to them for uncovering, evaluating and using suppliers that will add value to their work. All of this is within the realm of possibility. The proper indirect strategy, technology and processes can propel the 20 percent indirect tail spend into a tangible competitive advantage. 16
NEED TO RE-EVALUATE YOUR APPROACH ON INDIRECT SPEND? CONSIDER THE FOLLOWING: 1 What is your current process for managing indirect spend categories? Is it effective? 6 Do you know how many changes in scope and budget happen within your current SOWs? 2 What are the challenges your procurement organization faces in applying standards for sourcing, compliance and budgets? 3 to serve your indirect needs? 4 What is your company policy on the dollar threshold required to gain approval from procurement? under the threshold? 5 including templates? 7 Do you know what your suppliers provide and what you spend on their individual SOWs? 8 short-term, project-based SOWs? 9 Do you validate your suppliers compliance within contractual requirements (e.g., insurance)? 10 stakeholders about procurement processes and compliance needs? 17
REFERENCES: Procurement: The Roadmap to Success (Released May 2012) Available at: http://www.hcmworks.com http://www.kellyocg.com/uploadedfiles/content/knowledge/report_ Content/Talent_Supply_Chain_Management_Readiness.pdf http://www.sdcexec.com/article/11063801/in-procurement-there- Squeeze Savings from the Most Fragmented 20% Available at: http://www.kineticis.com.au/white-papers/proactis/ tail-spend-management-how-to-squeeze-savings-from-the-mostfragmented-20/ is-a-difference-between-direct-and-indirect-spend-and-the-bestorganizations-know-it http://www.procurementleaders.com/blog/my-blog--guest-blog/ is-it-time-to-outsource-tail-spend http://www.sig.org/newsletter.php?id=5823 18
For more thought leadership go to talentproject.com ABOUT THE AUTHOR BARBARA LAUER is Director of Services Procurement for the Contingent Workforce Solutions team of KellyOCG. She consults with clients across the globe to help them improve management of their Statement of Work (SOW) spend through process, supplier and rate optimization. Barb is a Subject Matter Expert in the management and sourcing of service providers and is responsible for the architecture and solutions design, implementation, delivery and overall customer satisfaction of Statement of Work (SOW) and RFX management solutions aligned with client s business strategy. Ms. Lauer has more than 20 years of procurement experience having worked in positions of increasing responsibility managing both direct and indirect categories within the Automotive, Consumer Products and Manufacturing industries. She has set strategies and purchased across the following indirect categories: contingent labor, consulting, professional services, manufacturing services, capital projects, MRO, travel and training. Barbara was named a 2014 Pro to Know by Supply & Demand Chain Executive magazine. ABOUT KELLYOCG KellyOCG is the Outsourcing and Consulting Group of workforce solutions provider Kelly Services, Inc. KellyOCG is a global leader in innovative talent management solutions in the areas of Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Contingent Workforce Outsourcing (CWO), including Independent Contractor Solutions, Human Resources Consulting, Career Transition and Executive Coaching, and Executive Search. KellyOCG was named in the International Association of Outsourcing Professionals 2014 Global Outsourcing 100 list, an annual ranking of the world s best outsourcing service providers and advisors. Further information about KellyOCG may be found at kellyocg.com.