Sourcing of indirect goods and services- Everybody can do that, can´t they?!

A lot of companies “choose” to not realize the benefits within procurement of so-called “non-strategic”, or indirect, goods and services. “This is something everyone can do”, is a phrase that goes with many of the decisions to not address it properly. In reality, the challenges of making the right purchase and realize the benefits within these categories is often more challenging than for direct goods and services – if it is to be done right…

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The vast majority of corporate leaders will agree with the statement that Procurement is important for the company they lead. They also agree that it is in their best interest to have it work properly, and to realize as much of the cost savings potential as possible, while still catering to the needs of the organisation. The vast majority are also supportive to spend time and resources on purchasing the goods and services that goes directly into the core processes of the company, while hesitating when asked to do the same with indirect goods and services.

What is “indirect goods and services” and who buys?

The expression “indirect goods and services” hides a plethora of procurement categories such as travel, banking, marketing, professional services, IT equipment, office supplies and a wide range of other categories. These are categories most employees have a basic knowledge about and that they even can purchase privately. The last part in particular, contribute to the fact that these categories often are managed directly by the line organization, and is purchased at an ad-hoc basis by a range of different employees.

How is this organized and purchased today?

In some cases, the company may have so called “lead buyers” (the largest buyer in the organization, or the employees with the most interest in the category) who have a responsibility to ensure the existence of an agreement within a specific category, such as car rental, office supplies or media. In the majority of cases, it is a “unprofessional purchaser” who gets the job in the Department that are appointed to ensure that there is an agreement in place.

These are people who, in most cases, have little or no experience as a procurement professional, have little or no knowledge of the category other than that buying the odd product and using it in the day-to-day operations, and they often lack even the most elementary tools and methodologies within procurement. The statement “We made a good negotiation and got x% discount”often characterize the summary of the process after a contract is signed. Knowing that the negotiations is one of the least important parts of the process to realize  procurement savings, this is hardly the place to focus.

In many cases competitions run by non-professionals consist of a short request sent to 2-3 vendors, that are known in the market and that the employee and his/her friends know about, with a partially complete specification of what the customer wants to buy. Often times the request does not contain information about the total volume, the trends of usage, other potential users across the company etc. The request is then followed by a simple comparison of the prices tendered from the vendors, and a subjective evaluation of the quality of the products. Then, it is straight into the negotiations with limited or no preparations.

Leaving money on the table – every day!

There are many business leaders do not realize is that 80% of the impact possible to achieve on the end result, is realized long before the negotiations start. The analyses and insights into your own needs and the market where which the vendors operate, form the basis for a category strategy that governs the procurement process, which strategies to use, what cost drivers are the most important, and so on. This should be the basis for the design of the request to the market and for the process all the way through to a finished implemented contract, and into the operation and follow-up of the contract afterwards.

Experience shows that on average the cost level is 8-12% higher on indirect goods and services of those who do not have a structured and competency-based approach. When we add the knowledge that the average business today carries an indirect cost percentage (of total sales) of 17-22%, it shows that companies are missing out on great value for their shareholders and stakeholders.

In short, one can say that, not surprisingly, the implementation of a good and structured approach with the right skills can lead to an improvement of 2%-points on the bottom line margin of the average company. The benefits realized dwarfs the cost of  having a dedicated strategic buyer with the right skills and tools that can facilitate the right interactions with the users & stakeholder, create a well thought of process and strategy for implementation, and that has the skills and knowledge to carry this trough to a well implemented contract in the end.

“Everybody can buy a pencil”

How does this connect to the indirect categories? Even if the company has a bottom line impact potential of +2% from doing the sourcing of indrect goods and services correctly, business leaders are reluctant to offer up resources. Why?

I think that it all goes back to the sentiment that “everybody can buy a pencil” – we all know the products, therefore we can all buy the products as well as the next person… It does not recognize the fact that procurement is a skill and a trade that is learned trough years of doing, testing, learning, experimenting, researching and negotiating. It is like all other professions – professionals just do it better than “the next person”…

If your company is looking for ways to increase your cost savings, or approach procurement of indirect goods and services, please contact us to schedule a meeting or a call to explore the possibilities that you might have in your situation.

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