Indirect Procurement: What’s in it for Finance?
Companies face constant pressure to reduce costs in order to offset other rising costs such as oil prices, health care insurance premiums and, at least in some instances, salary costs. In light of both domestic and global economic uncertainty, companies are struggling to find growth opportunities. In order to boost earnings, they have resorted to cost cutting.
However after such drastic cost cutting enacted during the global economic crisis 3 years ago, have companies run out of places to cut? With current US GDP growth barely topping 2%, a probable recession in the Eurozone and a slowing China, the prospects of increasing revenue look dim. Increases in earnings will have to come from further cost reductions and one item that’s often overlooked is indirect spend. CFOs typically have their finger on the pulse of spending on direct materials (or their related component, cost of revenue in service firms), However, indirect procurement—such as expenditures on travel, advertising and office supplies—may be overlooked in many organizations. In this blog, I’ll discuss why its overlooked and how cloud-based software from SAP can help identify and control indirect spend to help companies improve their earnings.
Why don’t CFOs pay more attention to indirect procurement? I’m sure it varies from company to company (one Fortune 1000 CFO dismissed my attempts to get him interested in my former company’s procurement analytics as “tracking toilet paper and light bulbs”). This cynical veteran’s views aside, CFO’s often overlook indirect spend because it’s not always visible at their level. The reason is that the purchasing of indirect goods and services such as professional services, office supplies and travel is often managed at the department level and finance executives rarely see the aggregated results of the overall expenses these line items represent. When looked at individually, the dollar amount of indirect spending in each department seems insignificant. But when added together, they can account for a significant portion of a company’s costs. Look at the income statement line “general and administrative expense” which for some companies can represent as much as 20 to 40 percent of revenue.
Another issue is how to control it. Indirect spend is complex and is typically fragmented across departments and geographies. What’s more, thousands of end-users across the company purchase services across diverse categories that often require nothing more than a manager’s authorization. Even when CFOs understand the need to get a handle on indirect spend, they may be put off by effort and time required to track and control it. In addition, managing and tracking indirect spend efficiently requires specialized software solutions which can be costly.
On demand solutions such as SAP Business ByDesign can help companies get a handle on their indirect spend, and ensure the process is properly controlled including working with approved vendors and securing the necessary approvals. In addition, SAP Business ByDesign is a cloud-based solution which means companies don’t have to spend a lot of money to acquire it and can be up and running in weeks.
Let’s walk through a procurement scenario to show how easy it is to manage procurement in SAP Business ByDesign. The solution’s user interface is organized into logical functional groupings called “work centers” and uses embedded workflows to streamline the process. Here’s an example: an employee needs a new computer monitor and logs in to SAP Business ByDesign. She starts in her Home screen and selects the “self-services” option. Here employees can perform many tasks on their own that eliminate the need to burden specialized staff in other departments such as purchasing in this case. From her self-service view, she clicks on the “Go Shopping” icon which lists several options such as office equipment. From the intuitive menu, she selects computer monitors and is presented with several options that her company has already approved. Upon making her selection, the item is placed in a “shopping cart” where she can review her selection and click “finish” to complete the process. SAP Business ByDesign’s powerful workflow automatically routes the request to the employee’s manager, who after reviewing the request, approves it by simply clicking a button. This sets the next stage of the workflow into motion where the approved request is sent to the company’s purchaser. The purchaser opens his “Sourcing and Contracting” work center and selects the “New RFQ” option. From a list of pre-approved computer equipment vendors, the purchaser can specify the item and delivery terms and transmit requests-for-quotes (RFQs) to multiple vendors, either electronically or in hardcopy PDF form. When the quotes are received, the purchaser again enters his “Sourcing and Contracting” work center and selects the compare quotes option. Form here he can evaluate prices and delivery terms and award the contract by with a click of a button. This action creates a purchase order that is transmitted to the successful vendor. The whole process is completed when the employee who created the original request receives the equipment and acknowledges that through a goods receipt. Later, when the company’s accounts payable staff receives the invoice from the vendor, they have all the information they need to process the invoice (including manager approvals, PO and goods receipt) for payment visible in the solution’s Document Flow. SAP Business ByDesign also features robust analytics to help you understand spend by different categories, vendors and cost centers. For more information on customer invoicing and sourcing contingent workforce, please see my previous blogs on Supplier Invoicing and Project Purchasing.
As CFOs look for ways to reduce costs, they should focus on a simple but often neglected category—items such as office supplies, services and travel being purchased and expensed across the entire organization. Properly managing indirect procurement can be a significant undertaking, requiring specialized skills and software. Fortunately, SAP has cloud-based options such as SAP Business ByDesign and our Sourcing OnDemand application that are both inexpensive to acquire and can be up and running in weeks.