Indirect spend includes the cost of goods and services that are essential for a business, but aren’t directly related to producing the products sold. In part, because direct spend is more obviously tied to revenue (COGS), it is typically more closely controlled, often through tools like inventory management systems or procurement software. Historically, however, the time invested in managing indirect spend often turned out to be more significant than time spent on direct spend. A meta-analysis of several older studies shows that, in the past, indirect spending accounted for only 20% of purchases by value, but 80% of purchases by volume.
Despite the low value processing, these purchases took a lot of time from finance departments, because indirect costs were less likely to be coordinated through a centralized procurement department and, therefore, more likely to be purchased without following corporate expense policies.
As a result, even more time went into resolving issues in order to complete the month-end close.
Fast-forward to 2021. Indirect spend is growing, and is even more difficult to manage. According to the management consulting firm McKinsey, indirect spend has increased by 7% per year since 2011, so the need to gain control and visibility over it becomes even more imperative. To further complicate matters, indirect spend now includes many high-value SaaS subscriptions — good examples include those staples of workplace communication in 2021, Zoom and Slack.
So, the financial costs of not gaining control are even higher than they were in the past.
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Saas subscriptions have changed corporate spending, and that change has occurred at a breakneck pace. Blissfully’s 2020 report states that spend on SaaS subscriptions per company is up 50% since 2018, with mid-sized businesses (101–1,000 employees) using an average of 137 unique apps. The report also points to rapidly rising incidents of both duplicate purchases and orphan spend. Those incidents not only cost a company money in terms of wasted spend, they also result in many wasted hours in order to resolve them.
This is just one area of indirect spend that can negatively impact a company’s bottom line if they lack insight into spending as it occurs. How can businesses gain better control over indirect spend? Take a look at these three strategies.
- Create a culture of accountability. When employees gain approval for a purchase up front, they provide all of the necessary information before spending happens. If an expense request is routed automatically to the correct chain of approvers, they are always clear on who signs off on a request, and it is clear to finance who owns each expense, when it was made, and what it is for.
- Gain full visibility. You can only truly gain a handle on indirect spend if you can view it at the line level as it takes place. This information should be available in real time, so nobody is surprised at the end of month, and a company’s financial status is always current. Forecasting and budgeting is, therefore, based on accurate data.
- Recognize that knowledge is power. Once you have visibility into spend, consider how you can leverage your insights. Look for ways to optimize your purchasing power. Can you:
An intelligent spend management system provides a clear view of company spending activity, giving businesses the tools they need to ensure their indirect spend gets the same control as their direct spend. Discover how to get started with an Airbase product demo.