Indirect Spend

What is indirect spend?

Indirect spend is the term used for purchases that aren’t included in an organization’s cost of goods sold (COGS). It includes goods and services necessary for operations that don’t directly contribute to its core products or services.

Indirect spend includes a diverse range of procurement categories that support overall business functions, employee well-being, and facility maintenance.

Effectively managing indirect spend is crucial for optimizing operational costs, maintaining efficiency, and achieving strategic financial objectives.

Understanding indirect spend.

Indirect spend includes a wide range of purchases an organization can make beyond the materials directly incorporated into its final products.

These purchases are essential for the smooth functioning of the business but are not directly linked to the products being sold. However, although it might not directly contribute to sales, this spending category often involves goods and services that contribute to the overall well-being and productivity of the organization, making it a critical aspect of procurement management.

Common categories of indirect spend.

These items are necessary for day-to-day operations but don’t directly contribute to COGS.

Office supplies.

Indirect spend covers the procurement of office supplies such as stationery, printer supplies, and office furniture.

IT services and software.

Expenses related to information technology, including software licenses and subscriptions, cloud services, and IT consulting, fall under the indirect spend category.

Facility maintenance.

Costs associated with maintaining the workplace, including cleaning services, building maintenance, and security services, are considered indirect spend.

Travel and accommodation.

Indirect spend covers travel-related expenses, including flights, accommodations, and transportation.

Utilities.

Expenses for essential services like electricity, water, and heating fall within the realm of indirect spend.

Professional services.

Hiring external expertise, such as legal, accounting, or consulting services, is also considered indirect spend.

Challenges in managing indirect spend.

Diverse categories.

Indirect spend spans a wide range of categories, each with its unique characteristics and suppliers. Managing this diversity presents challenges in terms of tracking, consolidating, and optimizing procurement processes.

Visibility and control.

Unlike direct spend, which is often closely monitored due to its direct impact on product costs, indirect spend often lacks visibility. Limited visibility makes it challenging to control and optimize expenses across various categories.

One issue is that online purchasing makes it possible for employees to purchase things like software subscriptions without any oversight, so the AP team may not even know a purchase had been made until long after the fact.

Vendor fragmentation.

Indirect spend often involves numerous suppliers across different categories, leading to vendor fragmentation.

Effective vendor management can be complex when there is a diverse group of suppliers.

Policy compliance.

Enforcing and ensuring compliance with procurement policies is challenging in the realm of indirect spend. The decentralized nature of these purchases may lead to inconsistencies in policy adherence. Employees making purchases may not fully understand policies.

Strategies for managing indirect spend.

Implement procurement technology.

Utilizing procurement technology, such as Airbase’s procure-to-pay platform, helps organizations gain visibility into their indirect spend. These tools enable better tracking, analysis, and optimization of expenses across diverse categories.

Consolidate suppliers.

Streamlining supplier relationships and consolidating vendors where possible can enhance efficiency in managing indirect spend. Reducing the number of suppliers simplifies procurement processes and negotiation efforts.

Establishing clear policies.

Developing and communicating clear procurement policies is crucial for managing indirect spend. Clearly defined guidelines ensure consistency in purchasing decisions and enhance compliance with organizational policies.

Data analytics and reporting.

Leveraging data analytics and reporting tools provides insights into spending patterns, supplier performance, and cost-saving opportunities within the realm of indirect spend. Data-driven decision-making contributes to more effective procurement strategies.

How Airbase helps with indirect spend.

Airbase takes the pain points away from indirect spend by increasing visibility and control and streamlining the entire procurement process.

With Airbase, businesses can easily set up approval workflows, ensuring that all indirect spend requests are reviewed by the right people. These approval chains can be configured in multiple ways, and prevent unnecessary or unauthorized spending, enhancing overall cost control.

Organizations can also assign virtual cards to specific vendors or departments for indirect spend. These virtual cards not only enhance security but also enable real-time tracking and monitoring of expenses associated with indirect spend categories.

Airbase’s robust reporting functionality creates better visibility into indirect spend patterns. Users can generate detailed reports to analyze spending trends, identify cost-saving opportunities, and make informed decisions about budget allocations.

By offering a comprehensive solution that covers approvals, virtual card management, and insightful analytics, Airbase empowers businesses to optimize their indirect spend management processes, resulting in increased efficiency, reduced costs, and better financial control.