“Indirect Spend” May Be Costing Contractors a Lot of Money
Ask a midsized or smaller building service contractor how much she is paying for vacuum cleaners and carpet extractors, and she likely will be able to give you an answer. However, ask those same cleaning contractors how much they are paying for paper supplies in their office, ink cartridges, electricity for their office, computer repairs, or even gas for their company vehicles, and you will likely hear most say they haven’t the slightest idea.
You see, vacuum cleaners and carpet extractors are big-ticket items, and often cleaning contractors have to budget for them. In the world of procurement, these are known as “direct spend” items. The other items, such as paper products and ink cartridges, are referred to as “indirect spend” items, and they are rarely budgeted for as line items. In fact, many cleaning contractors, just like so many other businesses, large and small, just group these expenses together and file them under “miscellaneous.”
It is long overdue for contractors to take a much closer look at these indirect spend items. They may be costing you far more than you realize. As to exact amounts, this can be hard to determine because no two companies in most any industry are the same. However, estimates range from as little as 5 percent to 35 percent or more of a company’s gross sales is spent on these items. In dollars-and-cents terms, if a cleaning contractor is grossing, for example, $200,000 per year, with 5 percent spent on indirect items, this means that it may be spending $10,000 or more on these items without even realizing it or understanding exactly where the company’s money is going.
Why Indirect Spending Gets So Little Notice
If your company is not paying that much attention to its indirect spending, you have plenty of company. A report going back a good decade ago found that as many as 50 percent of the Fortune 500 companies in the United States had no idea how much they were paying for indirect spend items and to whom.
However, this all turned around about 8 years ago. When the economy collapsed in 2008, those same companies were looking for ways to cut costs, and one of those ways was by focusing on indirect spend items. According to KellyOCG, an outsourcing and consulting group, as of 2013 more than 70 percent of procurement executives in these mega companies now cite indirect spending as a top focus for controlling and reducing costs.
The reasons many companies overlook indirect spending can vary, but typically the reasons fall into one or more of these categories:
• While most companies will have a system where purchases over a certain amount, say $5,000, must first be approved, rarely do companies have approval requirements for indirect spend items.
• Related to this, individually, indirect spend items are often small purchases made by different company departments throughout the year. Because each purchase is small, the amount spent and where and when are often overlooked.
• Indirect spending often involves a very wide range of goods and services, many of which do not fall under any procurement category. This is why they typically are considered “miscellaneous” expenditures.
• Depending on the size of the company, it can take considerable time and resources to keep tabs on indirect spending. This is time and resources the company may not have.
Houston, We Have a Problem
If you are reading this article, chances are that you already have an indirect spending problem or you want to take steps now to prevent one from developing. One of the first steps to take is to determine where and for what you are spending most of your indirect spending dollars. Collect bills of indirect spend items going back a year or more. Start placing these expenditures into categories, total the amounts in each category, and then total the amounts spent for all categories. Now you have, possibly for the first time, a very good idea of how much you are spending on indirect spend items, to which vendors, and for what goods or services.
Now, let’s say you purchase most of your office supplies from Staples, as an example, and they are ordered online or purchased at a nearby brick-and-mortar store down the block. Did you know Staples, as well as similar vendors, have special pricing programs just for businesses, especially if they are B2B businesses, as most cleaning contractors are?
This means that you can shop around for prices and do not be shy about negotiating rates. Several vendors are now reaching out to the B2B marketplace, so competition is much greater today than a few years back, creating competitive pricing for these items.
Other steps to take include the following:
Create indirect spending categories. If you have gone back a year to find indirect spend items, you likely have now created categories for these items. Now start tracking these expenditures for each category going forward. There are software programs that can assist with this, or you can just use a spreadsheet to tabulate them.
End sporadic purchasing. Sporadic purchasing occurs when contractors have different departments in their business office making indirect spending purchases. Say the personnel department finds it needs ink cartridges. Someone simply goes online and orders more. However, another department, perhaps accounting, is well stocked with ink cartridges, which could be shared with other departments. Set up some type of system to keep track of your overall inventory of indirect spend items and to verify if any are needed before an order is placed.
End “on-the-spot” purchases. This is a big problem for some cleaning contractors. This is essentially sporadic purchasing where purchases are made on the spot – either with a distributor or online - whether needed or not. This may occur when an online vendor indicates that the item you are purchasing is often purchased together with another item, so you go ahead and purchase the other item as well. Purchasing the second item along with the original item is an example of on-the-spot purchasing.
Make larger purchases. Most vendors will negotiate pricing if larger quantities of an item are purchased at one time. This can also help eliminate sporadic purchasing and make it easier to track indirect spending purchases.
Look for invoice errors. To ensure that you are getting what you are paying for, make it a point to review every invoice. Errors on indirect spend items occur more frequently than with direct spend items, since these are typically small-ticket items with several sales listed. It is easier to overlook, say, an overcharge of $2 on fifty items than an overcharge of $100 on just two items.
Hire a procurement specialist. If yours is a very large company, it may be a wise investment to hire a procurement specialist. View a procurement specialist as an auditor. He or she will go through all expenditures and suggest opportunities where all spending, direct and indirect, can be trimmed or better managed.
Make an announcement. You will need your staff to help you get on top of indirect spending. Announce to all staff members that the company now wants to keep tabs on indirect spending, and the best place to start doing so is with them.
The goal here is to develop an effective indirect spending management system. That is the only way to get on top of indirect spending.
We have already seen how big a savings are possible with such a system in place, and these savings can directly impact a cleaning contractor’s bottom line. And taking some of the additional steps mentioned here—such as purchasing in bulk, looking into a GPO, or negotiating pricing—can mean even greater savings in the future.