Identify the four types of spend that can boost your organization’s bottom line.
In recent years, Procurement’s scope has shifted from a tactical and tunnel vision cost-management approach to a focus on value-generating opportunities, but cost management is still a top priority among CPOs. A key strategy to cost management is bringing more spend under management, but you can’t manage what you can’t see. Making data-driven decisions around spend requires a clear understanding of spend categories, including direct, indirect, maverick, and tail spend.
1. Direct Spend
Direct spend, also known as direct procurement, includes the costs directly associated with acquiring raw materials and goods related to production. Direct spend typically represents the largest percentage of total spend in an organization. Activities related to direct spend include supplier relationship management, vendor risk management, inventory management, and logistics.
How can direct spend be better managed?
The direct procurement team’s close partnerships with its supply base represents are an area with great potential for innovation within the supply chain. Examining spend analytics of purchase orders will help identify trends and areas where improvements can be implemented to better leverage buying power.
2. Indirect Spend
Indirect spend, also known as indirect procurement, can be classified as operating expenses and overhead costs that can’t be directly associated with the total cost of the end product. Indirect spend can be further classified into categories for further analysis. An example of indirect spend categories includes the following:
- Operations: transportation, office equipment and supplies, food and beverage
- Services: facilities maintenance, professional services, marketing, human resources, travel and entertainment
- Technology: Software, hardware, telecommunications, storage
How can indirect spend be better managed?
Indirect spend is where many procurement leaders lose sight of spend visibility, which opens the door to maverick spend and tail spend. If each business unit is negotiating contracts outside of procurement’s purview, it can be a drag on the bottom line. An examination of maverick and tail spend in your organization can help identify low-hanging fruit for cost-savings opportunities. It will also identify purchasing redundancies, highlight potential compliance issues, or bring to light opportunities to renegotiate.
Indirect vs. Direct Spend
For procurement professionals to have a full picture of how their organization spends money, expenses are first categorized as either direct spend or indirect spend. Together, these two categories comprise the organization’s total spend. Analyzing direct and indirect spend is a sourcing strategy that can identify areas for cost-savings, expose potential supply risks or contractual gaps, and increase efficiencies.
Additional read: Advanced Spend Analytics Playbook
3. Maverick Spend
Maverick spend or maverick buying happens when purchases are made outside of the organization’s procurement guidelines. When procurement is not included in buying decisions, opportunities are lost for price comparisons and discounts while increasing the risk of compliance issues.
How can Maverick Spend be better managed?
Sometimes procurement is bypassed because it’s seen as slow or a gatekeeper to a product or service that a department feels strongly about. Most maverick spending can be contained through forming partnerships and educating internal stakeholders. By working in tandem with stakeholders, procurement can help drive down maverick spend and find cost-saving opportunities that departments can then put toward other resources.
Additional read: Different Perspectives of Maverick Spending
4. Tail Spend
Tail spend has a few monikers; it is also known as tail end spend or long tail spend, and maverick spend is often classified as a form of tail spend. Generally, tail spend is defined by the 80/20 rule: it is 80% of transactions but only 20% of spend volume.
Why is it important to manage Tail Spend?
Tail spend is hard to manage because the categories can be complex or hard to classify. Without a technology solution, tracking tail spend across Excel spreadsheets is a burden on employee resources. However, organizations that proactively manage tail spend can gain a competitive advantage by significantly trimming costs. According to Boston Consulting Group, companies that use technology to actively manage tail spend were able to cut annual expenditures by up to 10%.
Additional read: How Procurement and Finance Can Save More with Spend Visibility
Today’s procurement leaders must go beyond traditional cost-cutting measures. Spend analytics can help you find opportunities that generate more value through real-time, data-driven decision-making.