In many organizations, indirect procurement has been a low priority compared with direct procurement, according to NelsonHall, a Boston-based business process outsourcing (BPO) analyst firm whose recent study reveals that more than half of companies think reducing costs and managing large numbers of suppliers were the bigger challenges of indirect procurement.

According to NelsonHall research, the major indirect procurement challenges for organizations are as follows:

• A strong corporate requirement to reduce the cost of indirect goods and services;
• Difficulties in managing large numbers of suppliers in the absence of adequate breadth of internal category management expertise;
• Difficulties in managing large numbers of suppliers in the absence of common indirect procurement systems, processes and interfaces; and
• Lack of indirect spend visibility.

As a result, some organizations are now outsourcing indirect procurement services to improve the management of the increasingly important processes.

SupplyManagement.com recently noted the top three reasons why 326 global companies surveyed by NelsonHall choose to outsource indirect procurement:

• Reducing process costs (84 percent of companies);
• Accelerated sourcing times (79 percent); and,
• Improved ability to manage supplier performance (78 percent).

Another interesting finding of the study is that 70 percent of those companies are looking forward to implementing a shared service center — or, centralizing indirect procurement — before going the outsourcing route. Currently, only 30 percent of firms implemented a shared service center.

The first issue to be addressed in the majority of organizations is improved management of suppliers, according to NelsonHall:

Typically, organizations aim to improve their ability to reduce the cost of goods and services and the cost of procurement, to accelerate sourcing cycle times, and to improve vendor management. They expect to achieve improved vendor management through better spend visibility as well as through enhanced abilities to manage supplier performance through a single interface.

As such, NelsonHall's research supports the conclusion that organizations need to implement “best-practice” indirect procurement processes and systems as part of an indirect procurement outsourcing contract.

Moreover, Rachael Stormonth, research director at NelsonHall and author of a recent report on indirect procurement outsourcing, suggests “outsourcing one of these processes in isolation is unlikely to deliver both the vendor management and the internal compliance required for an optimum solution.”

“Organizations want an improved process compared to their in-house capability,” IndustryWeek quotes Stormonth as having said. “To achieve this goal, vendors need to offer end-to-end process improvement across both sourcing and category management and purchase-to-pay processes.”

In line with NelsonHall’s conclusion that indirect procurement has been a low priority for organizations compared to direct procurement, we direct you to an article mid-last year from Alf Noto, vice president of indirect sourcing at Nokia, written at European Leaders Network. There, he writes about five major differences between indirect/direct procurement. In a nutshell, here are the differences made by Noto summarized:

Creating Business Advantage: Direct procurement’s job is to source and manage suppliers who can support the business’ need for supply chain integration; these considerations usually don’t trouble people working in indirect sourcing.

Preferred Suppliers: In indirect sourcing, increasing your company’s use of a preferred supplier is critical to success. In the direct environment, very few (if anyone) on the manufacturing line will buy a component from a non-preferred supplier, while for many indirect categories everybody can use who they want.

Number of Stakeholders: In direct procurement, you are usually working with relatively few stakeholders (design engineers, quality managers, production specialists) who are located in a few centers of activity. The opposite is the case for the business stakeholders who influence indirect expenditure.

Buyer-Seller Power Relationships: Big companies can build a position of significant power over many key direct suppliers. On the other hand, almost by definition, indirect suppliers are not restricted as to which industries they can supply, so it is only on rare occasions that a company can use its volume buying power to attain a dominant position over an indirect supplier.

Measuring Savings: In the direct world, the focus is on cost of goods reduction. Every product has a bill of materials, and in most big companies, this is held within an ERP system. If procurement reduces the price of something, the impact on profit and loss is clear. With indirect, however, each saving made by procurement is open to questions: How much will we buy in the future? What level of compliance should we assume?