Indirect spend—the purchasing of goods and services not directly tied to production often represents 20-30% of a company’s total expenditure. Yet for many organizations, it remains one of the most challenging areas to manage effectively. From office supplies and IT services to marketing expenses and professional fees, indirect spend touches every department but often lacks the oversight and control of direct procurement.
If your finance team struggles with maverick spending, limited visibility, or inefficient approval processes for indirect purchases, you’re not alone. This guide will show you how to take control of your indirect spend and unlock significant cost savings.
Understanding the Indirect Spend Challenge
Unlike direct spend, which is typically managed through established supplier relationships and contracts, indirect spend is characterized by high transaction volumes, decentralized purchasing, and involvement from multiple stakeholders across the organization. This creates several common pain points:
Lack of visibility: Without centralized tracking, finance teams struggle to understand where money is going, who is spending it, and whether purchases align with company policies.
Maverick spending: When employees bypass established procurement processes, organizations lose negotiating power and miss opportunities for volume discounts.
Manual processes: Paper-based or email approval workflows create bottlenecks, slow down operations, and make it difficult to maintain accurate records.
Supplier fragmentation: Multiple departments may be purchasing similar items from different suppliers, missing opportunities for consolidation and better pricing.
Compliance risks: Without proper controls, organizations face increased risk of policy violations, fraud, and audit issues.
Building a Foundation for Indirect Spend Management
The first step in gaining control is establishing clear policies and processes. Start by conducting a thorough spend analysis to understand your current state. Where is money being spent? Which categories represent the largest expenditures? Which departments are the biggest spenders?
Once you have visibility into your spending patterns, develop a comprehensive procurement policy that defines approval workflows, spending limits, preferred suppliers, and acceptable purchasing methods. This policy should be communicated clearly across the organization, with training provided to ensure understanding and compliance.
Consider implementing spend categories and classification systems that allow you to group similar purchases together. This makes it easier to identify opportunities for consolidation, negotiate better contracts, and track spending trends over time.
Centralizing Control Without Creating Bottlenecks
Many organizations fear that tightening control over indirect spend will slow down operations and frustrate employees who need to make purchases quickly. The key is finding the right balance between control and efficiency.
Modern procurement software solutions enable centralized oversight while maintaining speed and flexibility. By implementing a user-friendly platform that allows employees to make necessary purchases within defined parameters, you can maintain control without creating bureaucratic delays.
Key features to look for include automated approval workflows that route requests based on amount and category, pre-negotiated catalogs from approved suppliers, real-time budget tracking, and mobile accessibility for approvals on the go.
Leveraging Technology for Spend Visibility
Technology is the cornerstone of effective indirect spend management. Without the right tools, even the best policies and processes will fall short.
A comprehensive spend management platform should provide real-time dashboards that show spending by department, category, supplier, and time period. This visibility allows finance leaders to identify trends, spot anomalies, and make data-driven decisions about where to focus cost reduction efforts.
Look for solutions that integrate with your existing financial systems, capturing data automatically and eliminating manual data entry. The ability to generate reports quickly and easily is essential for monitoring compliance, identifying savings opportunities, and communicating results to stakeholders.
Implementing Strategic Sourcing for Indirect Categories
Once you have visibility into your indirect spend, you can begin implementing strategic sourcing initiatives. This involves analyzing spending patterns, consolidating purchases with fewer suppliers, and negotiating better terms and pricing.
Start with your highest-spend categories where you’ll see the biggest impact. Common areas for indirect spend optimization include office supplies, travel and entertainment, IT hardware and software, marketing services, and facility maintenance.
When negotiating with suppliers, leverage your consolidated volume to secure better pricing, payment terms, and service levels. Consider establishing blanket purchase orders or framework agreements that simplify the purchasing process while ensuring you receive preferred pricing.
Engaging Stakeholders Across the Organization
Successful indirect spend management requires buy-in from stakeholders throughout the organization. Department heads and employees need to understand not just the rules, but the reasons behind them and the benefits they’ll see.
Communicate the value proposition clearly. When employees use approved processes and suppliers, they often benefit from faster fulfillment, better quality, and simplified purchasing. When the organization saves money through better spend management, those savings can be reinvested in strategic initiatives.
Provide ongoing training and support to help employees navigate new systems and processes. Make it easy for them to do the right thing by creating intuitive tools, clear guidelines, and responsive support channels.
Measuring Success and Continuous Improvement
To ensure your indirect spend management initiatives deliver results, establish clear metrics and track them consistently. Key performance indicators might include total indirect spend as a percentage of revenue, percentage of spend with preferred suppliers, average cost per transaction, number of maverick purchases, processing time for purchase requests, and supplier consolidation ratios.
Review these metrics regularly with leadership and use the insights to refine your approach. Indirect spend management is not a one-time project but an ongoing discipline that requires continuous attention and improvement.
Celebrate wins and share success stories across the organization. When employees see the tangible benefits of better spend management, they’re more likely to embrace the processes and contribute to ongoing improvements.
Common Pitfalls to Avoid
As you work to gain control of your indirect spend, be aware of common mistakes that can derail your efforts. Overcomplicating processes with too many approval layers can create frustration and drive employees to find workarounds. Failing to get executive sponsorship means your initiatives lack the authority and resources needed to succeed.
Choosing technology that’s difficult to use or doesn’t integrate well with existing systems will limit adoption and effectiveness. Focusing solely on cost reduction without considering quality, service, and employee satisfaction can damage relationships and create new problems.
Neglecting to communicate changes and the reasons behind them leads to resistance and non-compliance. Address these pitfalls proactively by keeping processes simple, securing leadership support, selecting user-friendly technology, taking a balanced approach to cost management, and communicating transparently throughout the organization.
The Path Forward
Gaining control of your indirect spend is a journey that requires commitment, the right tools, and ongoing attention. The rewards significant cost savings, improved compliance, better supplier relationships, and enhanced visibility make it well worth the effort.
By establishing clear policies, leveraging technology, engaging stakeholders, and continuously measuring and improving your approach, you can transform indirect spend from a source of frustration into a strategic advantage for your organization.
Ready to Take Control of Your Indirect Spend?
Don’t let unmanaged indirect spending continue to drain your budget and create inefficiencies. Penny Software’s procurement platform gives you the visibility, control, and automation you need to optimize your indirect spend while empowering your team to work efficiently.
Our expert team can show you how organizations like yours are achieving 15-25% savings on indirect spend while streamlining their procurement processes.
Book a call with our expert team today to discover how Penny Software can help you gain control of your indirect spend and unlock significant cost savings for your organization.
