This article was originally published on Forbes Business Council.
There’s an old maritime story about a ship preparing to leave port. The captain inspects the engines, confirms navigation systems are functioning, reviews the weather, and ensures the crew is ready. Everything critical to propulsion appears sound. But just before departure, an engineer notes barnacles forming along the hull. They won’t prevent the voyage, but they will create drag—a little more resistance, a little more fuel, a little less efficiency over time.
Most ships sail with some degree of drag, but it’s usually only addressed when efficiency begins to matter. In many organizations, indirect spend operates in much the same way.
Across industries, indirect goods and services can represent 10% to 20% of revenue. In a $5 billion organization, that could translate to approximately $1 billion in annual spend across technology, logistics, marketing, facilities, and professional services—the infrastructure that keeps the enterprise running. These costs are necessary, but in my experience, they tend to receive very little sustained strategic scrutiny.
A Cost Base Under Structural Pressure
This cost base is becoming materially more volatile. Global AI infrastructure market size is projected to rise at a CAGR of 30.4% between 2024 and 2030, with cybersecurity investments accelerating alongside it. In logistics, tariff uncertainty has pushed freight proposals into double-digit increases.
Individually, these movements are manageable. Across an indirect spend base, however, they can reshape an organization’s economic profile. The impact is rarely dramatic in a single quarter; in my experience, it tends to accumulate gradually until it becomes structural.
How Rational Decisions Can Compound Inefficiency
Indirect spend is typically dispersed across multiple functions. Each of these decisions is rational and defensible in isolation. In many instances, however, those decisions are made without a true procurement mindset and expertise.
Over time, supplier counts expand. Contracts renew because performance is “good enough.” Redundancies develop across divisions that rarely coordinate efforts.
In my company’s contract maturity analyses, which review thousands of indirect agreements annually, we’ve found that the structural patterns are consistent. Roughly 38% to 46% of contracts fall into low-maturity structures, lacking pricing transparency, benchmarking mechanisms, or meaningful flexibility clauses. Another 13% to 16% operate under expired terms.
These are not catastrophic failures, except for expired contracts that potentially can represent a business risk. They are structural gaps. In the aggregate, low-maturity contracts can carry 8% to 12% excess cost simply because pricing terms and escalation structures were never recalibrated against current market conditions. The result is not visible overspending—it is embedded inefficiency that compounds year after year.
When Growth No Longer Covers Drift
For much of the past decade, revenue growth was expected to absorb incremental cost drift. Expanding top lines could reduce the urgency of revisiting embedded cost structures.
Now, I’ve observed that more boards and investors are emphasizing margin durability and earnings consistency. Tariffs, energy volatility, supply chain realignment, and accelerated technology investment introduce unpredictability that cannot always be passed to customers.
In an organization where indirect spend approaches one billion dollars, even a 3% structural inefficiency could represent $30 million in margin pressure. Conversely, disciplined recalibration across that same cost base can meaningfully strengthen financial resilience—without relying on revenue acceleration or workforce reductions.
In many cases, the necessary leverage is already present within the cost structure. It simply requires deliberate stewardship.
From Expense Management To Economic Design
I have found that the best answer to these issues is to step back and deliberately design your indirect cost structure with the same rigor applied to product strategy or capital allocation. Start by asking yourself, “If I were building this company today—at its current scale, with full visibility into supplier markets and available technologies—would I build this cost structure the same way?”
Would you have the same number of suppliers? Would you allow overlapping services to persist across divisions? Would you structure contracts without pricing transparency or flexibility? Would you allow business units to manage spend in a silo and without utilizing sourcing and procurement experts?
Answering these questions can show you and your leadership the best places to begin reducing indirect spend. Here are several steps to help you get started:
1. Map where indirect spend exists—and how it’s changing.
Where does indirect spend sit across categories, suppliers, and business units, and how has it shifted? Structuring spend into a consistent taxonomy can help you create visibility into trends, ownership, and emerging risks.
2. Identify supplier fragmentation and consolidation opportunities.
How many of your suppliers support overlapping services? Pinpoint duplication to reveal where consolidation could reduce cost, complexity, and variability.
3. Assess contract transparency and competitiveness.
Which contracts lack pricing visibility or flexibility, and when were they last tested? Reviewing and benchmarking agreements can surface opportunities to improve terms.
4. Evaluate contract lifecycle risk.
What portion of agreements are expired or auto-renewing? Assess contract health to reduce your exposure to cost creep and unfavorable terms.
5. Uncover decentralized and unmanaged spend.
Where are business units operating outside procurement? Evaluate your demand and usage to reveal where there might be unmanaged spend and opportunities for greater discipline.
6. Benchmark your current state against the market.
If you went to market today, would your company’s pricing and terms hold up? I’ve found that having external benchmarks can help leaders quantify savings and prioritize high-impact opportunities.
The CFO’s Mandate
Indirect spend is often the largest controllable concentration of cost within an enterprise. It does not depend on demand elasticity, nor does it require product innovation to optimize. Because it develops gradually, it rarely commands sustained strategic focus. Yet at approximately 20% of revenue, its structure materially shapes operating performance and long-term competitiveness.
In today’s environment, don’t leave indirect spend as a back-office consideration. Instead, treat it as a clear indicator of management discipline and associated focus on cost control and overall EBITDA performance.
The ship will leave the port regardless. The difference lies in how much resistance it carries—and whether leadership chooses to actively engineer its cost structure or allow it to evolve unchecked.
See how optimizing indirect spend can help drive margin improvements and procurement efficiencies.
About the Author
David Pennino
Founder and Chief Executive Officer
David has over two decades of experience in the Services and Outsourcing industry, including senior leadership roles at Williams Lea, Scient Corp., and Gartner. As CEO, he is responsible for the growth and expansion of LogicSource’s procurement services and technology solutions as they continue to drive sustainable profit improvement, risk mitigation, and supply chain continuity for the world’s most recognizable brands.
