Keeping profit margins healthy can be a tall order amid rising costs, decreasing demand, and global economic uncertainty. Many tend to focus on revenue-centric strategies to address the challenge–after all, if you want to impact earnings, you increase sales, right? Well, doing so in a time of rising costs and decreased consumer spending is a risky play. But there are other ways you can boost profitability.
When was the last time you looked closely at your organization’s indirect spending? Typically, these goods and services represent around 20% of an organization’s annual revenue. Many companies treat this as a sunk cost when they should see it for what it can be: an untapped resource.
In fact, across all of our clients at LogicSource, we’ve found savings between 7-15% on their indirect expenditures. Consider how much sales would have to increase to make the same impact.
Perhaps it’s time for a frank review of your procurement processes and costs. Start with these five steps toward realizing potential savings for your business.
When more attention is paid to cutting costs than increasing sales, the focus shifts to cost of sales. And that makes perfect sense.
Those costs most directly impact customers, pricing, and sales cycle length. It broadly benefits from post-pandemic supply chain streamlining efforts that most businesses have undertaken today. It’s also easier to manage. There are fewer supplies; usually, all those costs are well-contained within a single system. In general, cost of sales is a straightforward and visible universe of spending for which it is more specific to diagnose issues and implement change.
In contrast, indirect costs can be fragmented and complex to understand. It can take significant time and effort to identify and capture all the expenses; information is typically housed in multiple systems, each with incomplete data, inaccurate categorization, and unreliable or conflicting content on how the organization manages expenses with its suppliers.
This mix of complexity and disorganization prevents leaders from addressing and reducing these expenses to drive profit improvement. There are many hundreds (and often thousands) of suppliers. Cost is spread across a highly diverse set of categories. Every department insists on managing indirect spending, being the best equipped and most knowledgeable about their needs.
Finally, and most critically, it’s typical that leadership does not get regular visibility into what is being spent in the aggregate. Consequently, few companies are prepared to invest in the resources to address these expenses to drive savings and, ultimately, profit improvement.
In our experience at LogicSource, a ton of savings usually hides in indirect categories like Marketing, Packaging, IT, Facilities, and Corporate Services. But that might be different for your organization.
Leaders need to analyze the spend at 30,000 feet and under a microscope to find the largest categories with the most significant opportunities to consolidate and save. It’s a cliché, but there’s a lot of truth to getting the “most bang for your buck,” and it shouldn’t be dismissed as a legitimate starting point.
Bring leadership together to commit to doing something about it. You’ll likely find that the biggest savings come from spending categories across the organization, all with different leaders at the helm—the CIO for IT, supply chain for Packaging and Logistics, and CMO for marketing expenditures.
As a leader, it’s your responsibility to get a commitment across the organization to address the opportunity, agree to work together to achieve the savings you’re after, and positively impact the bottom line.
Once you’ve got buy-in from leadership, new options become available.
If you choose to do the work internally, it can take up to a year to see savings come in. And even a year’s delay in completing the project could end up costing you more than if you’d brought on a partner from the start.
With the help of a third party, significant savings will start coming in after the first quarter, and sooner in some cases. Our clients typically see 7-15% savings on their indirect costs, so the lift of this acceleration is significant.
Building out a high-performing indirect procurement function requires multiple simultaneous workstreams, and once established, continued executive oversight on talent, metrics, technology enablement and relationship management.
This can take organizations a long time to achieve without some level of outside help, either with pace on attainment of savings, outside help on talent acquisition or with technology implementation.
A good partner can manage all of this and ensure the program is accretive in its early stages, and these short-term wins are critical to long-term transformation success and sustainability.
If you are unsure of how to get started, visit LogicSource’s Idea Lounge for more valuable insights here.