This article was originally published by CFO Brew.
Indirect spend represents a considerable chunk of revenue—around 10%, according to Deloitte, though some sources put it much higher—so it’s a prime opportunity for savings. David Pennino, CEO, director, and founder of procurement services software company LogicSource, spoke with CFO Brew about ways CFOs can keep better tabs on indirect spend, and ways for them to trim costs.
What are some ways that companies could improve the process by which they examine their indirect spend?
I meet CFOs for a living because our buyer is always the CFO. One of the most common things that they’ll tell me privately is they get asked to sign things a lot but they have no idea what they are. [Indirect spend] is a huge opportunity area for them to not only reduce costs, but also reduce risk.
So CFOs are maybe only seeing the 10,000-foot view of indirect spend and not getting granular enough?
Think about a household. Most folks know what their mortgages are. Most know what their car payment is. The death by a thousand cuts is the credit card bill and the Amazon bill. Indirect spend is like that for CFOs. There’s thousands of transactions, thousands of suppliers. It’s hard for them to get their arms around.
What are some ways that CFOs could keep closer tabs on all these transactions?
First and foremost, by having a living, breathing spend cube so you can see [answers to questions like,] “What do we buy? Who do we buy it from? Who buys it? What do we pay for it?”…You can’t manage what you can’t see.
Contracts are another good one. Most organizations don’t have all their contracts in one place. They have auto renews that they didn’t even know they had and now they’re liable for another three years of a contract…Getting control over your contracts and your data is a big step one.
What are some areas of indirect spend that you often see companies overlooking?
Marketing is always a hotbed of savings. There’s a huge opportunity here because marketers—and I am one—we’re emotional buyers. We like shiny things…Marketing can be a 10%–40% savings category.
Then there’s categories that people don’t think they can negotiate. CFOs don’t think they can negotiate with their auditors. Of course they can. Lawyers don’t think they can negotiate with their outside counsel. Of course they can. There’s a huge opportunity in what we broadly call corporate services.
Do you have any advice for CFOs on renegotiating contracts?
Hire domain experts, whether internally or externally. What you’ll find oftentimes is people will go into procurement that are generalists, and domain expertise means a lot in this space. The folks that we bring into our centers of excellence come from the industry. They were in the trucking business; they were in the ocean freight business…They understand how the sausage is made and understand how [industries] price and where the opportunities for reduction are.
