In today's economic environment, companies are continuously pressured to reduce costs in order to combat slower growth and offset commodity price increases, rising costs of energy and transportation, and various other pressures. Despite these issues and the economic instability worldwide, companies must continue to find growth opportunities to compete in the global marketplace. The question I keep returning to is, why don't more CFOs turn to indirect procurement as a significant source of savings to create a competitive advantage and fuel this growth?
According to a recent Harris poll, Fortune 1000 executives aren't satisfied with current cost cutting tactics and will be looking for new approaches and methods in 2012. With the current slow-growth market, this comes as no surprise. Although CFOs and finance departments typically have their finger on the pulse of spending on direct materials, it is ever more apparent that indirect procurement is seriously neglected in many organizations, even though it can represent as much as 20 to 40 percent of revenue.
So, why haven't more CFOs gotten directly involved in indirect procurement? The answer is two-fold. First, the purchasing of indirect goods and services in categories such as professional services, plant/facility services, utilities, MRO and travel is often managed at the department level, and finance executives rarely see the magnitude of overall spend that these categories represent. When looked at individually, the dollar amount of indirect spending in each department seems insignificant when compared to raw materials. But, when added together, they can account for hundreds of millions of dollars.
Second, the management of indirect spend is complex and requires a fundamentally different approach. This spend is highly fragmented across business units, locations and departments. It spans thousands of end-users and encompasses hundreds of unique sub-categories, all requiring specialized supply market knowledge. Even when CFOs uncover the opportunity, the effort and time required to develop a capability that integrates deep expertise, supply market intelligence, processes and technology that can be implemented enterprise-wide seems daunting.
However, this complexity does not excuse CFOs from overlooking the savings opportunity hidden in indirect procurement. During my tenure as a CFO, I brought procurement into the finance department, at times meeting daily with the purchasing team to go over expenditures line by line. While getting directly involved in indirect procurement may not win any popularity contests, CFOs can no longer afford to ignore this area if they want to be competitive. In fact, companies can realize up to a margin point of savings by effectively controlling indirect spend.
When trying to help a company in a turnaround, it's imperative to look in every corner, especially the ones that are hiding, often unknowingly, hundreds of millions in possible savings. On the other hand, managing indirect procurement is by no means a tool only for struggling companies. I don't know a CFO who isn't tasked with growing the company. And growth takes investment. Healthy companies can tap indirect procurement for a sustainable source of savings to fund R&D, innovation and expansion into new markets.
As CFOs continue to look for new, creative cost-cutting tactics, they should not forget to focus on basics—what is actually being purchased and expensed across the entire organization. Properly managing indirect procurement is a huge undertaking, requiring specialized skills and insights to unlock savings, but the benefits are worth the investment. CFOs have a choice to either build this capability internally or partner with companies who specialize in indirect procurement. Unfortunately in today's economy, few companies can afford to wait years to optimize indirect procurement.
In order to accelerate and maximize savings opportunities, I recommend that CFOs partner to leverage these capabilities. This approach allows internal teams to focus on optimizing direct spend, and offers a ready-built procurement infrastructure for indirect spending.
Robert Brust is the former chief financial officer for Sprint, helping the organization achieve synergies after the purchase of Nextel. Prior to joining Sprint, he spent seven years as CFO and executive vice president of Eastman Kodak Company. He also served as CFO for Unisys Corp. In April 2010, he was selected as one of America's top CFOs by Institutional Investor magazine. Brust also spent over 30 years at General Electric Company, concluding his service there as vice president, finance, of the plastics division. He currently serves on the board of directors and is chairman of the audit committees at Covidien and Smith & Wesson. He is also a trustee at the Nantucket Cottage Hospital. He is a former director and audit committee chairman at both Delphi Corp. and Applied Materials.