Indirect Spend Management: How to Control Your Expenses & Maximize Savings

Indirect spend management

Indirect spend accounts for about 25–40% of total company spending. Expenses like rent, office supplies, travel, and utilities are all examples of this type of spend and are considered standard costs of doing business. In other words, indirect spend is necessary just to keep your business running. By managing it effectively, you can lower costs and maximize profitability. Here’s how to do it.

Common Challenges of Indirect Spend Management

These are some of the main challenges you’ll run into when managing indirect spend:

  • Lack of spend visibility and data accuracy: Managing indirect spend that’s fragmented throughout your organization can lead to blind spots and inaccurate data.
  • Weak policy adoption: Few will actually follow spending policies if there’s not enough support, training, or enforcement to encourage their adoption.
  • Misalignment with business categories: If spend is miscategorized, the data won’t be useful.
  • Lots of vendors, suppliers, or stakeholders: Too many hands in the pot can lead to overspending and missed savings opportunities, especially when it comes to one-off purchases.
  • Maverick spending: Transactions made without regard to the company’s purchasing policies—like purchases from unauthorized vendors—increase risk and negatively impact your budget.

How to Improve Your Indirect Spend Management

Controlling and optimizing the management of your indirect spend requires some effort, but the reward is worth it. Implement these strategies to improve your processes and maximize cost savings.

Focus on Transparency & Visibility

Tracking your spend data is a critical part of informing strategic business decisions. To use that data for decision-making, you need to know how much you’re spending, what you’re spending on, and who you’re purchasing from. Conduct a detailed spend analysis to understand your spending history, identify savings opportunities, and decrease risks.

Develop a Strategic Plan & Define KPIs

Creating a formal, standardized process for spend management will allow you to optimize and control spending across the company. Be sure to implement and review key performance indicators (KPIs) to evaluate the effectiveness of these processes—you can’t fix it if you don’t know it’s broken.

A common KPI used across industries is spend under management (SUM). This compares total spend to the amount of spend managed under your policy. The higher the SUM percentage, the more control you have over indirect spend. A lower SUM percentage is a sign that your process could be improved.

Refine Your Spend Categories

Your spend categories should align with your business’s needs. The spend taxonomy you choose should correspond to the business expense categories you use for spending and reporting purposes. Making sure your spend categories are accurate and useful will help you develop partnerships with suppliers and vendors and secure better contract terms through economies of scale. This will allow you to negotiate better pricing and reduce costs.

Invest in Automated Solutions

Automated tools increase the visibility and accessibility of all indirect spend within the organization, consolidating overall spend into a single source of information that’s updated in real-time.

Spend management software can also provide effortless approvals, identify duplicate or fraudulent invoices, and guarantee compliance with internal budget limits. It allows you to automate lots of manual tasks throughout your payment workflow. And with advanced insights and custom reports, Mesh can help you find even more opportunities for cost savings.

Visibility and Automation Are Key

The most effective way to optimize your indirect spend is to get better visibility into where your money is going, and invest in automated solutions. Implementing automation will streamline the process even further, allowing you to manage and analyze all indirect spend in one place.

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