How CFOs can cut indirect spend

With each financial year, pressure mounts against finance leaders to suppress company costs and propel profits to new heights. But as markets fluctuate and the costs of doing business continue to stack up, this priority can begin to feel that little bit less attainable.

One influential factor threatening your business’ top line is indirect spend. Accounting for a significant 25-40% of total spending, this is far from the negligible figure that the name implies.

But what exactly is indirect spend, and how can you reduce it?

Let’s take a closer look at indirect spend management and more specifically, cost savings in SaaS.

What is indirect spend?

In simple terms, indirect spend is a procurement function that covers all the expenses that help to keep a business running. Also known as indirect procurement, this financial data is categorized and tracked as part of the budgeting and accounting process at most major organizations.

What is direct spend?

To gain a full understanding of how different types of procurement are categorized, we also need to understand direct spend.This refers to the sourcing of materials and goods that will go on to be sold directly to consumers, as opposed to those that support the ‘behind the scenes’ running of the business. This data is considered part of the cost of goods sold (COGS) in financial reporting.

Direct vs indirect spend

Direct spend refers to expenditures directly tied to the production of goods and services that a company sells, for example raw materials, components, or goods for resale. Basically, anything that becomes part of the final product or service offering. As a result, industries such as manufacturing, hospitality, and direct-to-consumer retail tend to see higher rates of direct spend.

On the other hand, indirect spend refers to the cost of the goods and services that support day-to-day operations, but that don't directly contribute to the company's end product.

Organizations often use strategies such as zero-based budgeting to manage this indirect spend more efficiently, ensuring that each expense is justified and aligned with business priorities.

Examples of indirect spend

Some of the most common examples of indirect spend categories include:

• Travel and accommodation expenses
• Office supply costs
• Workspace rent and utilities
• Employee wages
• IT systems and SaaS costs

An example of indirect spend in a catering business would be the money spent to deliver the food to its destination, whereas the direct spend would be how much the ingredients themselves cost.

But how does it apply in the context of SaaS?

SaaS is an example of indirect spend

SaaS is one of the fastest-growing sources of indirect spend across practically every sector. In fact, with businesses continuing to accelerate their digital transformation efforts, software now accounts for $1 in every $8 spent by the average organization.

And as demand increases, so do costs — SaaS prices are now increasing faster than market inflation, making software expenses a large (and growing) outgoing that need optimizing.

What makes SaaS spend management challenging?

As with many instances of indirect spend, SaaS costs can be difficult to get under control, especially if your existing SaaS management strategies are lacking.

The first, and perhaps most obvious reason, is because of the sheer volume of tools that organizations are using. Nowadays, the average company deploys 132 different software applications.

It can therefore become difficult to see where exactly your spend is going, especially if your stack has proliferated in a short space of time, an issue experienced by many organizations going through a period of growth.

The problem is, without full visibility, you could be missing instances of decentralized procurement or unused tools — and that’s not to mention unknown renewal deadlines for the contracts that you are aware of.In short, SaaS spend management can be an overwhelming prospect — but it doesn’t have to be.

How to reduce indirect spend by cutting SaaS costs

Let's look at some of the ways you can reduce this type of indirect spend.

1. Discover your entire software portfolio

To manage your SaaS spend effectively, you first need to get to grips with the full breadth of software use within your organization. Software discovery methods help to uncover any instances of shadow IT systems in operation without the IT team’s consent, which may be driving up costs if they’re being paid for through the company.

These methods can also help to illuminate where any tools are going completely unused, for example in the event that a contract has been forgotten about but is continuing to auto-renew each year. These new insights about your software portfolio can help to inform the next steps for saving on your subscriptions.

2. Trim your SaaS stack

Once you’ve gained visibility into your portfolio, you can assess which contracts should be retained, downsized or terminated. For this, we recommend using an application rationalization framework.

When rationalizing these apps, you should evaluate the terms and usage across each tool you subscribe to, as well as its context in your wider portfolio. It’s at this stage that you can determine which tools are providing a return on investment (ROI) and which are not — as they may be underutilized, duplicated, or redundant.

3. Centralize software procurement

Following the rationalization process, you should have a leaner suite of tools to contend with. But this doesn’t mean your work is done.

To ensure that future purchases are properly vetted and approved, you should work to standardize and automate your software procurement processes. This way, employees can request new tools through the appropriate channels, and they can be audited for compliance, costs, and prospective ROI. Governing software and new procurement centrally helps to reduce instances of maverick spending, improve security, and ensure that vital cost-saving opportunities can be exploited.,

Discover and address indirect SaaS spend with Vertice

Vertice offers unparalleled insights into the entire software portfolio in use within your organization, as we’ve recently added SSO application discovery for real-time monitoring of the tools your employees use.

But that's not all we do. As a procurement orchestration platform with spend management capabilities, we can manage your end-to-end indirect procurement process, helping you cut your indirect spend by negotiating contracts on your behalf, while identifying further opportunities for cost-savings across your entire tech stack.

See for yourself how we saved one company as much as $100,000 on a single contract, while helping another achieve average SaaS savings of 32%.