What is indirect procurement?

Indirect procurement explained

By definition, indirect procurement involves the purchasing of goods or services that support a company’s day-to-day operations, but that are not directly related to the production of its core product offering.  

The most common examples of indirect procurement will include goods and services such as IT procurement, including both SaaS and cloud infrastructure, as well as consulting services, travel-related expenses, and even office supplies.

Companies in sectors such as technology or financial services that don’t have physical products often only procure indirect goods. For those that do have a physical supply chain, however, indirect spend is still a notable cost center and should be closely managed, as it can make up a significant portion of a company’s overall spend. In fact, within the average organization, SaaS and cloud alone account for 25% of total expenditure, highlighting just how critical it is to manage indirect spend both strategically and efficiently.

Examples of indirect procurement

While we’ve covered a few examples of indirect procurement, here’s a more comprehensive list of the goods and services it typically includes:

• IT and Software
  
  • SaaS subscriptions
  • Cloud infrastructure such as AWS, Azure or Google Cloud
  • IT support and managed services
  • Cybersecurity services and tools
  • IT hardware
  • VPNs and remote access tools

• Professional services
  
  • Legal services
  • Consulting services
  • Accounting and audit services
  • PR and marketing agencies
  • Executive coaching or leadership training
  • Recruitment and staffing agencies
• Facilities and office management
  
  • Office supplies
  • Furniture and fixtures
  • Cleaning services
  • Security services
  • Office rent and utilities
  • HVAC maintenance and repairs
  • Catering services
  • Access control systems
• Logistics and travel
  
  • Business travel
  • Corporate travel platforms
  • Courier and delivery services
  • Warehousing for non-product storage‍
• Finance and admin
  • Insurance
  • Banking and transaction fees
  • Expense management software‍
  • Spend management platforms
  • ‍Corporate tax services

The difference between direct and indirect purchasing

Unlike indirect procurement, which refers to the sourcing of any goods or services that aren’t directly used in the production of a company’s products, direct procurement focuses on those that are.

Direct procurement specifically involves the sourcing of the raw materials, components, goods, or services that are essential to the production of a tangible product.

Challenges in managing indirect procurement

Indirect procurement certainly doesn’t come without its challenges. As with any type of procurement, there are a number of operational and compliance-related hurdles that companies must navigate to better manage their spend and maximize value.

Lack of visibility and control

Many purchases that fall within the indirect procurement category aren’t always monitored, often because of their perceived low-value. The problem is, when combined, this tail spend can account for a substantial amount of overall expenditure – something that’s a particular problem for recurring purchases such as software.

Over time, unmanaged tail spend can lead to wasted costs, missed savings opportunities, and possibly even compliance-related risks.

It’s not just the lower-value goods and services that are often overlooked in procurement, though. Procurement teams can also very quickly lose oversight of the more strategic purchases, a common example being enterprise software licenses. It’s not necessarily that they aren’t aware of the platform’s existence, but rather they often don’t have control of the licenses in use – with many of these tools overprovisioned and wasting huge amounts of money.

Having robust processes in place to ensure visibility, control, and proactive management of all indirect spend categories is crucial for driving cost efficiency, mitigating risks, and ensuring that procurement is successfully contributing to overall business performance.

Fragmented purchasing processes

Fragmented purchasing is a huge challenge for many organizations, especially when it comes to indirect procurement. It is often the result of a decentralized procurement process, with department heads or individual employees responsible for procuring their own goods and services.

The problem is, this fragmented approach often leads to:

• Shadow IT and compliance risks – When employees have the autonomy to procure their own goods or services – typically software – it often bypasses IT and procurement, leading to shadow IT. One of the biggest issues with this is that these unauthorized tools can expose the organization to security vulnerabilities, compliance breaches, and most commonly, missed renewal deadlines.
• Missed savings opportunities – Even if procurement, finance, and IT are aware of the goods and services being procured, employees typically lack negotiating power, vendor knowledge, and spend visibility, resulting in them paying an average of 26% more than is often required. By centralizing procurement, companies can better leverage volume discounts, negotiate better terms, and have more control over their budgets.
• Duplicate and redundant applications – Fragmented purchasing can also result in duplicate tools being subscribed to across the organization, as well as those with overlapping features. At Vertice, we see this most often across categories such as Development, Security, Sales, Marketing and Collaboration & Productivity.

‍Complex contract management

Given the broad and variable nature of indirect procurement, it comes as little surprise that managing these contracts can be a complex task.

There are a number of reasons for this:

• Contractor agreements – One of the biggest challenges when procuring the services of a contractor or other third-party service is that the agreements are likely to vary wildly in scope, duration and terms, with some potentially including confidentiality clauses, intellectual property rights, and even variable pricing models.
• High volume of software renewals – Ideally, each contract should be thoroughly evaluated and negotiated at the point of renewal, in order to optimize spend and prevent wastage. The challenge, however, is that the average company now uses 132 applications – a figure that is growing at a rate of 11% each year. This expanding SaaS stack alone places a significant burden on procurement teams, making it difficult to maintain oversight, ensure cost-efficiency, and avoid redundant or underutilized subscriptions.
• Compliance – Compliance can add a whole extra layer of complexity to contract management when it comes to indirect purchasing. To start with, procurement teams will need to ensure that all contracts are compliant with data privacy laws and security regulations, for example GDPR, SOC 2, ISO 27001, and even industry-specific regulations such as HIPAA. Companies may also have their own internal policies that need to be adhered to, for instance sustainability commitments or cyber risk scoring.
• License management – Managing software licenses across hundreds of applications is yet another challenge. Usage levels will often fluctuate, and without total visibility into actual consumption, companies risk over or under-provisioning these licenses.

What does a typical indirect procurement process look like?

While the exact procurement cycle will differ depending on what it is that’s being procured, most indirect procurement processes will typically consist of the following stages:

• Needs identification – A department or employee identifies the need for a service or tool, for example external support in the form of an agency, freelancer, or consultant, training, or a new software application. This need is then formalized through a purchase requisition, which includes key details such as the purpose and cost.
• Internal review and approval – Once a request has been submitted, the relevant stakeholders will need to approve it. For higher value or business-critical purchases, this may require multi-level approvals. To eliminate bottlenecks and increase efficiency, it’s worth having a procurement software solution in place that can automatically route approvals through to the appropriate stakeholders based on pre-determined criteria and thresholds.
• Supplier or vendor sourcing – The procurement team may evaluate vendors, assessing factors such as price, quality, and compliance.
• Contract negotiations – It’s best practice to negotiate terms and pricing, especially for the procurement of software. According to our own data, as many as 90% of SaaS buyers overpay by an average of 26%, meaning there are almost always savings to be had.

See a full list of terms that should be negotiated within a software contract

• Contract finalization – Once the negotiation stage has concluded, contracts may need to be reviewed from a legal and security standpoint. This could involve ensuring the agreement is in compliance with local laws and regulations, and that there aren’t ambiguities or uncertainties within the terms. Depending on the contract in question, final sign-offs may be required by senior management teams before the document is signed.
• Onboarding and payment – The exact process taken at this stage will vary depending on what it is that’s being procured. For one-off purchases such as office supplies or travel, the purchase is typically completed quickly with straightforward payment processing. In contrast, more complex purchases such as software subscriptions or consulting services may involve additional onboarding steps, with contract-based or even milestone-driven payment terms.
• Supplier relationship management – Maintaining strong relationships with suppliers is critical for ensuring long-term value. This includes ongoing communication, performance tracking, and issue resolution, along with regular catch-ups to assess service quality.
• Review and renewal (for SaaS) – With software being a recurring purchase, this stage is critical for deciding whether a contract should be renewed, amended, or terminated. With 89% of SaaS contracts including auto-renewal clauses and each one further stipulating varying notification periods, it’s important that you’re tracking these renewal deadlines.

Strategies for optimizing your indirect procurement spend

Create a centralized procurement process

When purchasing is fragmented across an organization, it leads to maverick spending, loss of visibility, missed savings opportunities, and even the risk of legal and security breaches. A standardized and centralized procurement process prevents this by enabling greater control, transparency, and alignment across all purchasing activities.

To successfully create a centralized procurement process, however, you will need to:

• Conduct a thorough audit of existing procurement processes across departments. Look at who is making purchases, what it is they’re procuring, which suppliers are being used, and how the contracts are currently being managed. From here, you can identify any inconsistencies, redundancies, and opportunities for consolidation.
• Gain executive buy-in and stakeholder alignment. As with any change management program, centralizing procurement requires cultural and operational change. By securing support from leadership, and both educating and engaging stakeholders early on, you are more likely to achieve a smooth adoption.
• Implement procurement policies. Develop policies for purchasing, approvals, vendor selection, and contract management. It’s worth setting clear thresholds for purchases over a certain value, so that they’re triggering the appropriate levels of approvals in workflows.
• Establish roles and responsibilities for approving indirect procurement. Be clear about who approves what and when. Different types of tools and services will require different levels of approval – in some cases they will require sign-off from multiple stakeholders from across procurement, IT, finance, and possibly even the leadership team. Low-value, tactical purchases may only require approval from the head of department.
• Invest in the right procurement platform. Streamlined procurement relies on flexible intake management, and the ability to create customizable approval workflows, both of which are only possible with a robust procurement platform. When evaluating these platforms, look for one with advanced automation capabilities and comprehensive reporting functionality.

Leverage data for strategic procurement decision-making

Indirect procurement often consists of a high volume of low-value purchases, spread across multiple departments, making it easy for inefficiencies and overspending to go unchecked.

By leveraging procurement data such as spend analytics and contract utilization, you can obtain full visibility into where departmental budgets are going and how much value you’re getting in return. With these insights, you can specifically:

• Identify cost-saving opportunities, such as supplier consolidation and volume-based discounts.
• Detect and reduce instances of maverick spending.
• Anticipate future needs more accurately, leading to better budget control.

Even for higher-value, strategic indirect purchases such as enterprise software, data can be used to uncover significant cost-saving opportunities, often hidden in underutilized licenses, redundant tools, and poorly negotiated contracts.

‍See how Vertice helped one company achieve more than $330,000 in savings in just three months

Negotiate better contract terms

This won’t apply to every type of indirect procurement contract, but for software purchases in particular, the terms and pricing are very rarely set in stone.

Which means there are almost always opportunities to secure more favorable rates. To give yourself the best chance when negotiating SaaS contracts, however, you should:

• Engage in negotiations more than 90 days ahead of the renewal deadline. Our own research suggests that this can secure average savings of 49%, compared to just 19% when conversations begin between 30 and 60 days ahead of renewals.  For some types of software, though, savings can be as high as 106% – see the full breakdown by SaaS category here.
• Obtain leverage in the form of pricing benchmarks. Arguably, the most effective way to drive down the price of software is by knowing exactly what other similar companies are paying for the same subscription. The only reliable way to access this data is through vendor pricing benchmarks.

Thinking about outsourcing your procurement? See how we can leverage pricing benchmarks to secure you the best possible deals.

• Be flexible on your side. Successful negotiations often require give and take. Knowing which terms you’re willing to be flexible on to secure a more lucrative deal can help you secure more purchasing power. This might mean being flexible around billing and payment terms, or committing to a multi-year contract.
• Implement a robust renewal management process. Keeping track of software renewals is only possible with an automated renewal and contract management platform.

Demonstrate strategic value by tracking KPIs and metrics

Procurement KPIs not only provide measurable insights into your organization’s spending and the performance of your suppliers, but they also serve as a critical tool for monitoring and evaluating the efficiency and effectiveness of your company’s procurement processes.

Only with this level of visibility can you begin to demonstrate the true value of procurement to the wider business – beyond just cost savings. With this in mind, consider tracking metrics such as:

• Approval times per function – Using this insight to reveal which departments and individuals are responsible for delaying approvals.
• Procurement ROI – Measured procurement ROI vs FTE salary can help prove value and justify investment in the department.

See all 11 advanced procurement metrics that the highest-performing teams are tracking to demonstrate value

Optimize your indirect procurement spend and processes with Vertice

Indirect procurement is rarely a one-size-fits-all process, which is why you need a platform that can adapt to the unique needs of your organization.

As a procurement orchestration platform, Vertice not only provides customizable workflow functionality – enabling you to streamline approvals, automate requests, and ensure full compliance – but we also help you optimize your spend, while negotiating indirect procurement contracts on your behalf, saving you a substantial amount of time and money.  

Why not see for yourself how we helped one company achieve average SaaS discounts of 32%, while accelerating another organization’s procurement cycles by 55%.

Alternatively, take a self-guided tour of the Vertice platform to get a better understanding of our platform’s capabilities.

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