There is hidden value in your indirect spend: Is it reachable (2 of 3)
With pressure only increasing on businesses to be more profitable, every source of potential value – even those hard to reach, like indirect spend – needs to be considered.
Previously we located where the value in your indirect spend is hidden. To recap, it is in the amount of money that a business pays by accepting; a higher price, less favourable payment terms and in wastage from maverick spend. It is also in the additional processing costs in the; sourcing, procure-2-pay and control functions. Finally, it is in reducing the risk of business interruption by ensuring the; quality, availability and continuity of supply of indirect spend items.
So, is it reachable in a cost-effective manner? To answer this question let us first identify the levers that a company can use to unlock this value and then establish if there is a cost-effective way for an individual business to accesses these levers.
The supplier of the indirect spend category is the critical counterparty, with whom the business will need to reach an accommodation to access the sources of hidden value listed above. So, what are the negotiating tactics that a business can deploy to achieve benefits form the supplier?
The business needs to view the purchase (of indirect spend items) transactions from the supplier perspective and consider the three prime elements that would increase the profitability of the supplier:
- Increased price.
- Increased volume (and thus value) committed to be purchased from a specific supplier.
- Reducing the supplier’s costs of acquiring a customer.
Increased price from the supplier is certainly not a means for the business to unlock value from its indirect spend. The opposite in fact. So, for the business to seek to reduce price from the supplier it will need to up the leverage available from the other two elements to enable a win-win outcome for both.
While increasing the committed volume is the strongest lever for a business when negotiating with its suppliers, for an individual business, to do so in an indirect spend category is difficult. So, the approach is for multiple businesses to bundle their indirect spend demand together. This is not a new concept – it even has a name – ‘buying clubs’. In an analogue era, these have been fraught with challenges of configuration, cooperation and conflict over sharing of the value.
The digital world, however, enables businesses to bundle their spend requirements with others, with whom they may have no relationship at all. Think of the Apple Apps Store or Google Play Store. The digital connectivity to these stores enables buyers (in this instance primarily Consumers) to readily and easily (with no additional digital technology) access applications for their mobile devices.
Enter the concept of the ‘Digital Indirect Spend Store’. This is analogous to the traditional brick-and-mortar Retail Store, where the suppliers contracted to provide their specialist indirect spend products and services. The customers that come to this destination store are not related to each other, but each come there to buy based on the promise of value (including price, terms and quality), convenience and lack of transaction friction.
This brings us to the third prime element. Suppliers are willing to list their indirect spend products and services on the Digital Indirect Spend Store as due to its scope (multiple categories available) and as a cost-effective channel for them to acquire new business customers.
So, ‘Is it reachable?’ - this value embedded in a business’ indirect spend.
Yes, it is. All a busines needs to do, is find a Digital Indirect Spend Store which has the built-in capability to bundle their spend with others enabling the access to the value hidden in its indirect spend.
In the next article we will address the question:
There is hidden value in your indirect spend: ‘How to get it?’ (3 of 3)
Author: Andrew Boyes-Varley
Andrew is a Managing Director at In4trade Limited. In4Trade is a new platform created to unlock value by bundling the indirect spend of 'affiliated' companies, including: Private Equity owned, Industry Association and Chamber of Commerce members. In4Trade Limited is a member of the Coventry & Warwickshire Chamber of Commerce.