Blog Post

Indirect Procurement Is Undergoing A Revolution: This McKinsey Framework Breaks It Down For Finance Teams

TAGS: indirect procurement

Approximate Read

10 Mins

Share on Social

Share on facebook
Share on twitter
Share on linkedin

Subscribe to Our Blog

Table of Contents

How do you stop a pattern you can’t see? For finance teams, that’s how it must feel to try to reduce costs on indirect procurement. Spend is often fragmented across locations and teams, or it simply goes unreported. If there are redundancies, no one notices.

 

Nevertheless, indirect procurement is an area where many finance teams find opportunities for costs savings—once they have the needed visibility into company-wide spend. Boston Scientific, for example, saved $30 million on indirect procurement when it broke down barriers between its finance and procurement teams, according to Bain.

 

How can finance teams achieve this visibility? McKinsey offers a framework that can help.

Ready to centralize and scale your company's purchasing?

What is McKinsey’s indirect procurement framework?

 

As SutiSoft puts it, indirect procurement involves “the expenses incurred for materials, services, and maintenance required to operate [your] business.” So if you run a hot dog stand, the cost of hot dogs and buns are expenses of direct procurement, while the paper towels and ammonia you use to clean your stand are expenses of indirect procurement.

 

And McKinsey’s framework is a seven-part model that helps businesses better manage their indirect procurement spend by identifying and preventing inefficient purchasing patterns.

 

Source: McKinsey & Company, April 2019

 

At the center of the model is an agile organization. That means while each department of a business has defined responsibilities, employees are flexible and willing to work across teams to get a job done. They are also willing to try new methods and pivot quickly to new ideas and tools.

 

Around the agile organization are six tools and processes that automate or reframe the way businesses approach a step in the procurement process. Following is a breakdown of each of these tools and how they can help your business achieve visibility into indirect procurement spend.

 

1. Intelligent spend engines automate classification and categorization

 

Intelligent spend engines are digital systems that automatically classify and categorize spending. With these systems, your accounting departments won’t have to chase down employees for receipts, purchase details, or approvals. Everything will be filed and categorized automatically. In fact, expense reports won’t exist at all—at least not for purchases related to indirect procurement.

 

Negotiatus has built-in intelligent spend capabilities that similarly automate spend classification. Our purchasing platform automatically tracks and groups spend with vendors so that your accounting team doesn’t have to labor over a sea of invoices. In fact, we revolutionized AP processes for ZeroCater and cut down their invoices 50 times over. “For Amazon alone we went from 200 invoices a month to maybe 3 or 4,” said Keith Bowles, IT and operations manager at ZeroCater.

 

2. Advanced analytics solutions unearth cost-savings opportunities

 

Advanced analytics solutions are technologies and processes that enable finance teams to see cost-saving and process-optimization opportunities on indirect procurement.

 

Negotiatus’s platform has a data and analytics function that allows finance teams to view and analyze their spend across the organization, in real time. This allows finance and accounts payables teams to run reports on spend and identify any areas where indirect procurement may be redundant. This feature is particularly helpful as businesses expand and open new locations, because it allows Accounts Payable teams to evaluate and optimize the organization procurement as a whole.

 

3. Seamless B2B ordering automates purchasing

 

Seamless B2B ordering refers to automated ordering systems for indirect procurement. These systems integrate with business service providers, such as Alibaba, Amazon Business, and Thomasnet, that allow teams to do supplier evaluation and selection, cross-category orders, and financial traceability.

 

Negotiatus can integrate all of these marketplaces onto our platform so that teams have full visibility into their ordering and spend across suppliers. We can also automate ordering, so that businesses don’t have to complete routine purchases again and again.

 

For Zeus Living, a furnished-housing provider, Negotiatus automated orders across 29 vendors, reducing the ordering process time from between five and seven hours to just one. Power-user features like custom Product Lists brought the time to order down even further.

 

But what happens if a product runs out and a substitution is needed? At the beginning of the COVID-19 crisis, for example, many businesses had a hard time sourcing routine purchases like disinfectant wipes and toilet paper from suppliers like Alibaba and Amazon, which were inundated with new buyers.

 

In scenarios like these, Negotiatus sourcing engines can automatically identify a new, perhaps lesser-known, vendor, to source your supplies. Our network includes thousands of suppliers so that supply chain disruption never affects your indirect procurement needs.

 

Negotiatus sourcing engines can also automatically look for vendor and product substitutions that may be more cost-effective. This service helped Cozen O’Connor, a global law firm, identify over 10% in cost-reduction opportunities.

 

4. Zero-based budgeting offers a fresh eye on budgets

 

Zero-based budgeting is a method of budgeting in which a new budget is developed from scratch every period, rather than adjusting the budget from the previous period, according to Deloitte. This approach guards against assumptions in the budgeting process and forces teams to think about the value of their spend.

 

The jury’s still out on whether this is the best way of budgeting, but businesses that take this approach can manage their zero-based budgets right from the Negotiatus platform.

 

5. Automated procure to pay (P2P) saves time

 

Procure to pay covers sourcing, purchasing, and payment — three key steps in the procurement process. By automating these functions, procurement professionals can significantly reduce the time it takes to complete a purchase. Moreover, automating these processes ensures that spend data never gets lost. Every indirect procurement purchase is tracked in a centralized database, so that accounting teams can keep track of company-wide spend.

 

Negotiatus allows businesses to do this both for the products they procure on our platform and for any subscriptions for IT technology or other services outside of the platform. This enables our users to completely centralize their accounts payable operation within their purchasing platform.

 

 

6. Financial P&L interlink connects procurement and finance teams

 

Financial P&L Internlink essentially means creating a link between your procurement and finance functions so that finance teams can better forecast based on profit and loss. Such a system would check data accuracy and compare data with supplier reports.

 

 

Negotiatus does this by linking accounts payable and purchasing operations. Not only are all invoices centralized, but finance teams have total visibility into spend and spend performance. If a delivery never arrives, for example, finance teams will know this, because our platform tracks it. They can then opt not to pay the supplier, protecting the business from paying for a service that was never received.

 

Revolutionize your indirect procurement

 

McKinsey estimates businesses can enable savings of 15–20% on indirect procurement spend when they implement these tools and processes properly.

 

Negotiatus is the only procurement solution on the market that can perform all six functions on one centralized platform. On top of that, our platform performs strategic sourcing, so you can find the best vendor based on your cost, delivery, or compliance needs.

 

Revolutionize your indirect procurement operations by requesting a demo of Negotiatus today.

 

Start Making the Most of Your Purchasing & Pay Content