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

Indirect procurement is an area where many finance teams find opportunities for costs savings—once they have the needed visibility into company-wide spend. But how can finance teams achieve this visibility? McKinsey offers a framework that can help.


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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.


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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.

Screen Shot 2020-10-28 at 6.11.56 PM.png 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.

Intelligent-spend.png
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.