For many organisations, indirect spend is a blind spot. Software licences, marketing retainers and professional fees – these are all business-critical expenditures that run quietly in the background, under the radar and out of mind. The problem, of course, is that these expenditures are sometimes overlooked by finance teams. And that’s where problems can start.
New research from Efficio shows that this corner of spending could be biting into balance sheets and nibbling at profits. The company’s latest report, The illusion of control in indirect spend, reveals 85% of Chief Procurement Officers (CPOs) and Chief Financial Officers (CFOs) said that more than a quarter of their indirect spend has no financial oversight, while fewer than one in five are fully confident they have an accurate picture of it.
What’s more, the current climate of persistent inflation, rising labour costs, and continued trade instability is putting significant pressure on indirect categories.
Considering that this spend comprises nearly half of total company expenditure, the scale of the potential losses cannot be ignored.
The hidden financial risk
Procurement oversight has traditionally centred on direct categories like production lines and core operations that drive revenue. It’s time for that focus to broaden. Indirect spend can go unaddressed because it doesn’t directly touch the product or customer. That distance makes it harder to link directly to profit and loss, but it’s also what makes it risky.
Another critical issue is maverick spend. This is a purchase made outside of agreed procurement channels or without following established policies. If left uncontrolled, maverick spend can act like a razor, draining value. In fact, 93% of senior leaders pointed to maverick spend as a major cause of cost leakage.
Let’s consider an example. In this scenario, a department renews a software contract with little or no challenge to the number or type of licences and no negotiation on price. You may think the problem would end with a single unauthorised purchase. Not so. Over time, automatic renewals, outdated supplier contracts, and unmonitored external costs stack up. Each unchecked transaction quietly chips away at profitability, creating inefficiencies that remain invisible until they become too large to ignore.
Barriers behind the loss of control
In many areas of indirect spend, ownership isn’t clear. Without ownership there can be no accountability. Without accountability, there is no control.
81% of leaders cited IT and software as the riskiest category for cost leakage, often because purchases of these services and platforms happen across many teams. Such decentralisation without oversight can add up to significant uncontrolled spend.
Take a thorough look at any business and you will see the same pattern playing out across a range of different categories and departments. Disconnected systems and processes make it difficult to see total commitments, assess supplier performance or negotiate effectively. Even the most careful leaders can’t manage what they can’t see.
From blind spot to value driver
The good news is that these issues are solvable. Procurement and finance teams are in a prime position to reclaim control. But only if they take immediate action.
It starts with building a realistic pipeline of opportunities, factoring in ownership and contract lengths. Compliance and tracking must be rigorous. It’s all too common for a company to run an excellent sourcing process, only to later fall down because they failed to ensure that everyone in the company followed the new solution.
Equally critical is agreeing on baselines and how the work’s impact will be assessed – this will vary by category and must be tailored to suit each process. Once the pipeline and objectives are established, it’s time to assemble a cross-functional working group.
This stage is critical. The fact is that procurement can’t deliver in isolation. Its role is to create visibility, generate insights, and enable informed decisions. It’s vital to ensure that CFOs and CPOs align on baselines and tracking, as indirect savings are harder to evidence than direct ones.
Another important step is agreeing on an appropriate system for measuring a procurement process’ success. It may sound surprising, but it’s not all about saving a few extra pennies. It’s all very well to shave £100 off your weekly deliveries, but if the quality isn’t there, the gains will be minimal. Instead, adopt a total cost of ownership approach, taking into account the full picture of the cost of the goods or services from acquisition to maintenance to disposal.
In the battle to manage indirect spend, true success lies not in the savings negotiated, but in the results realised. Tracking avoided costs, efficiency gains and supplier improvements provides a clearer, more credible measure of value. It also helps elevate procurement’s role from cost controller to value creator.
Turning indirect spend into a strategic advantage
When it comes to indirect spend, businesses cannot afford to cut corners. If businesses want to control cost leakage and combat rising cost pressures, the plan of action must focus on three core priorities: embedding the right governance, improving data transparency and fostering collaboration across the business.
For CPOs, this means taking ownership, improving visibility and enforcing disciplined renewals. While indirect spend may not sit on the production line, its impact is front and centre on profitability.
Success won’t come from spending less, but from spending with insight and intent. The organisations that win on cost control will be those who shine a light on the areas long overlooked, transforming indirect spend from a hidden risk into a strategic advantage.