How CFOs can cut indirect spend
Aimee Manning | JUN 08, 2023
With each financial year, pressure mounts against finance leaders to suppress company costs and propel profits to new heights. But as markets fluctuate and the costs of doing business continue to stack up, this priority can begin to feel that little bit less attainable.
One influential factor threatening your business’ top line is indirect spend. Accounting for a significant 25-40% of total spending, this is far from the negligible figure that the name implies. But what exactly is indirect spend, and how can you reduce it?
Let’s take a closer look at indirect spend management and more specifically, cost savings in SaaS.
What is indirect spend?
In simple terms, indirect spend is a procurement function that covers all the expenses that help to keep a business running. Also known as indirect procurement, this financial data is categorized and tracked as part of the budgeting and accounting process at most major organizations.
What is direct spend?
To gain a full understanding of how different types of procurement are categorized, we also need to understand direct spend.
This refers to the sourcing of materials and goods that will go on to be sold directly to consumers, as opposed to those that support the ‘behind the scenes’ running of the business. This data is considered part of the cost of goods sold (COGS) in financial reporting.
Direct vs indirect spend
Direct spend is managed primarily through supply chain management, with direct procurement managers typically responsible for liaising with long-standing suppliers and protecting relationships to ensure smooth workflow between supply, production, and distribution. As a result, industries such as manufacturing, hospitality, and direct-to-consumer retail tend to see higher rates of direct spend.
On the other hand, indirect spend management prioritizes spend analysis. Indirect procurement professionals aim to streamline the operational efficiency of a company for the lowest possible cost, working with internal stakeholders and employing rigorous strategies such as zero-based budgeting. Indirect spend management is most important in tertiary industries such as IT, as well as professional and financial services.
Examples of indirect spend
Some of the most common examples of indirect spend categories include:
- Travel and accommodation expenses
- Office supply costs
- Workspace rent and utilities
- Employee wages
- IT systems and SaaS costs
An example of indirect spend in a catering business would be the money spent to deliver the food to its destination, whereas the direct spend would be how much the ingredients themselves cost.
But how does it apply in the context of SaaS?
SaaS is an example of indirect spend
SaaS is one of the fastest-growing sources of indirect spend across practically every sector. In fact, with businesses continuing to accelerate their digital transformation efforts, software now accounts for $1 in every $8 spent by the average organization.
And as demand increases, so do costs — SaaS prices are now increasing faster than market inflation, making software expenses a large (and growing) outgoing that needs trimming.
What makes SaaS spend management challenging?
As with many instances of indirect spend, SaaS costs can be difficult to get under control, especially if your existing SaaS management strategies are lacking.
The first, and perhaps most obvious reason, is because of the sheer volume of tools that organizations are using. Nowadays, the average company deploys 130 different software applications.
It can therefore become difficult to see where exactly your spend is going, especially if your stack has proliferated in a short space of time, an issue experienced by many organizations going through a period of growth. The problem is, without full visibility, you could be missing instances of decentralized procurement or unused tools — and that’s not to mention unknown renewal deadlines for the contracts that you are aware of.
In short, SaaS spend management can be an overwhelming prospect — but it doesn’t have to be.
How to reduce indirect spend by cutting SaaS costs
Let’s look at some of the ways you can reduce this type of indirect spend.
1. Discover your entire software portfolio
To manage your SaaS spend effectively, you first need to get to grips with the full breadth of software use within your organization. Software discovery methods help to uncover any instances of shadow IT systems in operation without the IT team’s consent, which may be driving up costs if they’re being paid for through the company.
These methods can also help to illuminate where any tools are going completely unused, for example in the event that a contract has been forgotten about but is continuing to auto-renew each year. These new insights about your software portfolio can help to inform the next steps for saving on your subscriptions.
2. Trim your SaaS stack
Once you’ve gained visibility into your portfolio, you can assess which contracts should be retained, downsized or terminated. For this, we recommend using an application rationalization framework.
During application rationalization, you should evaluate the terms and usage across each tool you subscribe to, as well as its context in your wider portfolio. It’s at this stage that you can determine which apps are providing a return on investment (ROI) and which are not — as they may be underutilized, duplicated, or redundant.
3. Centralize software procurement
Following the rationalization process, you should have a leaner suite of tools to contend with. But this doesn’t mean your work is done. To ultimately ensure that future purchases are properly vetted and approved, you should work to standardize and automate your software procurement.
This way, staff members can request new tools through the appropriate channels, and they can be audited for compliance, costs, and prospective ROI. Governing software and new procurement centrally helps to reduce instances of maverick spending, improve security, and ensure that vital cost-saving opportunities can be exploited.
Discover and address indirect SaaS spend with Vertice
Vertice offers unparalleled insights into the entire software portfolio in use within your organization, as we’ve recently added SSO application discovery for real-time monitoring of the tools your employees use. But beyond just this, our platform is a one-stop dashboard for complete SaaS management.
We provide an overview of all your SaaS subscriptions, upcoming renewals, and cost-reducing opportunities — so that you can start cutting your indirect spend straight away.
Better yet, our team of SaaS purchasers will handle the procurement and renewal of these tools on your behalf, leveraging not only their extensive expertise, but also the pricing intel for more than 13,000 software providers worldwide, ensuring you’re getting the fairest possible price on any contract.
See for yourself how much you could be saving on your annual SaaS spend with a free audit, or alternatively search through our extensive vendor database for exclusive pricing and discounting insights.