Most sourcing organizations focus on direct procurement, potentially overlooking indirect procurement and missing key opportunities to reduce spend. As indirect purchases increasingly become a larger percentage of overall spend, for many organizations, indirect procurement can be a diamond in the rough. This article makes the arguement that the value of indirect procurement should not be overlooked.

1. Throughout the business community, public and private alike, boards are
meeting with a common theme that permeates their agendas: EBITDA
and how to improve it without degradation of service or compromise of
product quality.The revenue channels are nearly exhausted and gross margins
have been trimmed. Recurrently, this is leading to a reexamination of
indirect spend. After several hours, or even days, of financial presentations,
commercial consideration and executive deliberation, the results are
communicated to the leaders of the business. As a result of the re-examination
they are tasked with eliminating hundreds of millions of dollars from the
G&A cost line. Now the challenge begins for those finance leaders.
Most sourcing organizations focus on direct procurement, overlooking
indirect procurement and missing key opportunities to reduce spend. As
indirect purchases increasingly become a larger percentage of overall spend,
for many organizations, Indirect procurement can be a diamond in the rough.
As companies start to “rethink” indirect procurement, recognition is just
the start. The next step – and often time the most difficult - is finding the
right resources and expertise to make sure the company realizes the most
cost savings without decreasing the effect of services to the business.
When searching for ways to cut costs, senior procurement officers,
chief financial officers or controllers can choose to pull several levers or
combinations of levers.There are the obvious cost cutting measures, like
slashing corporate travel budgets, suspending contractor engagements or
canceling nonessential projects.This type of strategy will contribute to a lean
initiative and produce value, but the value is only temporary. Experience
has shown that better managed indirect expenditure can deliver significant
profit improvements, reduce the levels of risk to which organizations are
exposed, and positively influence buying behaviors across the organization.
‘Best in Class’ leaders often take an approach that directly addresses
the core monetary problem and embeds a more permanent practice.
The specifics differ by company, but the strategic premise (as illustrated
in figure 1) is founded on improving the three primary components
of the Indirect Procurement Requisition-to-Pay process by:
1. Leveraging tools and automation to realize cash savings
2. Intensely focusing on category management
3. Optimizing transactional processing to create efficiency and tighter controls
Drive Your Business
Indirect Procurement
A Diamond in the Rough
Strategy Brief | Indirect Procurement
1
“Across all industries
throughout the U.S. there
is pressure to significantly
reduce SGA costs,
business leaders can’t
afford to not ReThink their
indirect procurement.”
Michael Fullwood
Principal Consultant

2. Cash is still King.
Any leakage of savings (cash) is detrimental to this fundamental business
principal.Typically, the primary culprits for savings leakage are the lack
of visibility and the lack of mechanical controls. From a management
prospective, this is demonstrated by a limited ability to detect and prevent
shadow spend. A key to detecting and managing shadow spend is to
leverage automation and tools. In today’s technologically advanced Software
as a Service (SaaS) environment, even businesses without the traditional
enterprise procurement packages, now have commercially viable e-sourcing
and e-procurement tools available to them. Furthermore, these On-Demand
Tools can be deployed by specific module, packaged as a whole or packaged
as part of a managed service provider solution with service offerings.These
platforms offer a wide variety of features, including electronic catalogues,
real-time CFO/CPO dashboards, supplier relations management, contract
management, multilevel spend analysis and comprehensive reporting. In
recent times, of particular interest to many procurement managers, is a
packaged offering by managed service providers, which often includes
these e-tools. When sourced and negotiated properly, much of the capital
requirements associated with these applications can be funded from generated
savings of managed services. In fact, some managed service providers
will often guarantee savings as a result of implementing these tools.
Alone, these tools are not a cure-all, but they are operative accelerators,
with the definitive capacity to expand the zone of procurement influence
over indirect spend. Organizations that make use of these types of tools,
particularly spend analytics, will significantly improve their ability to:
WGroup
2
VALUE ADDS
Managed Service Capabilities
Tools
Automation
Category
Management
Transactional
Processing
Req-to-Source
Source-to-
Procure
Procure-to-Pay
Greater Zone of
Influence
Increase Realized
$ Savings
Downstream
Efficiency
Strong Operational Discipline and Process Rigor
DIRECT BENEFICIAL IMPACT
Figure 1: Adding Value Through Managed Service Capabilities
Source: WGroup

3. • Identify savings opportunities within specific categories
• Prioritize indirect spend projects/initiatives
• Improve negotiation leverage and identify alternatives
• Manage more spend
• Corral and mitigate maverick spend activity
Laser Focused Category Management is Key
Indirect procurement leaders are typically inhibited from becoming laser
focused on management of indirect categories due to resource constraints,
skill availability and the cyclical nature of many indirect categories. Assigning
category expertise and experience to each category, or subcategory, produces
better results to the bottom line savings. Accomplishing this generally
means organizations must scale up and scale down resources based on
current requirements.This cyclical approach is not practical for companies
today, instead, leading edge companies have chosen to supplement their
existing in-house category management expertise with the deep and broad
expertise available on-demand, from managed service providers. Managed
service providers are bringing substantial value, in this area of procurement.
Managed service providers can conduct efficient sourcing events and
prioritize value-based projects; resulting in realized savings ranging from 2
times to 4 times service fees. Other interesting trends (illustrated in figure
2) have emerged from these managed service provider relationships.
Control Standardization = Operational Efficiency
When it comes to Optimizing transactional process, leveraging the tools
that may be provided by a managed service provider will help procurement
organizations improve their control over the indirect procurement process as
well as enable the standardization of the approach to sourcing and buying of
indirect services and materials. E-tools have strong relevance in strengthening
controls and supporting rigor within the process. E-procurement tools will
help enforce basic procurement policy and protocols, while e-invoicing will
accomplish the same end for payables. Dashboards, workflow and innumerable
reporting features also promote operational efficiency of transaction processing.
E-tools are not only beneficial in the sourcing space, as mentioned above,
but also have strong relevance in strengthening controls and supporting
rigor within the process. E-procurement tools will help enforce basic
procurement policy and protocols, while e-invoicing will accomplish the
same end for payables. Dashboards, workflow and innumerable reporting
features also promote operational efficiency of transaction processing.
The transformation to centralized and shared services are, in and of
themselves, widely recognized as best practices, but just as important, is
the foundation that is established for the implementation of additional
best practices.The change management requirements are reduced and
the efficacy of change is afforded greater opportunity, when the effort
of change is initiated in a central or shared service environment.
Indirect Procurement
3
Managed service
providers can
conduct efficient sourcing
events and prioritize
value-based projects;
resulting in realized savings
ranging from 2 times to
4 times service fees.

4. It’s also worth noting that there measurably positive impacts to
payables, treasury and audit from the deployment of e-tools and
the implementation of best practices, commonly associated with
best in class shared service organizations or service providers.
All of these strategies have to be evaluated on a capital vs. return and risk
vs. reward basis; that should be customized by organization.The illustration
below represents WGroups prospective, based on data gathered.
WGroup
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Figure 2: 3 Emerging Trends in Managed Service Provider Relationships
Realized Savings
Contractually
Guaranteed
Managed service providers are not only signing
up for negotiated savings, but are furthermore
agreeing to contractual obligations to ensure
the actual realization of those savings. These
arrangements typically take the form of either
a variable outcome based pricing model or
discounts to an established fixed price model.
Provider led
Maverick Spend
Mitigation
Driven by their own guaranteed savings,
managed service providers have developed
extremely effective governance mechanisms
and rigorous process measures that drive
appropriate stakeholder behavior from the
client community to substantially reduce or
otherwise eliminate maverick spend activity.
Savings Velocity
The convergence of the rigorous sourcing
curriculum that managed service providers
bring and the continuing evolution of
analytical tools, create an environment for
the acceleration of committed savings. This
culminates in quicker paybacks periods, higher
ROI’s and more frequent cycles through spend.
Much like the gain-sharing mechanisms of BPO
providers, similar incentives exist in the client-
managed services relationship that opens the
door to velocity of savings. Financial managers
have also, in turn, used these unbudgeted
dollars to fund special projects or more capital
intensive ventures.
Source: WGroup

5. Case Study:
Client Benefits in a
Managed Service Provider
Client Benefits
The client company was able to
negotiate favorable and market
terms and conditions, with a
best-in-class managed service
provider.
A summary of these benefits
include:
• A short pursuit cycle of 10
weeks (Initiation to signed
contract)
• Minimal incremental or
transitional cost
• Several contractual
mechanisms to ensure the
achievement of realized—
not just negotiated—savings
targets
• Realized Savings-to-Provider
Fees ratio of greater than 2.75
• Incentives to encourage the
acceleration of realized savings
• The unique ability to push
forward even higher levels
of savings into years 1 and 2
without incurring additional
charges
• Access to spend analysis not
previously available because of
technological constraints
How WGroup Can Help
WGroup has multiple solutions to help better manage indirect procurement,
realizing cost savings and control benefits.The first is a quick hit one week
indirect procurement rapid evaluation where we:
• Utilize structured, but flexible methods and tools to dissect your indirect
procurement spend in relevant commodities against a database of pricing to
identify the size of potential savings opportunity.
• Determine if it is worth proceeding/engaging with a managed service
provider.
At the end of our evaluation you will be able to determine if there would be
cost savings associated with moving to an indirect managed service provider
and what that potential might be. For example, we can predict that with $200
million in indirect spend you may be able to save $10 million that goes to the
bottom line by moving to a managed service provider.
The second offering is an in depth Indirect Procurement Managed Services
strategy that will include:
• A strategy that incorporates client business requirements and industry best
practices
• Developing a proposal for the in-scope spend
• Determining which managed service providers should receive a proposal
• Outlining alternatives
• Confirming in-scope spend,
• Issuing an RFP
• Down-selecting to preferred providers
• Negotiating and contracting with the chosen provider
Indirect Procurement
5
Figure 3: Capital Vs. Return
Source: WGroup

6. Contact Us
WGroup
301 Lindenwood Drive, Suite 301
Malvern, PA 19355
610-854-2700
Copyright © 2013 WGroup. All Rights Reserved.6
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About WGroup
Founded in 1995, WGroup is a boutique management consulting firm
that provides Strategy, Management and Execution Services to
optimize business performance, minimize cost and create value. Our
consultants have years of experience, both as industry executives and
trusted advisors, to help clients think through complicated and pressing
challenges to drive their business forward.
For more information on WGroup, visit http://thinkwgroup.com
We adopt a vigorous, yet common sense approach. We start with a
comprehensive rapid evaluation that sets the tone and establishes a roadmap
for a Requisition-to-Pay strategy. We employ our deep expertise in both our
Rapid Evaluation and our Indirect Procurement Managed Services Strategy,
constructing sophisticated financial models and bringing up-to-date insights
about industry best practices and potential vendors and tools to drive tangible
business results. We leverage the rich experience from our pool of senior
consultants all with former roles as business leaders and shared service owners.
Ultimately, we drive business value, which is above and beyond processes.