Raising cost potentials in indirect purchasing

Indirect purchasing spend is 15-30% of total purchasing, depending on the company, but often still receives too little attention. According to a survey by Deloitte in 2021, 70% of respondents have a good overview of the risks with suppliers in level 1 of the supplier pyramid, but only 15% say they have a good overview of level 2 and below, where indirect purchasing materials are located. That's why it pays to take a closer look at the individual categories and suppliers in Indirect Spend.

1. service contracts in the IT sector

Data analysis can be used to analyse the costs of indirect materials, which are often spread across several departments due to decentralised organisation. In the case of service contracts, possible restrictions should be closely examined, which often drive up costs or limit the service. Investments in IT are important from the company's point of view, but if the order situation is tight, these budgets are often cut. Despite the cost pressure caused by the pandemic, companies are prioritising investments in IT. In a survey conducted by Capgemini, 73% of respondents say that IT budgets will increase over the next few years. One third of the participants even say that the IT budget will increase by more than 10 percent.

2. saving process costs through digitalisation

In general, companies are planning to invest more in the area of IT modernisation, for example to make applications cloud-capable. A study by Mercateo AG and HTWK Leipzig shows that digitalisation in indirect purchasing offers a savings potential of up to 40%. The example of AstraZeneca GmbH shows that the digital procurement process in indirect purchasing has resulted in a saving of process costs compared to manual procurement. Furthermore, by focusing on indirect purchasing, the company was able to achieve higher IT security as well as sustainability. For example, care is taken to ensure that external service providers who maintain the company website have the necessary know-how and protect themselves against external attacks.

3. increase in IT expenditure

According to a study conducted by Flexera in 2021, IT spending as a percentage of turnover averages 7.5% (USA 8.5%, Europe 6%). The size of the company is also crucial - companies with over 10,000 employees spend 5%, companies with 5,000-10,000 employees spend 10% and companies with 2,000-5,000 employees spend 8% on IT as a percentage of revenue. This compares to an average IT spend percentage of 4.7% in 2012. Gartner states that global IT spending has increased by 9.5% from 2020 to 2021 and it will increase again by 5.5% in 2022.

4. market volume IT project business and recruiters

Particularly when purchasing from service providers, it is worth making a comparison before awarding a project, as recruitment agencies often charge commissions of 20% and more (e.g. Hays Annual Report 2019). The recruitment company helps to find suitable skilled personnel and receives commissions of 15-20%, which can be up to 30% for hard-to-fill positions. For personnel leasing, commissions amount to around 2-6% of the employee's annual salary. In a study conducted by Lünendonk, 82% of recruiters state that their fees are 100% performance-based, whereby the commission is calculated by multiplying an employee's gross annual salary by a factor. The average placement fee is EUR 17,000. The study was conducted from 2018 to 2020 and shows that from 2018 to 2019 there was an increase in market volume for recruiters from EUR 13.2 billion to EUR 23.2 billion. From 2019 to 2020, the volume decreased to EUR 15.1 billion, due to the Corona pandemic and lower demand for recruitment services. In general, recruiters are positive about the future, as the shortage of skilled workers and the retirement wave of baby boomers will increase demand. Digitalisation has enabled recruitment companies to position themselves more strongly, as they can use algorithms and digital applications to quickly find suitable staff for their clients.

Challenges and tips in indirect purchasing

Not only direct recruitment costs should be taken into account - vacancies left unfilled for a long time lead to productivity losses and have disadvantages for existing staff, which in turn translates into costs. The German Personnel Leasing Act (Arbeitnehmerüberlassungsgesetz, AÜG), which came into force in April 2017, has raised barriers for self-employed IT service providers by increasing bureaucracy and the risk of bogus self-employment. As a result, many self-employed people have taken the path to temporary employment by means of personnel placement (Andreas Lutz, Verband der Gründer und Selbstständigen Deutschland e.V.).

The rising expenditure in the IT sector is increasingly obliging purchasing to monitor mark-ups more closely and to leverage the steadily rising cost potentials in an overall increasingly challenging market environment.

Other exciting blog articles on this topic include IT Procurement Trends 2022 and our series articles Finding the right IT service providers & digital experts faster.