The volatility, capacity shortages, transport disruptions, and the supply of commodities have been the origin points of high inflation. Wage increases weren’t far behind as businesses tried to lure workers back when the pandemic eased. But inflation has now spread to the goods, materials, and services not directly incorporated into making a product or service. Sectors such as telecom, legal, and financial services are raising their prices for their business customers.
“One of the things we’ve noticed is there’s uniformly a solid attempt by B2B [service providers] to try to inflate rates, even though they’re not necessarily compensating their staff in line with inflation,” said Kent Mahoney, executive vice president of North America for Proxima, a supply chain and procurement consultancy.
Unfortunately, the buyers of these goods and services won’t be able to continually pass on higher costs to their customers because, at some point, customers push back. “You have to work harder … to combat inflation because there is a point where people won’t pay,” Smashburger President Carl Bachmann told Yahoo Finance.
CFOs have started to pay more attention to these indirect costs such as office supplies, printed forms, furniture, professional services, and hardware. Businesses have to think about how they allocate internal resources, Mahoney said, and they want to focus their energy, time, and talent on the things that provide a competitive advantage.
The following are four tips Mahoney provided for CFOs planning to manage indirect spending more closely.
Controlling indirect costs is not easy. Companies can usually manage close to100% of all of their direct spend quite easily with a software tool and get 100% compliance from employees just because of the nature of the spend. Because there are many different kinds of indirect spending and more suppliers to interact with, however, it’s historically difficult to control buying behavior. So, even in an inflationary market, “there’s still tremendous opportunity to optimize the [indirect] portion of spend,” said Mahoney. Moreover, even a moderate percentage off indirect spending for companies with slim margins improves earnings.
Managing indirect spend centrally. The CFO needs to change the behavior of any worker who transacts with external suppliers. A program needs to set thresholds, establish the buying channels (directing purchases to the preferred suppliers), and renegotiate better supplier rates. Without widespread engagement across the company, employees may still make purchases outside purchasing policies and supplier agreements. “A sourcing function will say, ‘Hey, we saved $100 million this year,’ but the CFO doesn’t see that savings hit the P&L,” Mahoney said. That’s usually because the company decided to take a siloed approach to managing the indirect spend, he said.
Without widespread engagement across the company, employees may still make purchases outside purchasing policies and supplier agreements.
Reducing consumption. Rather than just cost reduction, more CFOs need to consider consumption reduction — a deep, recurring commercial examination of how money is spent. Inflationary pressures can be balanced out through demand reduction, said Mahoney. Such programs can help prevent paying for services that aren’t being rendered. A classic example of this is a business being over-provisioned in per-seat software licenses, paying for more seats than are being used.
Planning for cost transformation. In light of price inflation, companies are weighing their options for cost transformation, said Mahoney. Cost transformation is about simplifying and refocusing the organization. It involves a soup-to-nuts analysis of any action taken by the company and deciding: Is this something we should build? Is this something we should deliver internally, or does it make more sense to buy or outsource to an external supplier? Should we try to automate this activity? “Option three is starting to become the focus more and more,” Mahoney said.