Breaking down direct and indirect procurement: A comprehensive guide

Procurement is important in the Software as a Service (SaaS), where businesses must efficiently handle purchase licenses, contracts and negotiate prices. However, only a few companies efficiently manage procurement well.

According to McKinsey, it's because spending is spread across departments and is varied in type, making it hard to consolidate spending, optimize savings, identify redundant subscriptions and underutilized services, and reduce costs. The leaders in indirect procurement often need more influence in the company to get the technology and skilled people they need.

To effectively manage procurement in SaaS, you need to effectively differentiate its two variants - indirect procurement and direct procurement.  

Managing direct and indirect procurement effectively requires different approaches. While indirect spending requires a focus on the company's budget, direct spending revolves around fostering strong supplier relationships. Building long-term, mutually beneficial relationships with suppliers can significantly impact managing direct spending and lead to cost savings.

Understanding these nuances is essential as businesses transition to cloud-based solutions and adapt their SaaS procurement strategies to optimize their SaaS investments.

This article will discuss the two main SaaS procurement types: direct and indirect. They're different, and knowing these differences helps speed up and make the buying process smoother and more accurate.

What is direct procurement? 

Direct procurement means getting software directly from providers without intermediaries. This helps businesses control how they buy software, allowing them to build direct relationships with SaaS vendors and make buying essential software easier.

One big advantage of direct procurement is that businesses can negotiate specific terms with vendors. This includes pricing structures, negotiating service level agreements (SLAs), and establishing data security protocols specific to the organization's needs. Businesses can engage directly with vendors to ensure that the SaaS solutions align closely with their operational requirements and compliance standards.

Direct procurement also helps businesses better manage their software licenses or subscriptions. They can monitor how software is used, better use resources, and customize their software use as needed. For example, consider a manufacturing company that uses specialized design software for product development. By directly procuring this software procurement, the company can closely monitor usage patterns across different departments, ensuring that licenses are fully used. Understanding specific feature usage can lead to negotiations for customizations, focusing on what's actually needed and potentially reducing costs. 

Besides, direct procurement makes it easier for businesses to work closely with vendors, sharing ideas for improvements and trying out new features before they're widely available. This ongoing collaboration means software keeps improving, making the most of what businesses invest in SaaS solutions.

What is indirect procurement? 

Indirect procurement in SaaS means getting software products and services through middlemen, like resellers or third-party providers. This method is used when a company needs more options, or the software they want isn't directly available.

Indirect procurement has benefits, like more choices, flexible pricing and contracts, and tapping into intermediaries' expertise. However, companies must weigh the pros and cons of this approach and carefully check intermediaries' reputations and quality.

Here are some examples of indirect procurement in SaaS:

• Network devices: Companies need networking gear (like routers and firewalls) to ensure safe communication between SaaS solutions and other systems. This is an example of indirect procurement in SaaS.
• Hosting servers: Companies need servers to run their SaaS solutions and store data, another instance of indirect procurement.
• Data center resources: Data center services provide a secure place for hosting SaaS solutions and related infrastructure, showing another use of indirect procurement in SaaS.

Bucketing your spends into direct and indirect procurements

Understanding how to categorize direct and indirect procurements is crucial for effective budget allocation in SaaS procurement.

Direct procurement

These are core business investments like CRM systems, ERP solutions, or specialized software. Categorize them based on:

• Strategic alignment: Prioritize procurements aligned with long-term business strategies, ensuring they contribute directly to organizational goals and growth plans.
• Technical specifications: Evaluate technical specifications to ensure compatibility and scalability with existing systems, minimizing integration challenges and disruptions.
• Vendor relationships: Consider vendor responsiveness, support quality, and strategic partnerships. A strong vendor relationship enhances service delivery, support, and future collaboration opportunities.
• Regulatory compliance: Verify that direct procurements comply with data security and regulatory standards, mitigating legal risks and ensuring data protection.
• Integration capabilities: Evaluate integration potential with other systems for seamless operations. Direct procurements should integrate smoothly with existing infrastructure to maximize efficiency and minimize operational friction.

Indirect procurement

These support SaaS operations, including cloud services, data storage, cybersecurity tools, and collaboration platforms. Categorize them based on:

• Operational support: Assess contributions to day-to-day operations and infrastructure. Indirect procurements should enhance operational efficiency without directly impacting core business functions.
• Cost efficiency: Optimize spending for maximum cost-effectiveness and performance. Evaluate the total cost of ownership (TCO) and ROI to ensure value for money. Streamline procurement processes by placing requests with Spendflo’s immediate assisted buying. You can stay updated via Slack by receiving real-time concierge services, and fast-tracking renewals and purchases to save you a guaranteed amount of time and money. 
• Risk mitigation: Manage risks related to vendor dependencies and data security. Ensure that indirect procurements contribute to a robust risk management framework.
• Scalability: Ensure scalability to accommodate growth and changing business needs. Indirect procurements should be flexible enough to scale resources based on demand fluctuations.
• Compliance: Verify adherence to regulatory requirements and data protection standards. Indirect procurements should comply with industry regulations and safeguard sensitive data.

Strategic allocation and management

• Allocation strategy: Effective allocation of spends involves categorizing expenses based on their direct or indirect impact on SaaS operations and overall business objectives.
• Management approach: Implementing a robust procurement management framework involves defining clear procurement policies, conducting regular audits, optimizing vendor relationships, and leveraging analytics for cost optimization and risk management.
• Technology integration: Integrating procurement tools with SaaS management platforms, financial systems, and contract management software enables centralized control, visibility, and governance of procurement processes.

Best practices and optimization techniques

• Total cost of ownership (TCO) analysis: Conducting TCO analysis helps evaluate the holistic cost implications of direct and indirect procurements, including initial expenses, maintenance costs, and potential savings over time. 
• Vendor negotiations: Strategic vendor negotiations, including volume discounts, service-level agreements (SLAs), and contract renewals, are vital in optimizing procurement costs and maximizing value. Procurement teams can implement strategic vendor negotiations using Spendflo's data-driven insights and sentiment survey analysis tools. This approach enables you to secure volume discounts, optimize SLAs, and negotiate favorable contract renewals based on actual ROI metrics, enhancing procurement cost-effectiveness and value maximization.
• Continuous monitoring and benchmarking: Regular monitoring, benchmarking against industry standards, and performance tracking of vendors and procurement processes enable continuous improvement and cost efficiency. You can maintain the vendor performance against industry standards using Spendflo's benchmarking capabilities. Use employee sentiment data from the Sentiment Hub to save on your SaaS budget, and increase productivity across your organization.

Key differences between direct and indirect procurement

Procurement strategies vary significantly between direct and indirect procurement. 

How Spendflo can help with simplifying your procurements and management of your SaaS stack with guaranteed ROI

Many companies use software directly, giving them greater control over buying. Those without specialized purchasing teams use an indirect method. However, both approaches serve the same goal—facilitating the acquisition of new applications for smooth business operations. Employing SaaS-based purchasing software can streamline this process by automating routine tasks and simplifying complex purchases. 

Spendflo is a tool businesses use to ease SaaS purchases, strengthen vendor ties, and enhance negotiations for optimal applications. 

With Spendflo, you can effortlessly simplify your procurement processes and efficiently manage your SaaS stack, all while ensuring a guaranteed return on investment. Its automation features streamline tasks, enhance vendor relations, and optimize negotiations, making Spendflo a must-have SaaS purchase software tool for seamless and profitable operations. 

Do you want to know how they streamline their SaaS buying process? 

Book your free demo with us and learn more.