I dislike the ‘direct’ and ‘indirect’ spend classifications we use in procurement.
I’ve written about this before here, but it came up again last week when talking to a non-procurement colleague about our area of work.
“I’m always seeing all these ‘head of direct procurement’ job titles” he said. “What does direct procurement mean?”
As I gritted my teeth and explained that (according to CIPS) direct materials are “materials that are converted or processed to make the finished products” and indirect materials are “goods which are purchased to support the operation and which are not converted into finished products or resold” I couldn’t help but feel disappointed at these definitions and our functions’ overuse of them.
To me, direct and indirect spend classifications are antiquated and no longer relevant in modern procurement.
Sure, when they were first conceived, they may have been useful. Back when businesses were more about producing ‘hard goods’, you could argue that these classification held up. The same is true that for some business, these classifications remain relevant today (retail is an example that jumps to mind). But our business landscape has changed so greatly in the last few decades that I feel we need to stop applying these terms to procurement in the broader sense.
Lets look at some of today’s most important and influential companies. Google, Facebook, Airbnb and Uber are all prime examples of services companies. Their core business doesn’t involve producing a physical product. If Google doesn’t produce a physical product does it even do direct procurement? If so, what constitutes direct procurement for Google?
What’s more important?
What annoys me more than the outdated nature of these terms is the relative weight allocated to one of them.
In its glossary of terms, CIPS suggest the following:
“As direct materials usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups”
Isn’t that a huge generalisation?
Is direct spend the most critical factor that determines the quality of the final product for Facebook or Google? I don’t think it is and I certainly don’t think direct procurement is ‘more demanding’ for these businesses either. Look at Facebook’s current privacy concerns tell me that legal counsel wouldn’t be a complicated and demanding spend area for that business.
Obviously, some level of spend classification is necessary. However, I believe that the direct/indirect procurement dichotomy is an oversimplification of an inherently complex process. How can these two classifications possibly be attributed a similar weight at a business that produces finished products as they are in the ever growing service economy.
Perhaps it’s time to rethink the way we (over) use these terms?
Peter Smith of Spendmatters certainly seems to think so.
“I was CPO in two huge organisations; a major UK government department, and an international financial services giant. In neither case did our multi-billion pound spend have anything that could be traditionally defined as “direct spend.”