One of my favourite bloggers, having recently attended an ‘indirect’ procurement event, questioned the terms direct and indirect procurement and whether it is necessary to differentiate the two or if they should both should simply be termed ‘procurement’. This is something I have been thinking about for a while now because I too am not convinced that differentiating ‘indirect’ and ‘direct’ spend is either helpful or meaningful.
We can see this when we look at how the terms are used in different industries. For example, a retailer will see the things it buys to sell onto its customers as direct procurement, but the IT services it buys to support its business as indirect procurement. However, the same IT services are likely to be classed as direct procurement for a bank while the hotel next door would see them as an example of indirect procurement.
Confused yet? Probably. So let us go back a step and try and define the two terms.
Direct procurement is generally considered as being concerned with the core business of the organization buying the goods or services while indirect procurement is concerned with the supporting functions of the business – buying the goods and services that have to be bought to ‘make everything else work’.
So instead of indirect and direct procurement should we now be making a more operational distinction and be talking about core function and non-core function procurement? I’m not so sure because this throws up the same inconsistencies as direct and indirect since the same goods and services could be classified in either category depending on the industry. For any classification to be useful and taken seriously it needs to be consistent and mean the same thing to all audiences.
For any classification to be useful and taken seriously it needs to be consistent and mean the same thing to all audiences.
Another helpful criterion for a classification model is that it is necessary in the first place and I would suggest that this is not the case with indirect and direct purchasing. When thinking about why these terms came into being the cynic in me feels it’s largely because someone cleverer than me saw some money to be made. Unsurprisingly most organisations pay most attention to the goods and services that are the core of their business so by identifying an area in a business where there has been little attention you can bring focus to it for the first time and make money from the ‘new idea’ – in this case indirect procurement. The facts of running a business are that if it needs something in order to function the business makes a decision. The questions are simple “Do we do this ourselves?” or “Do do we buy it from someone else?” If it’s the latter, then the “thing” is already being bought so is there really a need to create a new classification and end up with two separate terms for things we buy?
As you can gather by now I am not a fan of the terms direct and indirect, they mean nothing in my opinion and worse still they introduce potential confusion because the terms mean different things to different people.
As I mentioned earlier, any classification model needs to consistent so if we do want to differentiate we need a simple system and for me it doesn’t need to be any more complicated than “stuff you can touch” i.e. goods and “stuff you can’t touch” i.e. services. This has the benefit of being easy to understand and potentially useful since they are bought and sold in different ways.
For me it doesn’t need to be any more complicated than “stuff you can touch” i.e. goods and “stuff you can’t touch” i.e. services.
When buying goods, you are buying something physical - boxes of beans, bags of sugar, car bulbs. They can be specified very well and you can physically touch them and see real examples of the work of the company you are buying from. When buying services you can still specify them very well but in my experience people find it harder to specify services then they do goods. For example, how do you specify when a floor in a supermarket, or a telephone on a desk is clean? Yes , of course you can take up references from other existing clients, but how do you know their standards for the services they buy are the same as yours? This is why a classification of ‘goods’ and ‘services’ could be useful because buying services is harder and requires different skills and techniques. There is a great term used in service selling which is “selling the invisible” because that is what service salespeople are doing. They are selling you something you cannot physically touch or see in real terms. Often you are buying the salesperson and their credibility, not the service their organization provides. As buyers we need to be aware of this so that we ensure the services we pay for do what we want them to do.
I think it’s time to get back to basics in the world of procurement, or is it sourcing or buying we should be calling it? Let’s stop calling it direct and indirect; let’s talk about goods or services. That’s something I can truly see as being different from each other.