Direct vs Indirect Procurement: Definition, Best Practices & Differences

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Procurement is essential to any business, but it is even more critical when considering Software as a Service (SaaS). The SaaS industry has transformed business operations, and procurement is not immune to this transformation.

Companies must change their procurement methods as they transition to cloud-based solutions to maximize their return on SaaS investments.

In this article, we will look at the two main types of SaaS procurement: direct and indirect procurement. Both have differences, and understanding these distinctions is critical for making informed SaaS purchasing decisions.

What is direct procurement?

Direct procurement is the process of purchasing essential materials, components, or services directly from the vendor that are used in producing a company’s final product. Direct procurement in SaaS involves buying software and services directly from the provider, bypassing intermediaries. 

This approach allows businesses to negotiate better deals, ensure quicker support, and maintain control over quality and costs, making it ideal for organizations with the resources to manage procurement effectively.

Direct procurement examples

Customer Relationship Management (CRM) Platform: When businesses require a centralized system for managing customer interactions and data, they’ll directly purchase it from the vendor or the marketplace.

In a nutshell, purchasing applications, hardware, and resources for the team falls under direct procurement.

Direct procurement best practices to follow

In direct procurement, you must follow specific rules to ensure the purchase is cost-effective, efficient, and secure. Here are some of the basic practices to keep in mind:

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Define the requirements and goals

Before directly procuring software and services, clearly defining your company's procurement requirements and goals is essential. This includes identifying the specific software and services needed and the desired features and capabilities.

Research and compare SaaS vendors

Carefully research and compare SaaS vendors to determine which ones best meet your company's needs. Consider factors such as the quality of products and services, the vendor's reputation, and customer support.

Negotiate pricing and contracts directly with vendors

When procuring software and services directly, it is essential to negotiate pricing and contract terms directly with vendors. This can provide greater control over costs and flexibility in pricing models and contract terms.

Ensure data security and privacy

Ensuring the security and privacy of your company's data is a critical consideration in any procurement process. When procuring directly, it is essential to thoroughly evaluate vendors' security measures and privacy policies to ensure that your data is protected.

Evaluate vendor reliability and track record

Before signing a deal with a SaaS vendor, evaluating their reliability and track record is vital. This includes reviewing references, analyzing customer feedback, and assessing their history of providing quality products and services.

Monitor and regularly review SaaS usage and costs

Regularly monitoring and reviewing SaaS usage and costs can help ensure that the software and services continue to meet your company's needs and control costs.

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Common Challenges in Direct Procurement‍

Direct procurement, while critical for production and delivering products to customers, comes with its own set of challenges that can disrupt operations and impact costs. Here are some of the key hurdles companies face:

• Supplier Reliability: Inconsistent suppliers can cause production delays or interruptions. A single issue with a supplier can ripple through the entire supply chain, impacting timelines and product quality. Building long-term, reliable supplier relationships is essential, but it requires continuous monitoring and effective communication.
  
  
• Fluctuating Raw Material Costs: Prices for raw materials like metals, plastics, and chemicals can fluctuate based on geopolitical factors, supply and demand, or natural disasters. This volatility can significantly affect production costs, making budgeting and cost control more difficult.
  
  
• Quality Control Issues: Maintaining high-quality standards for direct procurement is vital to ensure that the final product meets customer expectations. Variations in the quality of materials can lead to production delays, recalls, or customer dissatisfaction, resulting in reputational and financial losses.
  
  
• Long-Term Contracts: While long-term contracts can help lock in pricing and ensure supply consistency, they can also limit flexibility. If market conditions change, companies may find themselves stuck in agreements that no longer align with their business needs or financial goals.

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What is indirect procurement?

Indirect procurement refers to purchasing goods and services that support a company’s daily operations but are not directly involved in production. In the context of SaaS, this could include acquiring software, IT services, office supplies, or consulting services through third-party vendors or resellers. 

These purchases are crucial for maintaining the company's infrastructure, employee productivity, and overall functionality. Indirect procurement offers benefits like a wider selection of options, flexible pricing, and access to specialized expertise from intermediaries. However, it’s important to carefully evaluate vendors to ensure they meet the company's quality and reliability standards.

Indirect Procurement Examples

• Network Devices: To guarantee secure and dependable communication between SaaS solutions and other systems, organizations need networking equipment, like routers, switches, and firewalls, another illustration of indirect procurement in SaaS.
• Hosting Servers: To host their SaaS solutions and store data, organizations require servers, another example of indirect procurement in SaaS.
• Data Center Resources: Data center services offer organizations a secure and dependable environment for hosting their SaaS solutions and related infrastructure, another instance of indirect procurement in SaaS.

Indirect procurement best practices to follow

Indirect procurement can be trickier than direct procurement due to its complexity and the number of parties involved. Let’s take a look at the best practices for the same.

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Analyze intermediaries

Assess the intermediary options available through indirect procurement software to identify who can fulfill your requirements most effectively. Consider aspects such as the intermediary's stability, the quality of goods and services provided, and the level of customer assistance.

Assess the credibility of intermediaries

Before forming a partnership, it is critical to thoroughly examine their credibility and past performance. This involves exploring references, gauging customer feedback, and evaluating their history of delivering high-quality products and services.

Ensure seamless interaction with intermediaries

Keeping a smooth flow of communication and cooperation can guarantee the attainment of procurement targets and the prompt resolution of any problems that may arise.

Monitor the efficiency of intermediaries

Keeping a close watch on the efficiency of intermediaries can guarantee they meet your firm's demands and swiftly tackle any hurdles.

It is recommended to cut off ties if they are not delivering your requirements efficiently.

Develop a systematic approach for procurement

Forming and adhering to a systematic procurement and vendor management approach can lead to an efficient and effective procurement process.

Use a procurement tool to streamline your SaaS buying process and manage your vendors without hassles.

Perpetually evaluate procurement techniques

Continuously examining and enhancing procurement techniques and procedures can guarantee their effectiveness and the ability of your company to adapt to market fluctuations and new requirements.

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Common Challenges in Indirect Procurement

Indirect procurement deals with goods and services that support daily business operations but don't directly contribute to the production process. While it might seem less critical, it presents unique challenges that can impact overall business efficiency and costs:

• Lack of Visibility: With decentralized procurement processes, where multiple departments independently manage their purchasing, visibility becomes a key issue. Without central tracking, businesses may struggle to manage spend, leading to inefficiencies and missed opportunities for savings.

In fact, 48% of former employees still retain access six months post-termination, highlighting how poor visibility into software and vendor access can create serious security and compliance risks.

• Maverick Spend: Employees often bypass the approved procurement channels to make purchases on their own, leading to maverick or rogue spending. This can result in overspending, unapproved vendors, or suboptimal pricing, undermining the company's procurement strategy.
  
  
• Diverse Supplier Base: Unlike direct procurement, which focuses on a few strategic suppliers, indirect procurement involves a wide range of vendors. This can lead to fragmented communication, duplicate purchases, and an increased administrative burden. Managing a large supplier pool effectively requires streamlined processes and strong vendor relationships.
• Without standardized procedures across departments, indirect procurement can become chaotic. Lack of formal processes can lead to inefficiency, errors, and compliance issues, making it harder to control spending

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What is the difference between direct and indirect procurement?

The difference between direct and indirect procurement holds great significance.

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Strategies for Effective Procurement

To manage both direct and indirect procurement efficiently, here are some strategies that can help optimize processes and achieve cost savings:

• For Direct Procurement:
  
  
  • Strategic Sourcing: Focus on building strong supplier relationships through strategic sourcing. Evaluate suppliers not only on price but also on reliability, sustainability, and quality. This long-term approach helps mitigate risks related to supply chain disruptions.
    
  • Inventory Management: Implement just-in-time (JIT) inventory practices to reduce storage costs while ensuring materials arrive when needed. This requires close coordination with suppliers and robust forecasting tools.
    
  • Contract Negotiation: Negotiate long-term contracts that lock in prices and secure a stable supply of essential materials. Ensure these contracts are flexible enough to account for any unforeseen changes in market conditions.
    
    
• For Indirect Procurement:
  
  
  • Centralize Procurement: Adopt a centralized procurement system to streamline purchasing across departments. This ensures consistency in processes, improves visibility, and enables better spend management.
    
  • Vendor Consolidation: Reduce the number of suppliers for indirect spend by consolidating purchases. This can help you leverage bulk discounts, improve service levels, and simplify procurement processes.
    
  • Automate Routine Tasks: Automate the approval and purchasing workflows for frequent indirect buys. Using procurement software to handle these tasks reduces administrative workload and ensures compliance with policies.
    
  • Monitor & Evaluate Spend: Regularly assess indirect procurement spend to identify areas for savings. Use analytics to optimize supplier selection, track costs, and ensure that purchasing decisions align with overall company goals.

What to Look for in Direct/Indirect Procurement Software? 

As organizations manage both direct and indirect procurement, leveraging the right procurement software is essential to optimizing these processes. Here’s what to look for in a robust procurement platform:

• Vendor Management: Whether for direct or indirect procurement, managing supplier relationships efficiently is key. The software should allow for easy tracking of vendor performance, certifications, and compliance, helping to build and maintain long-term partnerships.
  
• Spend Tracking & Reporting: The ability to monitor and report on all procurement activities in real-time is critical. Look for software that can provide insights into where money is being spent, how much is being saved, and what areas require attention.
  
• Contract Management: A procurement system should allow you to manage contracts, track renewals, and automate approval workflows. This reduces manual processes and ensures compliance with procurement policies.
  
• Budget Forecasting: Procurement software should include features for forecasting budgets, so you can predict future spending based on historical data and trends. This helps in managing cash flow and avoiding surprises.
  
• Integration with Other Tools: Ensure that the procurement software integrates seamlessly with other systems like ERP, accounting, and project management tools. This will help centralize procurement data and ensure that all teams have the right information at their fingertips.

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Direct vs Indirect procurement: How a SaaS procurement software can help you?

Managing both direct and indirect procurement can be a challenge for any organization, especially as businesses scale and move toward cloud-based solutions. SaaS procurement software provides a streamlined approach to both, helping organizations make more efficient and cost-effective purchasing decisions.

Here’s how SaaS procurement software like CloudEagle.ai can provide value:

1. Simplified Vendor Search and Purchase Management

SaaS procurement software makes it easier to search for vendors, compare options, and manage the entire procurement lifecycle from request to approval. By automating purchase request approvals and integrating with supplier networks, procurement teams can save valuable time while ensuring compliance with internal policies.

2. Automated Contract and Invoice Management

Managing contracts and invoices manually can be a time-consuming process. With CloudEagle, businesses can automate these workflows, reducing human errors and minimizing delays. Automated tracking of contract renewals ensures that organizations never miss a deadline, allowing them to proactively manage renewals and renegotiate terms before costs rise.

3. Increased Visibility and Control Over SaaS Spend

CloudEagle provides deep insights into procurement activities, giving you full visibility into your SaaS spend. This transparency allows finance and procurement teams to track expenses against their budget goals, identify areas for savings, and prevent overspending on unnecessary software or services. With detailed analytics and reporting, CloudEagle enables informed decision-making based on real-time data.

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4. Market Data and Price Benchmarking

One of the significant advantages of SaaS procurement software is its ability to provide access to market data and price benchmarking. With CloudEagle, businesses can benchmark prices, negotiate better terms with suppliers, and ensure that they are getting the best value for their investments. This strategic sourcing approach enhances procurement efficiency and helps secure better pricing models.

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5. Streamlined Renewals and Risk Mitigation

For indirect procurement, where multiple vendors are often involved, CloudEagle’s centralized platform helps companies stay on top of renewals, expiration dates, and vendor performance. This reduces the risk of missed renewals, unexpected price hikes, and service interruptions that can disrupt business operations.

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Nowports Saves 34% with CloudEagle

Nowports, a digital freight forwarder, streamlined its SaaS procurement with CloudEagle, saving 34% through better vendor management. The platform centralized contracts, automated renewals, and provided price benchmarking, giving the finance team full visibility into usage and spend. This resulted in a 70% reduction in procurement time and smarter, data-driven decisions.

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Conclusion

In this article, we looked at direct and indirect procurement, their examples, and how they differ.

Most businesses prefer a direct procurement strategy to purchase SaaS applications, giving them more control over the process. Businesses that lack dedicated procurement teams are the ones that use indirect procurement.

But both methods serve a similar purpose for businesses—helping them acquire new applications for a seamless business operation.

You can streamline the procurement process using SaaS-based buying software, as it’ll help you automate repetitive tasks and take the sting out of the complex purchasing process.

Businesses have been using CloudEagle to simplify SaaS buying, enhance vendor relationships, and improve SaaS negotiations to secure their businesses' best apps.

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

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FAQs

‍1. What are indirect procurement examples? 

Indirect procurement refers to purchasing goods or services that support a company’s operations but don’t directly contribute to the final product. Examples include office supplies, IT services, cleaning services, and employee training.

2. What is direct procurement with an example? 

Direct procurement involves purchasing raw materials, components, or services that are directly used in the production of goods or services. An example is a car manufacturer buying steel and tires to assemble vehicles.

3. What is the difference between indirect and direct procurement? 

Direct procurement focuses on acquiring materials and components essential for production, while indirect procurement covers goods and services that support day-to-day operations, such as office supplies, IT services, and facilities management.

4. What is the indirect procurement process?

The indirect procurement process involves identifying non-production-related goods and services needed to support business operations. This includes sourcing vendors, negotiating contracts, managing purchases, and ensuring cost-efficiency.

5. What is direct purchase in procurement?

Direct purchase in procurement refers to the acquisition of goods and services directly tied to the production process. For example, buying raw materials or components used in manufacturing the final product.

6. How does SAP handle direct vs indirect procurement?

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In SAP, direct procurement focuses on materials that are integral to production (e.g., raw materials), while indirect procurement in SAP handles non-production items like office supplies, IT tools, and services, optimizing internal business functions.

7. What are the categories of indirect procurement?

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Indirect procurement categories include office supplies, IT services, marketing materials, travel expenses, facilities maintenance, and other support services required to keep the business running smoothly.

8. What is the difference between direct and indirect procurement in SAP MM?

In SAP MM (Materials Management), direct procurement involves sourcing materials that go into production, such as components and raw materials, while indirect procurement refers to services and goods necessary for business operations but not directly tied to product creation.

9. Can I download a direct vs indirect procurement pdf?

Yes, many resources and PDFs compare direct vs indirect procurement, providing insights into their differences, processes, and best practices. These resources help businesses better understand each procurement method.

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