The Overlooked Portfolio-Wide Margin Lever Hiding in Indirect Services
Over the last year, more CEOs and CFOs have used earnings calls to put procurement in the spotlight. The message is direct: find spend reduction, improve cost visibility, and tighten control in complex service Over more than two decades of working with procurement and operations teams, I’ve consistently been surprised by how often smart and confident buyers have presided over truly awful indirect service programs – and the enormity of overspend in these categories. I’ve come to understand why this is the case. Suppliers know buyers aren’t incentivized to watch what happens after the contract is signed. Organizational inattention is their profit model.
It’s easy to see why it also slips under the radar for private equity operating teams. They wield a finite number of levers available to improve EBITDA, and the most obvious ones (labor, footprint, direct materials pricing, working capital, and technology) tend to come first.
Indirect services, however, don’t tend to garner strategies which recognize and address the specific challenges these expenses pose.
On the surface, expenses like janitorial services, waste and recycling, uniform rental, pest control, security, facilities services, and energy and utilities may resemble a collection of small contracts rather than meaningful margin-driving levers. But when assessed across a large multi-site company, and then across a portfolio containing several such companies, a very different picture often emerges – and it’s both ugly and alluring.
The ugly: spend in these categories tends to escalate by 6-15% in non-contract years, in areas where three to five-year service contracts are the norm. Indirect services thus harm EBITDA and erode progress in other areas. The allure: these categories represent a meaningful and repeatable opportunity for margin reclamation.
But the broad-brush solutions that may work in other categories simply won’t do the trick when it comes to managing these costs.
Why operating partners are kept in the dark about indirect services
In businesses with significant physical operations, indirect services matter more than operating partners might think. Manufacturers, food processors, pharmaceutical companies, retailers, grocers, healthcare providers and real estate companies may operate dozens or hundreds of locations requiring a tailored combination of service expenses.
The total spend can be substantial but bills rarely arrive in a form that makes the opportunity obvious. Charges are scattered across bills, suppliers, accounts and cost centers, while contracts, invoices and service data typically reside with different teams.
Organizations tend to have reasonably clear ownership of the contracts involved, but not of the expenses themselves. Many groups touch the spend, yet no one owns it from end to end.
Procurement may own the supplier agreements, while operations determines location-level needs—needs which tend to change week-to-week. Accounting processes invoices. Each sees only part of the program.
Meanwhile, the invoices keep coming.
Good contract / bad deal is the norm
There is a common misconception that a well-negotiated contract will keep an expense under control. That assumption works reasonably well for widgets, but it’s a fallacy for indirect services.
With these categories, a good contract may reside in a file folder somewhere in procurement, but the suppliers’ invoices coming in and the checks flying out the door often reflect a very different reality. Contracts, and the negotiated unit rates within them, are not nearly as determinative of actual spend as they tend to be with widgets.
Service quantities change beyond actual needs because service providers have added unnecessary inventory, or, worse yet, the inventories listed on invoices don’t reflect plant-level reality. Suppliers introduce new products and services at “book price,” and impose discretionary charges and off-cycle price increases. Suppliers interpret terms differently, and nobody has the time or category knowledge to challenge every questionable charge.
The indirect supplier’s growth model is your cost problem.
Pricing in these categories can be extraordinarily difficult to compare. Suppliers use different billing structures, terminology, units of measure, and fee descriptions. Without category-specific knowledge and a clear baseline, it is highly difficult to determine whether the company has a pricing problem, a service problem, a compliance problem, or some combination of all three.
A portfolio-wide playbook beats a portfolio-wide contract
When operating teams think about applying procurement discipline across a portfolio, the conversation often moves quickly toward consolidated purchasing. That makes sense in some categories, but it offers little value with indirect services spend.
The specific opportunities will vary by company. Placing every portfolio company with the same suppliers or under the same agreement won’t neutralize the array of margin-grabbing tactics that vendors deploy.
Instead, it’s critical to apply a consistent playbook across the portfolio, informed by deep category expertise and the most comprehensive indirect services data available. The winning approach entails all the strategies for fending off the spend escalation that threatens to turn your good contracts into bad deals.
What actually grows EBITDA
The work begins with identifying and organizing the spend, which is more difficult than it sounds. Contracts, invoices, service records, and location data are spread across systems and internal teams. Until those records are assembled and normalized, it is difficult to establish a reliable starting point.
The next step is determining what each location is actually using. Most teams operate with invoices that show what a supplier charges but do not provide enough information to assess whether the underlying service level is necessary or appropriate. Getting the right information from each supplier is critical to enable a fulsome audit of service delivery.
Incomplete delivery and inaccurate accounting are rampant within these categories…but the problems are difficult to spot. But uncovering these shortfalls is foundational to gaining leverage for renegotiating current agreements, correcting pricing, right-sizing service levels, and optimizing spend.
Then comes the part that is most often neglected: continuously managing the expense after new agreements are implemented. After deals get signed, indirect service suppliers deploy a vast range of “margin-grabbing” tactics, all of which require ongoing attention. Without continuous oversight, the initial savings erodes as internal attention shifts elsewhere.
A sourcing event can temporarily improve a deal, but continuous oversight is what truly defends the P&L.
Your portco teams can’t do it on their own
This is not a criticism of portco teams. Procurement organizations are managing huge amounts of spend with limited resources, so their best people focus on the categories with the greatest strategic or financial importance.
Few teams have the systems or bandwidth to monitor recurring service invoices and supplier behaviors month after month. Specialized outside support adds the category knowledge, data, and ongoing management capacity that is nearly impossible to replicate in-house.
Where Fine Tune fits
Fine Tune works with PE-backed and other multi-site organizations to reduce and control indirect-services expenses.
Our world-leading industry experts get the right data for our clients, organize that data into useful baselines, and educate the clients on what target spend levels should be for the services they need. We then use our proprietary auditing technology to continuously flag billing anomalies, and a model of continuous, vigilant management to fend off supplier margin-grabbing tactics and defend the client’s P&L.
While the norm with indirect services is high-margin supplier deals, high in-house management time, and low control and visibility, Fine Tune clients enjoy tight-margin supplier deals, enhanced departmental productivity, and high levels of visibility, control, and confidence in the integrity of their spend.
