Most organisations spend more with third parties than on payroll, and far fewer can say who owns it. Here is what procurement actually covers.
A mid-sized company spends 62 percent of its revenue with third parties. Software, freight, raw materials, contractors, insurance, office space, legal advice, cloud infrastructure. That figure is not unusual — for most organisations, external spend dwarfs payroll. And yet ask the average executive team who owns that 62 percent and you will get a shrug, a reference to "whoever raised the PO", and a spreadsheet that is eleven months out of date.
That gap between how much money goes out the door and how much attention it gets is the reason procurement exists as a discipline. It is not a back-office function that files paperwork after someone has already chosen a vendor. Done properly, it is the function that decides what the organisation buys, from whom, on what terms, and at what risk.
Procurement is the end-to-end business function of acquiring the goods and services an organisation needs to operate. It spans identifying a need, defining what will satisfy it, finding and evaluating suppliers, negotiating commercial and legal terms, executing the agreement, managing delivery and payment, and maintaining the supplier relationship afterwards.
The definition matters because of what it includes. Procurement is not the moment of purchase. It is everything around the purchase, and most of the value — and nearly all of the risk — sits in the parts that happen before and after money changes hands.
These three words get used interchangeably and shouldn't be. The distinction is genuinely useful:
A useful test: purchasing asks "how do we buy this?" Sourcing asks "who should we buy it from?" Procurement asks "should we be buying this at all, and on what terms?"
The most consequential split in procurement is between direct and indirect spend, because they behave completely differently and are frequently run by different teams under different rules.
Direct spend buys what goes into the product. Raw materials, components, packaging, manufacturing services. It is characterised by high volume, deep supplier relationships, tight specification control, and a direct line to cost of goods sold. A one percent improvement in direct spend drops straight to gross margin, which is why it gets attention in manufacturing businesses.
Direct procurement tends to involve fewer suppliers, longer contracts, more rigorous qualification, and genuine switching costs. A supplier failure here stops production.
Indirect spend buys everything else: software, travel, professional services, facilities, marketing, IT equipment, recruitment. It is characterised by enormous fragmentation, many small transactions, and a long tail of suppliers nobody has ever formally reviewed.
Indirect is where most organisations lose money quietly. Not through bad negotiation but through absence of visibility: four teams buying four overlapping SaaS tools, a contract that auto-renewed because nobody tracked the notice window, a consultant engaged at a rate nobody benchmarked. For service businesses and software companies, indirect spend is often the majority of external spend, and it is almost always the less governed half.
Increasingly treated as its own category, because services resist the mechanics built for goods. You cannot inspect a consulting engagement on receipt. Quality is subjective, scope drifts, and value is realised over time rather than at delivery. Services procurement depends far more heavily on well-drafted statements of work and clear acceptance criteria, which is why it is disproportionately where vendor agreement quality determines outcomes.
Procurement's strategic case rests on four things.
The organisational model varies enormously with size, and the model shapes what is possible.
A single procurement function owns supplier selection and contracting across the business. Advantages: aggregated volume, consistent terms, genuine spend visibility, specialist negotiating capability. Disadvantages: slower, and business units complain about bottlenecks — usually justifiably.
Business units buy independently. Faster and more responsive to local needs, at the cost of duplicated spend, inconsistent terms, and no aggregate leverage. Common in fast-growing companies that have not yet felt the pain.
The most common mature model. A central function sets policy, negotiates framework agreements, manages strategic categories and high-value contracts, while business units transact within those frameworks. Most organisations arrive here eventually, usually after a decentralised period produced a surprise.
In smaller organisations all of this may be one person, often sitting in finance, doing procurement alongside three other jobs. That is fine until spend crosses a threshold where the absence of dedicated attention starts costing more than the salary would.
Mature procurement organises spend into categories — logical groupings of similar goods or services with a shared supply market — and builds a strategy for each rather than treating every purchase as a one-off.
The classic analytical frame plots each category on two axes: how much you spend, and how risky or complex the supply market is. The resulting quadrants suggest different approaches. High-value, low-risk categories reward competitive tendering and aggressive negotiation. High-value, high-risk categories reward partnership, joint planning, and supply security over price. Low-value, low-risk categories should be automated and forgotten. Low-value, high-risk categories — the small spend that can stop your operation — deserve attention disproportionate to their cost.
The practical value of this framing is that it stops teams applying the same playbook everywhere. Running a full competitive tender on a £4,000 annual spend destroys more value in process cost than it could possibly save.
Procurement functions live and die by their metrics, and most measure the wrong things.
The procurement software market splits roughly into source-to-contract tools (sourcing events, supplier qualification, contract management) and procure-to-pay tools (requisitions, purchase orders, receipting, invoice matching). Large suites attempt both.
The honest assessment is that technology does two things well and one thing badly. It handles transaction volume excellently — routing approvals, matching invoices to orders, enforcing thresholds. It handles visibility well, provided the data going in is clean. What it handles badly is the contract itself: in most procurement stacks, the agreement is a PDF attachment. The commercial terms that took weeks to negotiate become unstructured text, and the obligations they create — renewal windows, price escalators, service credits, volume commitments — exist only in prose that no system can query. That is why so many organisations with expensive procurement platforms still miss auto-renewals.
Understanding the operational sequence is the prerequisite for fixing any of this, and the seven steps of the procurement process covers that mechanics in detail.
Purchasing is the transactional act of buying — raising an order, receiving goods, paying an invoice. Procurement is the broader function that surrounds it, covering need identification, specification, supplier sourcing and qualification, negotiation, contracting, delivery management, payment, and ongoing supplier relationship management. Purchasing is a component of procurement, roughly the middle third. Organisations that treat the two as synonymous typically have strong transaction processing and weak supplier strategy, because they have automated the easy part and left the valuable part unowned.
The primary split is direct versus indirect. Direct procurement buys inputs that go into the product — raw materials, components, packaging — and links directly to cost of goods sold. Indirect procurement buys everything needed to run the business but not embedded in the product: software, professional services, facilities, travel, marketing. Services procurement is increasingly treated separately because services cannot be inspected on delivery and depend far more on scope definition and acceptance criteria. Public sector procurement operates under distinct statutory rules governing competition, transparency, and award challenge.
Day to day: developing category strategies, running sourcing events, qualifying and onboarding suppliers, negotiating commercial and legal terms, managing the contract portfolio, monitoring supplier performance, tracking renewals and expiries, ensuring compliance with policy and regulation, and reporting on savings and spend. In smaller organisations these responsibilities are distributed across finance, operations, and whoever needs the item. The work is roughly evenly split between finding better deals and preventing worse ones.
Spend under management is the share of total third-party spend that flows through governed procurement processes — negotiated contracts, approved suppliers, proper competitive process. It is one of the more honest indicators of procurement maturity because it exposes the gap between what the function is credited with and what it actually controls. Organisations frequently discover their figure is far lower than assumed once long-tail indirect spend, departmental credit card purchases, and auto-renewing subscriptions are counted.
Through supplier qualification before engagement, contractual protections such as indemnities and liability allocation, ongoing monitoring of supplier financial health and performance, deliberate management of single-source dependencies, and maintaining visibility of which suppliers are critical to which operations. The contractual layer is often the weakest link — not because terms are badly negotiated, but because the obligations they create are never tracked after signature, so the protections exist on paper and are never invoked.
Not necessarily a dedicated function, but they need the discipline. A useful trigger point is when nobody can answer, within a day, what the company spends with its top twenty suppliers and when each of those agreements renews. At that point the cost of not knowing has exceeded the cost of someone owning it. Early-stage discipline is usually cheap: a single spend register, standard terms for common purchase types, and a tracked list of renewal dates.
HERO gives procurement teams contracts that stay structured after signing. Payment terms, renewal windows, escalation clauses, service levels, and volume commitments remain addressable rather than flattening into a PDF nobody can query — so a question like "which agreements auto-renew in the next ninety days" is a lookup, not a reading exercise. Book a demo and bring your messiest supplier agreement.