Direct vs. Indirect Spend: Where Should Your Predictive Procurement Focus First?

For procurement teams, there’s never been more pressure to deliver cost savings. According to The Hackett Group, cost reduction is one of the top priorities influencing the 2026 procurement world, and leadership is expecting results.

That makes an already-pressing question more consequential than ever: where do you focus first? Direct or indirect spend?

Direct spend is higher stakes, with every optimized dollar flowing straight to your cost of goods sold. Meanwhile, indirect spend covers more ground but is harder to manage. Though it offers real savings opportunities, it’s often buried under fragmented data and decentralized purchasing.

If you try to tackle both at once, you may see slow progress that’s hard to justify internally. To build momentum fast, you’ll need to make a clear, data-driven decision about where to start. This guide helps you make the right call based on your unique business priorities.

Direct vs. Indirect Spend in Procurement: What’s the Difference?

To make a smart choice about where to start, you first need a clear picture of what you’re working with. Once you’re clear on what these two categories actually mean, your prioritization decision becomes a lot easier.

What is Direct Spend?

Direct spend is everything your organization buys that goes into the product or service you sell, from raw materials and components to packaging and manufacturing inputs. If it’s related to your final product, it falls into this category.

If you’re an auto manufacturer, your direct spend is steel and semiconductors. If you’re a food and beverage company, it’s ingredients and bottles. This category is usually higher volume, easily managed, and closely related to your cost of goods sold.

What is Indirect Spend?

Indirect spend is everything else related to your business’s expenses—the things that keep your business running, but aren’t part of your product. It could include IT services, office supplies, marketing agencies, and more.

Indirect spend tends to be more scattered across departments. Rather than sitting neatly within procurement, it’s owned by more people across the organization, making it harder to track consistently.

Why is the Distinction Important?

Direct and indirect spend don’t have much in common when it comes to business operations. Direct spend typically comes with cleaner data, clearer supplier relationships, and a more direct line to margin impact. Meanwhile, indirect spend is often fragmented, inconsistently categorized, and spread across the business.

This distinction changes everything about your data, savings potential, and ROI timeline. For example, when you optimize a direct spend category like raw materials, you’re usually working with structured data and defined supplier contracts. Importantly, you can more easily tie savings directly to margin impact.

When you go after something like facilities management or professional services, you’ll need to sort out where the spend is hiding before the analysis can even begin.

In both cases, there’s real opportunity, but the path getting there looks completely different.

Four Things To Consider Before You Decide

Now for the real question: which one should your team start with? Before you commit to a spend prioritization strategy, here are four practical considerations worth digging into.

How big is the opportunity?

Start by following the money. Which category represents your largest spend volume? Where would small cost savings be the most meaningful? Don’t focus on the biggest number. Just make sure your early efforts justify the investment and make stakeholders take notice.

How close is it to your margin?

Not all spend sits equally close to your bottom line. With direct spend, savings tend to show up in your margins quickly and clearly. Indirect savings are real too, but they can be harder to measure and slower to show meaningful results. So if margins are an immediate concern, consider starting with direct spend.

How complex is the category?

Some procurement spend categories are organized and easy to analyze. Others are a tangled mess of vendors, departments, and inconsistent records. The messier the category, the longer it takes before you can do anything useful with it. That doesn’t mean you should avoid it forever, but do factor it into your timing.

How quickly do you need to see results?

If your team needs to demonstrate value within a set timeframe, pick a starting point where results are actually achievable in that window. If your stakeholders expect results quickly, don’t start with something that’ll take 18 months to show ROI.

When To Prioritize Direct Spend Optimization

Sometimes the case for starting with direct spend is clear. If your organization is dealing with any of these factors, direct spend optimization probably shouldn’t wait.

• Margin pressure: Your costs are going up, but your prices aren’t. If leadership is looking for ways to save and buffer profitability, cutting direct spend is one of the fastest ways to get there.
• Strategic supplier leverage: You’re buying a lot from a small group of suppliers, but you’re not getting the best terms or pricing out of those relationships. In this case, optimizing direct spend can help you see where you’re leaving value on the table.
• Large material categories: When you’re buying raw materials or components at high volumes, there’s too much data and too many variables to optimize manually. Direct spend optimization can help you spot patterns and opportunities you might miss at scale.

When Indirect Spend Management Is the Better Starting Point

Indirect spend management rarely gets enough attention in most organizations. That means the savings are often there for the taking, waiting to be found. If any of these sound familiar, this is a great place to start.

• Fragmented spend: Different departments are buying from different vendors, often for the same things, with no one keeping track of the big picture. Fragmented spend leads to a lot of lost savings, which predictive tools are very good at finding.
• Tail spend: Hundreds of small purchases happening outside your normal procurement process don’t seem like a big deal on their own. But when you add them all up, the number is usually a lot bigger than anyone expected—and indirect spend optimization can bring that under control.
• Need quick wins: If your indirect spend has never had much procurement oversight, the savings are often obvious and easy to act on early. The wins may be smaller in dollar terms than direct spend, but they’re faster to find and visible enough to build procurement’s credibility.

See Where the Opportunity Is in Your Business

At the end of the day, you don’t need to choose between direct vs. indirect spend forever. You just need to figure out where to start.

To be successful, start with the category where your data is in good shape, your business needs are most pressing, and results are achievable in a reasonable timeframe.

If you’re not sure where that is yet, Arkestro can help. Schedule a strategy consultation today and discover where predictive procurement can move the needle fastest for your business.