How companies reduce indirect costs

What are indirect costs?

Direct costs relate to what the company sells or produces: materials, components, inputs and production-related services.

Indirect costs are the external costs that keep the business running. Transport, energy, waste, cleaning, telecom, software, packaging, insurance, vehicles and service contracts are typical examples.

Individually they are rarely strategic. Taken together they often represent a significant share of the external cost base.

Why are they difficult to manage?

The difficulty is rarely that the costs are unknown. It is that accountability is dispersed.

• Many internal requisitioners make small decisions that each look insignificant.
• Accountability is decentralised and differs between units and countries.
• Finance sees the invoice, but not always the actual usage behind it.
• Procurement does not always own the category, particularly outside the core spend.
• Supplier agreements can remain in place for years and renew without active review.
• A saving on paper is not the same as a realised financial effect.

ERA Group's whitepaper on the CFO/CPO partnership describes how a lack of spend visibility makes target setting and monitoring unreliable: without an accurate picture of external spend, any arrangement between finance and procurement rests on flawed information.

A practical method in seven steps

1. Build visibility of the cost base

Start simply: what are the largest external cost categories, what do they cost annually, how many suppliers are used, and when was the arrangement last reviewed?

A full procurement analysis is rarely needed to see where the question is large enough to deserve attention.

2. Make clear who owns each category

A category without a clear owner is rarely reassessed. Ownership needs to cover the cost, the usage and the supplier relationship.

This is also a central theme in ERA Group's CFO/CPO material: shared objectives and clear accountability between finance and procurement are a precondition for results being followed up at all.

3. Prioritise which categories are worth analysing

Not every category should be analysed. Prioritise on size, changes in the business, absence of an owner and how the market has developed since the agreement was signed.

When is an external cost analysis actually worth doing?

4. Gather the right information

For the prioritised categories you need contracts, invoices, volume data, specification, actual usage and service levels.

The information itself is often valuable. It exposes the differences between what is agreed, what is paid and what is actually used.

5. Compare the current arrangement with the market

Benchmarking is not only about finding a lower price. Its purpose is to create a fact-based basis for decision: are today's terms, specification and supplier arrangement reasonable relative to the market as it stands?

The conclusion may well be that the arrangement is already competitive. That is also a useful answer.

6. Negotiate and implement the change

Identified potential becomes an improvement only once it is implemented. That may mean renegotiation, a changed specification, changed usage or a different supplier arrangement.

Implementation requires an accountable owner, a timeline and a clear view of what will change in practice.

7. Verify that the improvement actually shows in the cost

The final step is follow-up against actual invoices and volumes. Agreed terms are not always applied automatically, and usage can change after implementation.

ERA Group's CFO/CPO material is explicit on this point: savings count only when they have a measurable effect on the bottom line, so reporting should be based on realised effect rather than identified potential. The material also stresses total cost of ownership as an evaluation principle.

Culture and staying power

ERA Group's whitepaper Creating a Culture of Cost Optimization argues that cost optimisation belongs in strategic planning rather than being run as an isolated savings exercise.

It also explains why broad short-term cuts — reducing all costs by a set percentage, for example — are rarely sustainable, and why understanding suppliers' industries improves the outcome. Maintaining momentum over time is, according to the material, a decisive factor.

ERA Group's Cost Management Barometer 2026, based on a survey of 1,000 senior decision-makers, in turn describes cost management as a strategic capability tied to margin, transformation and resilience rather than as a one-off exercise.

Four common mistakes

• Focusing only on price and overlooking specification, usage and scope.
• Negotiating without sufficient data on volumes, usage and actual terms.
• Having no clear owner for implementation once the contract is signed.
• Reporting a theoretical saving as though it had already been realised.

A reasonable first step

No extensive documentation is needed to decide whether the question is relevant. A first 15-minute Teams meeting is usually enough to go through which categories are largest, what has changed and where ownership is unclear.

The conclusion may equally be that no category is worth more time right now.