Non-Addressable Spend

Non-addressable spend refers to procurement expenditures that cannot be influenced or optimized through standard procurement processes. These are costs that procurement has no practical ability to negotiate, consolidate, or reduce through competitive sourcing, either because of regulatory requirements, contractual lock-in, or the nature of the expense.

Examples of Non-Addressable Spend

• Government fees and taxes: regulatory fees, licenses, permits, duties
• Utilities under regulated rates: electricity, water where rates are fixed by regulators
• Insurance premiums: when mandated by regulations with limited provider choice
• Sole-source mandated purchases: parts only available from one OEM
• Employee benefits: health insurance, pension contributions set by policy
• Intercompany transfers: costs between divisions of the same organization
• Litigation and legal settlements: court-ordered payments

Non-Addressable vs. Addressable Spend

Addressable spend is everything procurement CAN influence through negotiation, competitive bidding, supplier consolidation, or demand management. It is the spend that procurement targets for savings. Non-addressable spend is what is left - the costs that exist regardless of procurement strategy.

Most organizations find that 60-80% of their total spend is addressable. The remaining 20-40% is non-addressable. However, the boundary between addressable and non-addressable is not fixed - creative procurement teams often find ways to influence spend that was previously considered non-addressable.

Why the Distinction Matters

• Savings targets: procurement teams should set savings targets against addressable spend, not total spend. A 5% savings target on $10M total spend sounds reasonable, but if $4M is non-addressable, the real target is 8.3% on $6M addressable spend.
• Performance measurement: 'spend under management' metrics should exclude non-addressable spend to accurately reflect procurement's impact
• Resource allocation: procurement effort should focus on addressable categories where competitive sourcing can drive value

Challenging Non-Addressable Classifications

Regularly review what is classified as non-addressable. Spend that was non-addressable last year may be addressable today due to market changes, deregulation, contract expiry, or new supplier entrants. A common procurement improvement initiative is to reclassify 5-10% of non-addressable spend as addressable each year.