How to combat maverick spending through digital procurement
Maverick spending causes higher procurement and administrative costs, as well as a loss of control over spending and suppliers. In fact, it’s estimated that organisations lose on average 10-20% of their savings because of maverick spend. In addition, maverick spending makes achieving ESG goals harder and poses a major risk when it comes to legal standards. Here we look at what exactly maverick spending is, the reasons behind it, and how your organisation can tackle maverick spending through digital procurement.
What is maverick spending?
In an ideal world, organisations make contracts with suppliers and build long-term relationships that are profitable and beneficial to both sides. The aim of these contracts is to keep procurement costs down and to ensure a steady supply of products or services from trustworthy vendors. Maverick spending is a purchase that is made outside of these agreed contracts. It either deliberately ignores the predefined procurement processes or is caused by purchasing errors that are not in accordance with previously negotiated purchasing terms, leading to higher procurement costs and damaged supplier relationships.
Why is it important to control maverick spending?
In most organisations, indirect products and services account for up to 80% of purchase transactions and up to 40% of total spend. As a result, deviating purchasing behaviour with minor losses on each transaction quickly adds up. According to Aberdeen Strategy & Research, the pharmaceutical giant GSK loses between $80 and $120 million per year through non-regulatory purchases. This amounts to around 20-30% of unrealised cost savings. Aberdeen estimates that, across all industries, the average savings from compliant purchases is 22% compared to non-compliant purchases. And missing out on savings is just one of the reasons it’s important to control maverick spend. The negative effects of maverick spending can range from:
- Diminished quality control, as the procured goods haven’t been curated and are likely to be of inferior quality.
- Loss of trust with suppliers due to possible contract violations. There’s also the risk of regulatory non-compliance when you deal with unknown suppliers.
- Wasted time for the accounting team who has to balance the books as a result of maverick spending. It’s estimated that maverick spend alone accounts for 80% of administrative costs.
- Inaccurate budgeting, as you don’t know for sure if you’ve been spending within budget or not. This makes budget planning and saving more complicated.
What are the causes of maverick spending?
Before we outline some ways organisations can control maverick spending, it’s crucial to first understand why purchases are made outside agreed contracts. Maverick spending typically occurs because of six reasons:
In a bid to be more agile and to cut down on bureaucracy, some organisations implement a distributed procurement system where individual team members or departments have corporate cards which they can use to make purchases. While this might, in theory, simplify the procurement process, it can also lead to employees or departments making purchases that are already covered by existing contracts, of which they may not even be aware.
- Competitive maverick spending
In some cases, employees are aware that there is an existing contract covering an order they want to make. However, they still opt to purchase from a different supplier because the alternative is cheaper and they want to save the company money.
- Badly managed spend approval
For the aforementioned distributed procurement system to work, approvals need to be built in so the central procurement team can approve purchases by employees or departments. If this system is not in place, maverick spending skyrockets as individuals and teams within the organisation can make purchases wherever they like without any controls by the central procurement team.
- High indirect spend (typical for digital businesses)
For digital companies, there is a constantly changing list of requirements and employees may have to make purchases outside existing contracts – if these contracts even exist in the first place. In the ensuing chaos, it can be easy for maverick spending to continue unchecked for prolonged periods of time.
- Inefficient and time-consuming procurement processes
If employees or departments within your organisation realise that the official internal processes needed to make purchases take longer than they can wait, they will most likely find an easier, faster option.
- Poor supply documentation / Lack of awareness
If staff are unaware that a particular product or service they need is covered under an existing contract, they will quickly seek out alternatives.
How do you tackle maverick spending?
You need to start by asking yourself and your employees questions such as:
- Do you fully understand our procurement process?
- Is it time consuming or frustrating?
- Are we actually getting the best prices or the best service for our money?
- Is the digital procurement solution complicated?
- Do you need to run training sessions?
- Can you easily find what you need in procurement?
- Can you easily request something you cannot find?
On the basis of the answers to these questions, conduct a detailed spend analysis, educate your team, implement smarter procurement systems, create a process for special purchase needs, and build procurement education into your HR process. Taking the time to go through this process will go a long way to identifying who is responsible for the maverick spending in your organisation and what you can do to eliminate it.
Combatting maverick spend through digital procurement
According to the Chartered Institute of Procurement & Supply (CIPS), up to 80% of all invoices are generated from uncontrolled buying, even in large organisations with professional procurement departments. This explains why, increasingly, businesses are looking to implement digital procurement solutions as a way to control rampant maverick spending. Most digital procurement systems can easily be integrated with a variety of ERP systems, enabling spend and supplier data to be fed back and forth within the organisation, and giving finance and procurement teams a better overview of all spend data. By improving spend analysis through automation and digital handling of data and analytics, organisations have more control over their budgets. Researchers agree that a functioning digital procurement system not only leads to less maverick buying and more transparency in spending, but also results in considerable savings.
Maverick spending is a real challenge for organisations all over the world. If it isn’t detected and eliminated quickly, it can cause significant problems to the financial health of your business. Digital procurement ensures organisations identify maverick spending before it becomes a major loss.
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