How can maverick spend hurt your company?

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MaverickSpend_150.jpgRogue purchasing can cost you plenty. PurchaseControl unpacks the implications of maverick spend and how you can tackle it.

Deep in the heart of 19th-century Texas, a rancher named Samuel A. Maverick gained an unusual sort of notoriety by failing to brand his cattle. Whether by design or indifference, the independent-minded rancher went his own way, defying the standards of the time - and, eventually, his name became synonymous with breaking convention. Today, being a maverick can earn a person accolades in the political or public arenas. But maverick spend, i.e. unmanaged, uncontrolled spend inside an organisation, can quickly lead even the most successful business to ruin.

Maverick spend can be intentional, such as when individuals simply refuse to follow the proper procurement process. It can also be accidental, owing to miscommunication in the supply chain, poorly-structured workflows or a lack of an effective procure-to-pay (P2P) programme. Whatever the reason, maverick spend can harm a business by creating unauthorised expenditures, producing logjams in workflows and draining resources.

Understanding maverick spend is the first step to identifying and eliminating it. With the right techniques and tools, you can rein in the strays, and improve your company's efficiency and bottom line.

How does maverick spend occur?
You might know it as rogue spending, tail spend or "who on earth is buying all of these office supplies?". But whatever you call it, maverick spend, which can account for up to 80% of spend in companies without a centralised purchase-to-pay procurement process, is a headache waiting to happen.

The root causes of this behaviour include:
- "It is just a pencil/printer/laptop." Without effective communication of best practice and proper supplier management, employees might dismiss modest or everyday purchases as too miniscule to have any serious effect on the bottom line. So instead of following procedure, they engage in maverick buying.
- "Management only cares about the big buys." If management is constantly focussing all of their attention on purchases above a certain value threshold, employees might see anything under that line as free from the constraints of the approval process. This is especially true if corporate policy permits a percentage of spend to remain unmanaged or, even worse, management believes unmanaged spend is inevitable.
- "Do I really have to fill out a form for my toner?" It is all too easy for employees to rely on their own devices if a company does not have a formal P2P process in place for smaller transactions − or if the current process is overly-complicated, time-consuming or does not integrate with the system for large purchases.
- "Our contracts are a mess." Without well-established policies and centralised procurement, a company might have overlapping or redundant contracts on any number of items.
- "We are bailing water in a bottomless canoe." If maverick buying already has a firm grip at a company, you might have so many vendors and supply chain challenges that management sees the cure (fixing the problem) as more costly than the disease. This has the unintended effect of letting the problem grow even worse as time marches on.

Death by inches: the effect of maverick spend
Costing time, money and manpower, every maverick purchase pushes a company closer to the brink. Without total spend visibility, you cannot perform effective ongoing spend analysis. Company money is wasted, data management is compromised and the risk of non-compliance issues balloons.

Consider the following effects of maverick spend:
- Excess vendors. Too many cooks spoil the broth, and too many vendors bring costly redundancies and contract issues to an already-crowded table.
- Inferior goods at higher prices. Maverick buyers are unlikely to use preferred suppliers and, as a result, the goods and services they receive simply will not match the approved suppliers' timeliness, quality, price, efficiency or customer support.
- Contract crises. When suppliers are unmanaged, it is all too easy for contracts to conflict, exposing an organisation to compliance risks.
- Transaction overload. Unmonitored, invisible, rogue spend creates a high volume of unnecessary transactions and generates additional processing fees.
- Wasted work hours. When procurement professionals are putting out fires and chasing down transactions or suppliers, they are not planning or building value for their company.
- Lost value. Beyond the monetary costs that come with contract conflicts, overtime and processing fees, maverick spend also reduces efficiency, hampers financial planning and creates conflict. Supplier relationships and interdepartmental co-operation can both be damaged in serious ways.

How to combat and eliminate maverick spend
It might feel inevitable, but you can defeat unmanaged spend with proper policies, planning and procurement processes. Here's what you can do:

1. Perform a spend analysis
This may seem impossible. And it will likely be painful and possibly costly. But without a clear picture of both direct and indirect spend at all price levels, you will not be able to identify the scope of the problem. Once your procurement department performs a thorough spend analysis, you can take the next steps.

2. Get everyone − yes, everyone! − on board
Even with solid data, your procurement department will be bailing that same leaky canoe if you cannot get full support from your internal stakeholders. Everyone needs to be on the same page, starting with the executive leadership, or maverick spend will continue to eat away at the bottom line. Take the time to identify the stakeholders at all levels. Engage them, and explain how both they and the company will benefit from more effective procurement. Communicate expectations clearly, address concerns and provide frequent updates, and you will be on your way to a smooth transition.

3. Deploy e-procurement software
Everything from P2P processes, to sourcing initiatives, to supplier management, is easier when an organisation has a centralised solution for managing all aspects of procurement. The best procurement software integrates with your enterprise resource planning (ERP) package to create a comprehensive solution and removes workflow roadblocks, redundancies and errors. You will be able to manage spend and procurement planning while simultaneously supporting the larger goals of the business − and a one-stop, user-friendly solution whenever you need an audit trail.

4. Centralise contract management
Giving your procurement professionals full access to all of your contracts is essential to spend management. With every contract under their constant supervision, your team can easily find and eliminate overlapping, conflicting or obsolete terms. And by managing your contracts through e-procurement software, monitoring transactions for more effective forecasting is much easier for everyone.

5. Establish a purchasing threshold
Using spend analysis data, set a purchasing threshold. Assign purchase cards (also known as p-cards) and institute a policy that any purchase made for less than the threshold amount must be made with p-cards. In addition to simplifying tracking, p-cards also eliminate the need for purchase orders on items below the threshold. You will save on labour and your procurement team will be able to focus on larger priorities.

6. Create an e-catalogue for preferred suppliers
Corral your lower-value purchases into an e-catalogue for your staff to use, limiting selections to preferred suppliers. As time passes, you will be able to account for both routine and one-off buys, and ensure that they are managed as opposed to maverick.

7. Assign roles with care
One of the most powerful and effective ways to reduce maverick spend is by limiting the number of people who can make purchases. Fewer employees authorised to make purchases means fewer headaches at every step of the P2P process. Setting roles in your procurement software dovetails neatly with your approval system to prevent unauthorised use of both p-cards and purchase orders.

Eliminate maverick spend and boost your bottom line
Going your own way can be an adventure, but it is a perilous path for procurement. Invest the time and effort to chase down your maverick spend, and bring your stray spenders into the fold. You will cut costs, improve accountability and help keep your business riding high.

PurchaseControl

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