Struggling to control maverick spend in your Company?
Controlling maverick Spend is challenging for finance professionals and especially in a growing company.
if you are struggling with this problem, you are not alone. Read on..
In this post, we will cover
Before we get into controlling maverick spending, let’s look at why maverick spending is a problem for many procurement organizations
Reduced cost savings:
Maverick spend leads to cost savings leakage and prevents sourcing teams to fully realize the cost savings associated with a negotiated contract.
If your employees are purchasing from unauthorized vendors, it could lead to additional risk.
Consider the impact of an uncertified spare part in a piece of machinery. It could lead to breakdowns, voided manufacturer warranty, etc.
Increased process cost:
This is not always true, but maverick Spend could lead to additional work for purchasing and the Accounts Payable AP team.
Think about the additional process cost for setting up and paying unapproved vendors.
Maverick spend (a.k.a rogue spend) is defined as the external vendor spend which doesn’t follow the defined purchasing policies.
Let’s take an example, Your sourcing team did an awesome job of negotiating a 35% off the office supplies contract with your office supplies vendor.
That contract, of course, has some discounts built based on the volume of the purchase.
Now instead of buying from the selected vendor, your employees purchase office supplies from a different vendor and generally at a higher price.
Since your employees are not purchasing from preferred vendors, that generally leads to less volume with the preferred vendor and hence lost cost savings.
This is one of many examples of maverick spend and there are many more.
Another example could be that the spend doesn’t follow the correct process.
You have set up a PO process for all material purchases, however, your employees tend to use their corporate credit cards for such purchases.
You might have required Purchase orders because that helps you aggregate spend and provides better visibility.
This behavior deviates from the setup process and hence this is an example of maverick spend.
Here are the top 5 common reasons for maverick Spend in any organization:
Even though you have well-defined policies, some employees would love to negotiate their own contracts and pricing without procurement involvement.
This might be happening due to lack of understanding of the process or the individual doesn’t care about the defined sourcing process.
Let’s look at some common reasons for maverick Spend.
Decentralization is a common root cause of maverick Spend.
This could be decentralized teams who don’t collaborate with each other or you have decentralized operations and each location manages their own purchasing.
It is also common when you have a corporate and a business unit structure. For example, the corporate team might have negotiated a contract for professionals services but the individual locations or different business units may or may not use that contract.
Another reason for maverick Spend could be the lack of tighter purchasing controls.
Let’s break this into two subprocesses
Lack of a centralized system
If you don’t have a centralized purchasing system, then it is very difficult to route spend to preferred vendors and having some sort of control over the purchasing process.
The lack of centralized systems is very common in larger companies with inorganic growth. In other words, they are a combination of multiple companies acquired over a period of time.
Each company has its own purchasing systems and that could lead to challenges implementing a common purchasing policy.
Lack of a centralized process for purchase
If your organization doesn’t have a centralized purchasing process, that could easily lead to maverick Spend.
It could mean that purchasing teams at different locations are using different processes and that leads to off process and off-contract spend with different vendors.
In absence of a standardized process, each location or business unit is free to set up their own process.
Even if you have a standardized process, it is important that is implemented consistently across different business units or locations.
Lack of product standardization could also lead to maverick Spend.
Let’s take a simple example of IT Hardware.
Let’s say you have a contract with CDW for all your hardware purchases. So assume that there is no standard for a common commodity like Laptop.
That could lead to people at different locations purchasing a laptop model not carried by CDW and hence leading to maverick Spend.
Now, this is a very simple example to make the case, most of the IT departments would already have standardized requirements across the board.
However, this is a very common problem with MRO products or high volume, low spend items like screws, gloves, etc.
If you are a manufacturing company, most of your Spend is direct with the exception of MRO supplies and other supplies which are required to run the business.
Direct spend is very well controlled and hence limited maverick spend opportunity.
Let’s now take the case of a software company, almost all the Spend is Indirect Spend.
Since the Indirect spend is spread across multiple categories, it is hard to implement standardized processes and control and that could lead to higher maverick spend.
This is not always true, but higher Indirect Spend, in general, would lead to higher maverick Spend.
In some cases, your business itself lends to maverick Spend. Let me explain with an example
Let’s assume that you are in the business of installing telecommunication systems/phones for businesses. Your supply chain group diligently manages all the parts required for installation and ensures that the technicians are carrying those parts with them all the time. For example, phones, cables, installation equipment, supplies, etc.
Now since each installation is unique (different customer premise), your technicians need to purchase a material/part to service the customer. That is a genuine business need but since you can’t predict accurately what they need all the time, technicians can purchase the parts from the nearest local store.
This is a genuine business need, so not sure whether you would agree with calling it maverick spend but the spend is not with your preferred vendor.
Before we get into controlling maverick Spend, you need to first understand the degree of this problem. Also, it is important to understand the root cause so that you can recommend an appropriate solution to the problem. Let’s look at step by step how to do it.
The first step is to conduct a spend analysis exercise to identify the maverick spend.
Fixing the maverick spend problem needs effort and buy-in from executives. So it is important to correctly estimate the cost of maverick Spend.
To estimate the cost of maverick spend, start with the top spend categories.
Let’s take an example:
Let say you spend a total of $5M on MRO on an annual basis. Out of $5 M $500K spend is with a non-preferred vendor or in other words, maverick spend.
For the sake of simplicity, let’s assume that the cost of the non-preferred vendor is 10% higher than your preferred vendor. To get actual cost difference, please conduct a part purchase price variance exercise.
So 10% of $500K is $50K which is the cost of maverick spend in this case. Depending on your spend this number could be significant or insignificant.
The maverick spend identification is not complete without forecasting cost savings lost over the next few years. This paints a better picture on cost savings leakage and frankly gets you the support you need to do something about the maverick spend.
Here’s how to do it
1. Create a table where you list the spend by category, list only those categories where you have identified maverick spend.
2. Let’s take the above MRO example, in that case, your table should look like
3. Now do this exercise for all the categories.
4. Now, in this case, I have assumed that the annual demand and the price remain steady. This might not be the case for you.
So please review the demand and cost and adjust the annual numbers accordingly.
At the end of this, you have a reasonably accurate forecast of the cost of not doing anything with maverick spend.
With your accurate forecast, you are now ready to tackle the maverick spend issue. Here are a couple of techniques that you can use
I might sound like a broken record, but getting executive buy-in is crucial. It gives you the tailwind you need to get any adoption on this program.
So key people who should be made aware of this problem
The chief financial officer, of course, cares about cost savings. Since you have quantified the cost of maverick Spend, it is easy to make a case for fixing it.
There are various ways to approach the problem, you might want to automate the process through purchasing automation or you might want to have more manual checks to ensure employees are not purchasing from non-preferred vendors.
Whatever the business case is, having quantified numbers will get you the support for fixing the maverick spend.
The other key stakeholders might be the Vice president of each department. They are not involved in the day-to-day purchasing but they should be aware of the situation and they should be willing to support you.
If they communicate with their staff about the need to fix the maverick spend, you have a better chance of getting adopted.
Sometimes employees need to be reminded about the role of procurement.
There are times your employees will take the matter into their own hands and sign contracts with a new vendor when you already have a preferred rate with an existing vendor.
The common excuse is that they didn’t know that we have to include procurement.
So try to get ahead of this problem by constantly communicating the role of procurement in the organization.
There are different ways to do it.
Almost all companies have a company intranet page where they publish news about company and employee resources.
You can create a section on “How to purchase” and use that as an avenue to communicate the role of procurement in the organization.
Work with HR:
You can work with your HR department to include a section about purchasing in the employee handbook or during the induction process. This would be a good way to introduce new employees to the purchasing departments.
If your HR department has an onboarding program, then you could have a procurement representative present during on-boarding
Road Shows: Another common practice is to conduct roadshows with different departments on the role of procurement and the value of consolidated volume leverage.
Individual presentations: Another good idea to communicate with your stakeholder is through presentations with individual departments.
Most of the department heads have their staff meeting, you can easily request 20 – 30 minutes in the staff meeting to talk about the role of procurement.
This affords you the opportunity to answer any questions and hopefully help to increase engagement and control maverick spend.
In most organizations, a purchase order needs to be approved before the PO can be sent to the supplier.
Mandating purchase orders for all material orders will ensure that purchase is reviewed by purchasing before the order can be sent or the spend is committed.
During the review process, the purchasing team can reject any spending which doesn’t match your defined purchasing guidelines.
Purchasing team can then route your employees to the preferred vendors.
Purchase orders also ensure that the vendors are aware of your standard terms. The vendors would receive your standard terms and if they don’t agree with it, they have all rights to decline the order.
Before you mandate purchase orders, ensure that you have appropriate staff to review the purchase orders. All these things can be automated through a simple purchase order management software and we will discuss that next.
We sell purchasing automation software so we of course talk about the benefits of purchasing automation. But a purchase order management system can definitely help you bring your maverick spend under control, here are few ways the tool can achieve this goal
a ) By automating the purchase order approval process:
This ensures that all purchase orders go through required approvals. Since you can automate the approval process, it reduces the load on your purchasing team and helps you to improve your team productivity.
On top of that, you can automate certain approvals so that you don’t have to review and approve every purchase order.
For example, you can set up a rule so that any order which is less than $1,000 and with a preferred vendor doesn’t need to be reviewed by the procurement department until it has approval from the appropriate person in the business.
Building catalogs is another way to control maverick Spend, the more catalogs you have, the easier it is for your employees to find the product or service they are looking for.
Since they can find most of the items in the catalog, it is unlikely that they will try to find items from other vendors.
c) Define a process for purchase escalation/ Emergency needs:
A purchasing system also allows you to set up a process for purchase escalation. There are always cases where you need a part urgently. This is a common cause for maverick Spend.
Employees need to run operations and they need a part now and since your preferred vendor takes 2 to 3 days to deliver, they will go to a local store and purchase that part.
Having a system can help them mark an item as urgent and that allows the purchasing person to check if the same part is available from another preferred vendor.
Another thing you can do is to work with suppliers and see if they can keep local stock for some emergency items. You definitely don’t want to carry excess inventory.
Your supplier might be able to carry this at a close location especially when that supplier has multiple customers in the same area.
There is always an inherent risk that comes with purchasing parts from non-preferred vendors.
For example, You normally purchase a repair part from a certain manufacturer through a distributor. That widget is certified by your QA department to meet the requirements.
Let’s say your employee didn’t purchase that part from your preferred suppliers and used an equivalent part which caused damage to the machine. That is not just a cost issue but also a huge risk to the production schedule.
Let’s take another example, your facilities manager signed up with a contractor to repair the broken glass at your facilities. Since she did this on her own, she didn’t see the need to involve procurement and didn’t work through your preferred contractor.
The new contractor land up injuring one of your customers in the process of replacing the glass.
Who bears the burden of liability?
You guessed it right, it will be your company and not the contractor. You can sue the vendor for damages.
These are some examples but the point I am trying to make is that the risk of maverick Spend is not just limited to missed cost savings but also there is a bigger risk of liability which your company is obligated in case of a disastrous event.
Communicating this risk to your stakeholders will help drive better engagement but also help reduce maverick spending.
There are obviously many benefits of controlling maverick Spend. There are also multiple ways to control maverick Spend.
However, the strategy for controlling maverick spend depends on a good understanding of what is causing the maverick spend in the first place and then designing a solution to solve it.
What are you doing in your organization to control maverick spending?