Why Does Maverick Spend Keep Happening?
Maverick spend is one of Procurement’s most easily recognizable enemies simply because it feels so sinister. When a Procurement team has gone through the trouble of going out to bid and negotiating with vendors only for internal purchasers to go rogue, it can feel particularly demoralizing.
Worse still is the fact that maverick spend has a very real effect on businesses. On a recent webinar with SpendHQ, Ardent Partners’ founder Andrew Bartolini revealed that for every dollar of non-compliant spend, costs increase by 12-18 cents. One or two instances of rogue spend might not make a significant difference to a business’ bottom line, but non-compliance rarely involves only a handful of purchases. The results add up over time, making non-compliance a serious issue.
In a procurement world that’s becoming increasingly digital, you might be tempted to think that non-compliant spend is on its way out. Unfortunately, maverick buying is still alive and well for a few key reasons. But as always, knowledge is power. By understanding why rogue spend is still a problem, you can position yourself to take the upper hand in the ongoing battle against it.
What is maverick spend
Maverick spend, also known as non-compliance, savings leakage, and rogue spending, is spending that takes place outside of approved channels, purchasing programs, and vendor contracts.
Types of maverick spend
At a basic level, maverick spend is purchasing that takes place outside of approved contracts and purchasing programs. However, there are important nuances that change how procurement leaders should think about and respond to different instances of non-compliance.
For instance, spend is uncontrolled and unknown when it involves vendors you have never purchased from before. Teams can watch for uncontrolled and unknown spend by monitoring their supplier lists for new vendors. Keeping and eye on this information allows Procurement to actively manage the supply base and redirect maverick spending as soon as it appears instead of addressing it once it has an impact on spend management.
On the other hand, some maverick spend is known but uncontrolled, meaning it’s continued spend with a vendor that falls outside approved purchasing programs. This is usually a sign that you need to remind someone about which vendors are approved and which aren’t. Thankfully, it’s an easy metric to track and address simply by monitoring compliance.
Some maverick spend also comes from unapproved goods and services. This could include buying that falls out of scope, technical specification, or even approved use of funds. While it’s a subtle issue that can more easily hide in your spend data, it will usually appear in one of your subcategory trends, especially if your data is well-categorized.
Finally, some maverick spend is simply an issue of incorrect pricing. Purchase price variance (PPV) occurs when different business units pay different prices for the same good or service. Tracking this metric keeps costs from inflating artificially, ensures that your suppliers uphold their end of contracts, and enforces approved purchasing channels. Like unapproved goods and services, you’ll need to make sure your data is well-categorized and granular to track this type of non-compliance.
Reason 1: Confusing and inefficient procurement processes
Often, procurement leaders kick off digital transformation, sign contracts with suppliers, and celebrate the new, smooth processes they’ve created. Unfortunately, these new processes can introduce complexity into other departments’ daily operations. Even if the new processes create improvements, there will still be a transition period before they produce positive results.
As a result, the affected internal teams may find that their jobs have suddenly become more difficult or tedious. Purchasing activities that used to take a few moments or clicks now take twice as long. In other cases, the new preferred supplier may be difficult to deal with or offer a lower quality product or service that slows operations down. In these instances, purchasers may feel that spending outside of contract is a strategic decision to increase output or raise the quality of work.
Reason 2: One-time purchases
One purchase may not matter much to an individual buyer, but one-off purchases matter to an organization for two reasons. First, what seems like an isolated business need is almost always shared in at least one other department or location.
Imagine that two purchasers in different offices buy something outside of contract because they have an urgent need. Both may assume that they’re dealing with an isolated situation, but they’ve both added to non-compliant spend. Now multiply this effect by an order of magnitude for a global company, and you’re dealing with a staggering amount of savings leakage.
Secondly, purchases across a large organization simply add up. If hundreds or thousands of managers with purchasing power buy outside of contract even once each, their rogue spend will represent thousands of dollars by the end of the year. Simply put, there’s no such thing as a single purchase in a mid-sized organization.
Reason 3: Overlapping contracts
In the world of digital procurement, there are several platforms that help teams manage their contracts. This in and of itself is the problem—multiple contract tools mean that critical information becomes spread out or siloed. As a result, a company could have two overlapping contracts for the same good or service.
Technically, this isn’t maverick spend. It’s also not inherently bad, because companies should have good relationships with several vendors to mitigate supply chain risk. However, overlapping contracts can drive up prices because the contracted vendors are likely charging different prices per unit. Any buyers who do business with the more expensive supplier are contributing to savings leakage even though they’re trying to be compliant.
Additionally, overlapping contracts can impact the benefits of having a preferred supplier in the first place. By splitting your spend between two preferred vendors, you may be reducing the per-unit discount you could get from one of the suppliers. But because contracts are often housed in multiple systems, many businesses lose significant money while believing that they have their spend under management.
Reason 4: Lack of stakeholder buy-in
Unlike individual buyers or purchasing managers, executive and director-level stakeholders can usually decide which purchases are business-critical, even if they aren’t within an established contract. In many ways, this is positive. It allows them to drive the business forward without waiting through a lengthy approval process.
However, if organizational leaders aren’t bought into Procurement’s initiatives, this authority can cause problems. Without goal and priority alignment, all the contracts in the world won’t mean much. High-ranking buyers can often simply disregard them.
Executive purchasing decisions and initiatives often create the most spend, but the consequences of poor buy-in from stakeholders extend beyond savings leakage. If Procurement doesn’t work closely with stakeholders, then ESG goals, diversity initiatives, and other Procurement projects can never hope to fully take root.
At core, this is typically an issue with communication. However, it can also stem from Procurement’s reputation as the “you can’t buy that department.” Therefore, it’s critical procurement leaders to make genuine efforts to connect with and cultivate relations with other executives. When someone knows you and your priorities, they’re much more likely to engage with the projects you’re championing.
Reason 5: No organizational accountability
Most rogue spend isn’t intentional, but some of it is. If buyers know that no one is going to monitor who they’re spending with, then they’re more likely to buy from the vendors they want to work with, especially if they don’t like the contracted vendor.
This is a larger problem in less mature organizations that aren’t using P2P suites. But even within digitally enabled businesses that are centralized or center-led, individual buyers are still capable of non-compliant buying. Many companies have disparate ERP systems and aggregating purchase orders is still challenging. As a result, many buyers knowingly buy outside of contract simply because they can. Until they know that rogue spend invites attention, they’re unlikely to stop.
Thankfully, setting and communicating policies that enforce compliance make this a relatively easy problem to solve. However, you need holistic spend visibility before these processes will mean anything. Until you can systematically identify who’s spending outside of contract, correcting the issue is going to be difficult.
Best practices for procurement policy enforcement
Now that you understand the reasons why it happens and the forms it can take, here are some general steps you can take to reduce maverick spend and keep it under control.
Identifying maverick spend
If you want to manage maverick spend, you need a way to find it consistently and reliably. That requires spend intelligence that is comprehensive, well-categorized, and updated at regular intervals. Your solution should also
- List any spend with vendors you haven’t identified as contracted or preferred
- Provide insights on where maverick spending is having the largest impact
- Compare non-compliance at the enterprise, category, and sub-category levels.
Analyzing the causes of maverick spend
Maverick spend can have a variety of causes, and raw data alone will rarely be enough to diagnose them. Monitor your data closely to find out where non-compliance is concentrated and who’s responsible. Then work with business units and stakeholders to understand where the disconnect is coming from. A simple conversation can do a lot to help you understand the factors motivating maverick buying.
Comprehensive review of procurement processes
Talking to a guilty party might reveal that purchasing processes are convoluted or broken. If that’s the case, then you have a great opportunity to fix them. Work with that stakeholder to review the processes and come to a solution together. Including them in the fix can build trust, secure their compliance, and even create a champion for broader compliance across the organization.
Bridging gaps in procurement processes
Sometimes your processes work well, but they aren’t comprehensive. Taking a 10,000 foot view of purchasing SOPs will reveal the gaps. Again, it’s a good idea to work with relevant stakeholders as you fill these gaps.
Enforcing managerial accountability for spending
Getting everyone on board with your purchasing programs is great in theory, but people can be stubborn. Sometimes managerial accountability is the most reliable solution to non-compliance. With a spend intelligence solution, this is as easy as sending a customized, focused report to the appropriate manager and reporting maverick spend across the business on a regular basis.
Beyond visibility: Doing something about maverick spend
In conclusion, there are several reasons that maverick spend continues to plague today’s procurement organizations. However, continuing to address it is a core procurement duty. According to Ardent Partners, the Procurement Departments that have the biggest bottom line impact have more than 73% of their spend under contract compliance. Everyone else averages just a little over 60%. Clearly, compliance has a significant impact.
However, simply seeing rogue spend and reacting when it raises its head won’t do much to stop it. To truly address non-compliance, you’ll need a strategic approach that goes beyond visibility. By implementing a system built around cross-departmental visibility, holistic reporting, and Procurement-focused project management, you can begin weeding out rogue spend.
First, cross-departmental visibility opens lines of communication and sustains stakeholder buy-in. By giving key partners like Finance and IT a window into Procurement’s projects, results, and areas of focus, you can ensure you’re on the same page with leaders organization-wide. When decision-makers can see what your department is working towards, they’re more likely to invest in your initiatives.
Secondly, holistic reporting allows Procurement to track savings and all other relevant metrics in one place. This further improves communication, helps Procurement make data-driven decisions, and allows leaders to clearly see Procurement’s impact on the business.
Finally, Procurement-focused project management lets you see opportunities, plan initiatives, and then execute on them. Without it, combatting non-compliance is like playing Whack-a-Mole. You’ll spend your time watching for and reacting to problems instead of achieving net improvements.
Thankfully, building a system around these three pillars isn’t as hard as it seems. Our unified platforms are already built around them. Spend Intelligence combines an organization’s complete spend data to give Procurement a slice-and-dice view of their spend profile. Procurement Performance Management (PPM) then gives them a Procurement-focused project management platform for identifying opportunities, executing on projects, and communicating success. The combined result is a system built for efficiently conquering any Procurement project.
Together, these two platforms have revolutionized the way hundreds of businesses approach maverick spend, ESG, supplier relationships, and daily procurement operations. But don’t just take our word for it; see our solutions in action for yourself. Click below now to schedule a live demo and discover how your Procurement Department can instantly begin operating on a whole new level.
