Is your company losing money due to unauthorized spending outside of your procurement process? Are your team members hesitant to make purchase orders because of the complexity of the system? Then, the possibility of financial risks caused by unaccounted maverick spending may exist in your organization. According to the Chartered Institute of Procurement & Supply (CIPS) study, maverick spending accounts for up to 80% of all invoices in many organizations. If this continues, several businesses may experience a loss of revenue, and it will become increasingly difficult to control the procure-to-pay (P2P) cycle. Moreover, the maverick spending may also hinder progress towards ESG targets and create a significant risk in terms of legal compliance. Yet, this does not have to be the case! There are some ways that can help minimize financial risks and control an organization’s maverick spending.
Here, in this blog we will explore:
- What is maverick spending?
- Types of maverick spend.
- What are the reasons behind maverick spending?
- How maverick spending affects your business?
- Top 5 tips to help identify and control maverick spending.
What is maverick spending?
Purchases made outside of agreed-upon contracts are referred to as maverick spending. Such spending often disregards established procurement processes and can prove costly for organizations. It also results in businesses losing out on discounts and supplier credibility in addition to damaging supplier relationships due to unethical business activities.
For instance, Maverick spending might occur when an individual worker purchases without seeking consent from their management or when a department incurs expenses that exceeds the allocated budget.
Types of maverick spend
Maverick spending falls into the following three primary categories:
Maverick spending that is uncontrolled and unknown
An invoice from an unknown supplier is referred to as uncontrolled and unknown maverick spending. Also, there isn’t any prior experience working with those suppliers, nor there is a contract to verify their services.
Semi-known & semi-controlled maverick spending
This might occur, for instance when a supplier with whom you may have previously dealt, with submits an incomplete invoice. The invoice might be backed by a contract, but the contract may not be comprehensive, or the invoice may not be clear about what was requested and whether it was approved or not.
Known and semi-controlled manner
It often originates from an established contract and a vendor that has been approved. Yet, key information is missing from the contract. If employees do not have standard operating procedures (SOPs) to follow or choose not to adhere to existing ones, it can lead to a semi-controlled or known maverick spending.
What are the reasons behind maverick spending?
In a survey by Hackett group, one of the leading reasons for maverick purchases for 75% of procurement specialists, is a lack of self-service or guided buying tools. However, maverick spending is influenced by a variety of other factors, amongst them some of the common ones are:
Most procurement policies are decentralized and ad hoc, which forces supervisors and managers to exert their decisions and “twist” the standards and guidelines as required. And when that takes place, repeated out-of-policy spending normalizes itself.
Paper-based procurement methods
Organizations may be depending excessively on paper-based procurement techniques to make purchases and hire services, which is another common cause for maverick spending. With paper-based purchasing systems, it is challenging to collect and evaluate spending data, making it practically impossible to identify cases of uncontrolled spending.
Maverick spending due to a competitive environment
In certain situations, despite the employees being aware of the existing contract that covers a purchase they need to place, they keep procuring supplies from a different provider since the alternative is less expensive and they are interested in saving the company money.
Lengthy and inefficient procurement processes
Maverick spending may be the outcome of ineffective procurement processes. When the P2P strategy is poorly defined or the approval process for purchase requisitions (PR) and purchase orders (PO) appears drawn out, the majority of procurement executives become confused and irritated. In these situations, these procurement professionals prefer to violate the procurement standards and seek simpler, and faster approaches to fulfil their business requirements, which lowers profitability and increases operational risk exposure.
Significant Indirect Spending
Indirect spending accounts for 50% of a company’s purchases. It is typically distributed across a variety of categories in organizations, making it challenging to develop consistent processes and controls, which might result in increased maverick spend.
How maverick spending affects your business?
The lack of traceability isn’t the only issue with maverick spending. Prolonged, unauthorized spending in a business can result in poor reporting, and working capital concerns, and eventually results in the requirement of risk mitigation techniques.
Other impacts on the company may include the following:
Top 5 tips to help identify and control maverick spend
“Maverick spending” can be a cause for concern, but businesses can take preventative measures to identify and control unknown or unapproved spending to ensure that the procurement processes are managed strictly and in accordance with the negotiated contracts.
Here are the top five strategies for identifying and controlling maverick spending:
Identify maverick spending using spend analysis
The first step in identifying the source of maverick spending is to determine where it occurs and how it affects your bottom line. To do this, perform a spend analysis of all your direct and indirect spending and create spend visibility in the following manner:
Review and implement clear procurement policies
Reviewing your maverick spending policy is necessary when you are aware of the extent of maverick spending and have determined its causes. Educate your employees about how maverick spending impacts an organization and make sure that the updated policies are completely understood by all employees with spending responsibilities.
Simplify the approval process
Your purchase approval process should be strong enough to prevent maverick spending, yet simple enough that employees don’t find it to be a hassle. One standard approach is getting the procurement manager’s consent for purchases over a specified limit. For immediate responses, these managers should directly contact the finance or procurement divisions.
Improve your P2P (Procure-to-Pay) cycle
P2P cycle is an integral part of an organization’s procurement function. To ensure effective P2P operations, it is crucial to establish a strong link between the accounts payable department and procurement functions. Maintaining stringent controls over payments and supplier relationships is a hallmark of a robust P2P cycle, and it helps in minimizing the maverick spend.
Introduce automation and utilize strategic sourcing initiatives
An e-procurement software for businesses offers a centralized system that allows you to automate your procurement processes and make purchases online. A reliable e-procurement software also lets you enhance spend visibility providing real time insights into spending patterns and trends while minimizing the workload of your spend approval teams.
Maverick spending can be attributed to both the procurement method and vendor selected. Strategic sourcing when used in conjunction with the best e-procurement software platforms, enables organizations to negotiate the best possible price and terms. Also, it minimizes the supplier risk associated with purchasing from unverified or new suppliers.
Maverick spending is a significant problem for businesses everywhere as it can lead to substantial financial losses if not identified and addressed promptly. Digital procurement makes sure that businesses detect maverick spending before it causes a significant loss. The amount of spending that exceeds the company budget every quarter can be reduced by features like compliance monitoring to automatically flag non-compliant transactions and transactional recordkeeping to identify unusual spending patterns. However, selecting the appropriate strategic procurement software that is user-friendly and offers external support is equally crucial to optimize the benefits.
MeRLIN is a strategic sourcing software that can manage an organization’s direct and indirect procurement requirements by combining advanced analytics with capabilities for supplier relationship management, category management, eSourcing (RFx and eAuctions), contract management, requisition management, and eProcurement. Contact us to find out how our solution can help you in proactively managing your maverick spending.