Invest to Prevent Maverick Purchasing
Spend Matters welcomes another guest post from Becky Partida of APQC.
Despite having formal procurement processes, some organizations have staff members who engage in maverick purchasing—circumventing standard procedures to procure items individually. According to APQC’s Open Standards Benchmarking in procurement, bottom-performing organizations have maverick purchasing worth 10 percent or more of their total annual procurement value. For top-performing organizations, maverick purchasing represents only 0.24 percent of their total annual procurement value.
To determine the potential effects of maverick purchasing on an organization’s procurement function, APQC looked at the procurement performance of two groups: those with 1 percent or less of their annual purchase value obtained via maverick purchasing and those with 16 percent or more of their annual purchase value procured via maverick purchasing. The results indicate that order placement time and order processing time improve with less maverick spending. However, less maverick purchasing is associated with higher procurement costs.
Despite the common belief among employees that maverick buying can lead to faster receipt of materials, this purchasing method may result in significantly slower order processing and delivery of purchased items. At the median, organizations with higher levels of maverick purchasing need more than three business days to issue a purchase order to a vendor; those companies with less maverick purchasing need only five hours to issue a purchase order. Organizations with more maverick buying also have longer supplier lead times. At the median, they have lead times of 12 days, whereas organizations that conduct less maverick purchasing have supplier lead times of only six days.
These shorter times could be the result of organizations with less maverick purchasing having more streamlined and regulated purchasing processes. They may also have systems that ensure adherence to processes and reduce the opportunity for maverick buying. Organizations with less maverick purchasing are also more likely to use vendors that have been vetted, which can result in mutually developed processes to quickly issue purchase orders to that vendor. The use of approved vendors also means that organizations have already determined the reliability of those vendors, which can lead to faster deliveries.
Although having less maverick purchasing can have positive effects, it does not necessarily lead to benefits across the board. APQC’s data indicates that organizations with less maverick purchasing actually spend more on the procurement process overall (see the figure below). At the median, organizations with less than 1 percent of their annual purchase value made via maverick buying spend $4.04 more on procurement per $1,000 in purchases than organizations with 16 percent or more.
The higher procurement costs incurred by organizations with less maverick buying are likely related to the fact that these companies have higher procurement systems costs and more full-time equivalent employees (FTEs). At the median, organizations conducting less maverick purchasing spend $60.05 more per $100,000 in purchases ($76.72) for systems related to ordering materials and services than organizations conducting more maverick purchasing. Organizations with less maverick purchasing most likely put more expensive procurement systems in place as a way of ensuring that staff members adhere to procurement processes.
The need for more procurement personnel to support formalized processes could be another contributor to higher procurement costs. At the median, organizations conducting fewer maverick purchases need 117 procurement FTEs per $1 billion in purchases, which is 39 FTEs more than needed at organizations conducting more maverick purchasing.
APQC recommends that organizations take a comprehensive approach to formalizing procurement processes and reducing maverick purchasing. They should adopt and customize procurement systems so that employees cannot order products without following established channels. Electronic purchase order approval can be built into systems to ensure that approved vendors are used and that purchases are made at a reasonable price. Although these investments may result in higher overall procurement costs, they can result in purchases that provide the best value to the organization—regardless of price.
At the same time, organizations must consider whether their procurement processes are user-friendly. They must also evaluate whether or not employees have received adequate training on procurement procedures. If employees consider the processes and systems too cumbersome, they will bypass formal procedures to get what they need.