Spend Matters welcomes this guest post by Lars Ola Petters, CEO of Palette.
Being a maverick can sometimes be good in business, but not when it comes to procurement. Maverick spending is a major challenge for finance professionals, with recent studies showing that, on average, one-third of all purchases in organizations are made without the knowledge of the procurement department. This figure can be much higher in some organizations. Palette’s own survey among purchasing managers showed that three-quarters of them indicated that a high or very high proportion of all purchases were made outside their purchasing team.
Maverick spending can create a number of problems, not least higher costs. Research suggests that this type of spending can increase purchasing costs by almost 40% compared with when all purchasing is conducted through the procurement department. It also causes organizational and communication issues when the procurement department is not aware of employees’ behaviour. A big chunk of accounts payable departments’ time is spent resolving invoicing issues, such as invoices that do not refer to a purchase order or that come from unknown suppliers. Maverick spending reduces the control that the department has over purchasing, creating a situation in which errors and confusion are more likely. It also poses a security risk, as purchases that take place outside the jurisdiction of the procurement department are naturally more exposed to fraud.
Before tackling the problem of maverick spending, organizations need to identify where and why it is taking place. While maverick spenders can create difficulties, they can also benefit organisations by highlighting weaknesses in their procurement processes. The first step to reducing the problem is defining maverick spending — for example, can any approved supplier be used for any purchase, or are there specific suppliers that have to be used for certain spend categories? Once maverick spending has been defined, organizations can begin to examine where it is happening and identify the root causes that influence employees’ spending behaviour.
Getting to the Root of the Problem
There is normally a reason why employees break rules. Maverick spending can occur by either deliberately ignoring corporate procedures or by making mistakes that breach agreed contracts or policies. Either way, it suggests that there are flaws within your purchasing procedures. It might be that they are too complicated, unclear or that new employees are not taught about them when they start, leaving them to make mistakes. Or it could be that they find the rules too restrictive and unreasonable, so the mavericks choose to make their own purchases instead.
Therefore, to mitigate the problem of maverick spending, organizations need clearly defined procedures and roles within the purchasing process. For larger organisations, one way of doing this is by having buyers in the business who are wholly responsible for such decisions. Employees then only have the power to submit requests, which are either accepted or rejected by the buyers according to the company’s policies. Meanwhile organizations need to ensure that they have clear guidelines in place for purchasing that are understood by all employees, so that staff do not feel the need to rebel and break the rules.
Furthermore, purchase-to-pay technology can greatly help organizations to control employees’ purchasing activity. P2P solutions give finance departments a greater overview of all purchases, allowing them to see whether they comply with the rules. Many solutions also automatically match invoices with purchase orders, ensuring that purchases are entered into the system and that only approved suppliers are approved. Technology helps to enforce established roles and workflows, meaning that employees do not need constant supervision. One tool that can be handy for procurement departments is e-catalogues, which provide organizations with an online portal of approved items and prices. Research suggests that many of the top-performing companies in terms of purchase-to-pay use these catalogues to maintain relationships with suppliers. These types of catalogues save both time and money, as staff can quickly find the product they were looking for, often at a discounted price, while enabling procurement departments to keep spending under control.
It is difficult to change employee behavior, but by establishing clear roles and procedures, and taking advantage of purchase-to-pay solutions that help organisations to control spending activity, businesses can eliminate maverick spending and ensure that everybody plays by the rules.