Procurement, Spend Analysis

What is maverick spend and how to reduce it?

Maverick spend is the action of purchasing from suppliers outside pre-established procurement policy. Maverick spend can be defined as off-contract spend or buying from non-preferred suppliers.  Across all types of organizations, there is a wide range of between 25% - 80% of total spend that has been attributed to maverick spend. These purchases may not all be intentional, some may be genuine mistakes or lack of knowledge. Maverick spending means not benefitting from the agreements and price discounts you worked hard to negotiate. At best, maverick spend is minor leakage from negotiated supplier contracts, at its worst, it is uncontrolled, rebellious buying.

Why is maverick spending a problem?

The main problems with maverick spend are the loss of savings from negotiated contracts and the risk of a potential breach of contract through volume leakage. Procurement’s #1 priority is still cost savings. Maverick spend means lost cost savings through not utilizing pre-negotiated prices or harnessing discounts by not achieving volume targets. Buying from unapproved or uncontracted suppliers leads to operational, supply and reputational risk. It may also create problems in developing key supplier relationships and source-to-pay processes.

Types of maverick spend

Traditionally maverick spending has been most evident around tail-spend (i.e. low-value/high-frequency purchases). It occurs where there the Procure-to-Pay (P2P) process is not clear, and where P-cards are in use. There is a growing trend towards using P-cards and personal credit cards (for later reimbursement) to purchase items from e-commerce sites such as Amazon, Walmart or similar.

In mid-size enterprises there may be areas of spend that are not directly controlled by procurement. These are often categories such as marketing, IT software, and some of the professional services. This may lead to higher amount of spend that is categorized as maverick.

Why maverick spending occurs

Most employees don’t maverick spend intentionally or with rebellious intentions. Much of the problem of unregulated spending relates to behaviors that have become rooted over time, especially if off-contract spend is not monitored. Often times root cause for maverick spend relates to insufficient tools and processes as well as lack of knowledge and communication. Despite the intentions, the end result remains the same for spend management – money is left on the table.

  • Inefficient purchasing processes
    Inefficient processes may cause maverick spending. Where the P2P process is not clearly defined or communicated, there is both confusion and frustration among users, i.e. corporate shoppers. A poorly functioning P2P process creates a situation where a corporate shopper looks for a simpler, faster alternative to fulfill their needs. Employees may find corporate purchase systems tricky and time consuming compared to consumer buying experience. Slow approval of Purchase Requisitions (PR) and Purchase Orders (PO) can be to blame. Where purchase processes are ineffective employees will bypass the rules. Maverick spending hurts profits and exposes your organization to operational risks.
  • Poor internal communication
    Suboptimal communication often leads to maverick spending. Employees may not be aware of the preferred suppliers or procurement policies. Implementation of new or renegotiated contracts is often poorly executed and communicated late, if at all. Employees can only take advantage of contracts if they know that they exist. They may not be aware of the full contract scope, potential discounts and value added services that impact on total cost of ownership (TCO). Often the terms and conditions of an well-negotiated contract are not clear or there is limited access to the contents of the contract, so the temptation is for users to find their own supplier instead. Employees are going to look for an easier way especially in the “difficult” categories such as maintenance and repair, marketing, IT software, and some professional services. This often happens in decentralized organizations or those that work in silos. 

See below full list of reported causes of maverick spend according to the Hackett Group (2019).

Maverick Spend (1)

Tips to reduce maverick spend

In mitigating maverick spend, CIPS recommends to establish clear roles and define who holds the license to buy. P2P processes and policies should be clear for all categories, and easy for employees to justify and follow. CIPS continues, that purchase orders should be placed for every purchase, which is commonly referenced as "no PO no Pay" policy. (Source: CIPS, 2014)

Additional ways to reduce maverick spend include:

  • Identify maverick spenders with spend analysis.
  • Educate and train users on the benefits of your procurement policy.
  • Foster collaborative relationship with business functions. Strive to find the best suppliers together.
  • Communicate preferred suppliers and relevant contract terms. Have a read on how to succeed in your next handover: A Complete Guide to RFP: a Guide to Successful Contract Handover
  • Make purchasing off from the preferred suppliers easy. Consider setting up catalogs for ordering.
  • Speed up the approval process of requisitions and orders.
  • Create a procedure for one-off purchases. Support the use of p-cards.

Is all maverick spend harmful?

Not all maverick spend is bad. Instead, it can occasionally act as a dialogue starter. From time-to-time procurement may find themselves in situation where business has found a competitive alternative for a contracted supplier. Employees may find a local supplier with better unit cost and specification fit. In that case, having a discussion on product or service requirements and considering potential tender or re-negotiation of the current agreement is needed. Where organizations have a localization or diversity policy, maverick spending may reveal new suppliers for future assessment or emergency use. Transparent dialogue on maverick spend that is based on category data can reveal opportunities for improvement and change attitudes. A clear explanation of the risks of buying from unapproved suppliers would include highlighting quality related problems, compliance issues and possible failure to supply.

How to trace maverick spend

Spend analysis will uncover maverick spending and show where maverick spend is occurring. You can identify the problem areas by category, monitor them and take corrective action. Robust spend analysis can help you identify gaps and pinpoint which functions are on top of your rogue spending list. To showcase opportunity cost, it is possible to calculate how much maverick spending is costing by identifying the purchase price variance (PPV) and saving had you stayed within contracts.

Maverick spending thrives in organizations where the procurement function is immature, or where the culture does not support cost-saving initiatives. This being said, not all large enterprises with mature procurement organization track their spend covered by purchase agreements, i.e. contract coverage, month-over-month. Some enterprises don’t track their spend efficiently enough to provide meaningful data, or if they do, they do not share it with the wider organization to enable continuous improvement of spend coverage.

You need right tools and sufficient data for mitigating maverick spending. Spend analysis solutions are available for identifying where off-contract spend is occurring and potential areas for spend consolidation. Continuous monitoring provides for corrective action.

image (1)-1

Example of contract coverage dashboard in Sievo

 

Header picture credit: Luke Stackpoole (unsplash.com)

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