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; specifically Indirect Spend within organizations are made without the knowledge of the procurement department.
Maverick spending can create a number of problems, not least of which are higher costs. Research suggests that this type of spending can increase purchasing costs by almost 40% when compared with all purchasing that is conducted through the procurement department. It also causes organizational and communication issues when the procurement department is not aware of employees’ behavior. 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.
Companies can be very good at managing the costs that go directly into their manufactured goods, but may be unaware of or unsure how to tackle the other costs of doing business – their Indirect Spend. This area can seem like the Wild West with every group working with different vendors and purchasing supplies that range from paper clips to airplane travel.
What is “Indirect Spend”?
Indirect spend consists of all the materials and services that businesses need in order to operate. This can include areas like marketing and other professional services, travel, IT and HR, facilities, utilities, and maintenance, as well as basic consumables such as paper, paper clips and other office supplies.
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.
In Part II we’ll review how Business Process Improvement strategies can help, and some initial steps you can take to start to bring those expenditures under control.
At ISS Group we recognized the need for such Business Process Improvement (BPI) solutions over two decades ago, and today, ISS Group continues to deliver to the QAD EA community Agile BPI solutions, such as e-Procurement, which digitize business processes that connect people and processes via the cloud, mobile devices, and social networks, for Mid-market and Divisions of Fortune 1000 Manufacturing and Distribution organizations.
Did you miss a few of our articles in 2015? Catch-up by clicking here to review our previous blog posts…!