7 tips to reduce maverick spend in procurement

Maverick spend in procurement is off-contract spend or buying from non-preferred suppliers outside the pre-established procurement policy.

The total spend attributed to maverick spend varies greatly across organizations. The share of maverick spending depends on spend under management, purchasing policy implementation success and procurement maturity.

These purchases may not all be intentional, and some may be genuine mistakes or lack of knowledge. But the result 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.

In this article, we'll explain the causes of maverick spend in procurement and 7 tips to reduce it. 

Why is it a problem?

Many problems can be caused by maverick spending. The top ones we can think of are:

1. Lost savings
2. Breach of contract
3. Reputational risk

The main problems with maverick spend are the loss of savings from negotiated contracts. Procurement’s #1 priority is still cost savings. Lost cost savings arise when buyers do not utilize pre-negotiated prices or miss out on discounts by not achieving volume targets.

Next, there is the risk of a breach of contract through volume leakage. In purchase agreements, you may have agreed to certain minimum volumes, e.g. 200k units per year. If part of your organization buys the same goods or materials from another supplier, you may fall short of the purchase quantities from your preferred/contracted supplier.

This would then result in a contract breach and allow the supplier to terminate the agreement and seek an agreement.

The causes of maverick spending

Maverick spending is most evident around tail-spend (low-value/high-frequency purchases). It can occur when the Procure-to-Pay (P2P) process is unclear.

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 professional services.

Ironically, though, being too centralized can lead to maverick spending as well because of overly tedious approval processes and not truly understanding end-user needs.

Most employees don’t maverick spend intentionally or with rebellious intentions. 

The root cause for maverick spending is insufficient tools and processes and lack of communication. New employees may not know any better if purchasing 101 is not part of the induction plan.

Despite the intentions, the end result remains the same for spend management – money is left on the table.

Inefficient purchasing processes

When 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 the 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. This hurts profits and exposes your organization to operational risks.

Poor internal communication

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. Contract handover is a key step in not leaving money on the table.

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 the total cost of ownership (TCO).

Often the terms and conditions of a well-negotiated contract are unclear, or there is limited access to the contents of the contract. The temptation is for users to find their own supplier instead.

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

How to reduce maverick spend in procurement: 7 tips

In mitigating maverick spend, the big idea is 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. Purchase orders should be placed for every purchase, commonly referenced as the "no PO, no Pay" policy.

Some companies simply refuse to pay the bill with no corresponding order number and make the purchaser explain their behavior to their financial controller. If this sounds too harsh, here are 7 concrete tips to help you reduce maverick spend:

1. Identify maverick spenders with spend analysis.

Good spend analysis data will also allow you to track and identify suppliers who have non-contracted spend, as well as spend with non-contracted vendors. Spend classification helps reveal multiple vendors for the same product or service category and consolidate spending on preferred suppliers.

2. Educate and train users on the benefits of your procurement policy.

Nobody likes senseless rules. Showing the WHY of your procurement process policies can make a difference. Procurement policy does not exist for the fun of it. It does not serve procurement interests only. Discuss why cost optimization, contract with detailed specifications, quality management, and ESG risk mitigation are for their benefit, not only yours.

3. Foster collaborative relationships with business functions.

Get to know your business priorities, customer requirements, market dynamics, and supply base. Strive to find the best suppliers together. When supplier selection is a joint agreement, there will be a higher level of commitment to the business relationship too.

4. Communicate preferred suppliers and relevant contract terms.

Nothing is more frustrating than ordering products online with a high shipping cost and learning later that you would've gotten a free delivery by just ordering one more item. The same applies for corporate buying. Everyone working with the supplier should understand the terms you have agreed on for purchasing the products or services. Make finding the preferred supplier with the best delivery terms easy for the purchasers. Have a read on how to succeed in your next handover-- A Complete Guide to RFP: a Guide to Successful Contract Handover.

5. Make purchasing from the preferred suppliers easy.

Purchasing from the best vendor should be as easy as possible. Have list of preferred suppliers available for each category and communicate what is a just reason for choosing an alternative supplier. Consider setting up catalogs for ordering. Catalogs should include a list of products/services, prices, minimum order volume, and possible volume discounts.

6. Speed up the approval process of requisitions and orders.

When there is a real need for a product or service, you don't want to slow down your business by adding lead time for purchasing and approvals. When there is a strong drive to start a project and get things done, people may not have the time or the will to wait days or weeks for bureaucracy. Study your processes and eliminate any bottlenecks.

7. Create a procedure for one-off purchases. Support the use of p-cards.

All ad hoc needs cannot be predicted. Agree on what counts as a one-off purchase and avoid adding them up to your tail spend. Credit cards and p-cards are a good solution for these, as they do not only consolidate these expenses under one label on your spend report but also provide security and piece of mind by the credit union for your purchases.

Is it always harmful?

Not all maverick spend is bad. It can occasionally act as a dialogue starter. 

Employees may find a local supplier with a better unit cost and specification fit. In that case, discussing 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 in case of supply disruption.

Transparent dialogue on maverick spend based on category data can reveal opportunities for improvement and change attitudes.

How to track 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. It is possible to calculate how much maverick spending costs by identifying the purchase price variance (PPV) and savings missed.

Maverick spending thrives in organizations where the procurement function is immature, or the culture does not support cost-saving initiatives.

Not all track their spend covered by purchase agreements or 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 the right tools and sufficient data to mitigate maverick spending. Sievo Spend Analytics reveals where off-contract spend is occurring and potential areas for spend consolidation. 

Example of contract coverage dashboard in Sievo

Header picture credit: Luke Stackpoole (unsplash.com)