Do you know that there are "corporate mavericks" out there who are costing companies thousands of dollars every day? Yes, you read that right. These mavericks are known for their insidious cash leak, also known as maverick spending, which can be found in virtually every company budget. While one-off purchases and emergent expenses are common, maverick spending is one of the most critical issues that can harm a company's hard-earned capital.
In this blog, we will dive deep into the world of maverick spending. We will discuss what constitutes maverick spending, why and how it happens, and most importantly, how it can damage an organization.
But don't worry, you will get to know how to control this issue to prevent it from affecting revenue and creating liability. By implementing these changes, procurement teams and stakeholders can breathe a sigh of relief and focus on their core responsibilities.
So, buckle up and get ready to learn how to put a stop to maverick spending once and for all.
Maverick spending, also referred to as rogue, unmanaged, dark, or off-the-books spending, is a major problem for companies. It is defined as purchasing goods or services from non-preferred suppliers or outside of agreed contracts, channels, and prices, without following the company's pre-established procurement policy.
Such purchasing activity can harm vendor relationships, affect future contract terms, and prevent companies from realizing the value associated with negotiated contracts, including preferred supplier discounts.
While maverick spending may seem insignificant, it can add up over time and cost businesses a lot of money. It can account for as much as 80% of the total procurement budget in a large organization. Identifying maverick spending is easy, but it can be costly. It is often a symptom of underlying problems, such as unclear paths to meeting buyers' needs.
Establish clear procurement policies and communicate them effectively throughout the organization for removing maverick spending. Hence, businesses can minimize the maverick spending's impact and improve their bottom line.
It's vital to first establish why businesses make purchases outside of pre-agreed contracts—that is, why maverick spending occurs at all—before we can specify the way organizations might limit their maverick expenditure.
The typical causes of maverick spending can be attributed to six main factors, including:
1. Lack of Awareness
Maverick spending can also happen when staff members are not properly informed about their company's purchasing policies and practices. This lack of awareness is due to several factors, such as poor organizational communication and training, frequent policy changes, or a failure to appreciate the significance of adhering to purchase rules.
Employees could also mistakenly feel that their purchases won't have a big impact on the business' overall budget and that maverick spending has a negative financial impact on the firm. Organizations should not only set concrete guidelines but also routinely communicate with and inform their workforce of their significance and the consequences of not complying.
2. Distributed Procurement
A decentralized procurement system, which gives individual group members and divisions access to cash through corporate cards and eliminates the need for them to through numerous layers of bureaucracy, may be used by some businesses in order to increase their agility.
This technique could make the purchasing process more efficient, but it also increases the chance of maverick spending.
Employees sometimes buy things that are already covered by contracts without realizing it, which is how this happens. It's also possible that there aren't enough control and coordination measures in place during the purchasing process, which results in wasted time and costs.
To prevent maverick spending and enable their workers to make informed purchase decisions, firms must find a compromise between autonomy and control.
By using specific guidelines, this can be accomplished. This can be done by establishing precise rules for purchasing, educating staff members on the policies and processes, and providing oversight to ensure adherence to set agreements and spending limits.
3. Insufficient Oversight
Another factor that may contribute to maverick spending is a lack of supervision or a lack of strict adherence to purchasing guidelines. When there are insufficient controls in place, people can take advantage of the circumstance and make illicit purchases without worrying about consequences. Furthermore, if management doesn't keep an eye on purchase activities, they might not be aware of the magnitude of maverick spending and how it affects the organization's finances.
Due to some employees' potential motivation to pursue personal gain, this oversight gap can also raise the danger of fraud and corruption. Because of this, companies need to set up reliable monitoring systems to make sure that purchasing policies and processes are being followed, and they need to move quickly to remedy any violations.
This can involve carrying out routine audits, establishing a procedure for purchasing approval, and putting up a method for keeping track of spending. By doing this, businesses may lower the risk of irrational expenditure and make sure that their financial resources are being spent effectively and efficiently.
4. Inefficient Spending Control Management
Many modern procurement tools allow teams and employees to make purchases using allocated funds, promoting distributed spending. However, to avoid unapproved spending, incorporate an approval system into the procurement process.
The central procurement team authorizes the approved purchases made by teams and individuals, ensuring that they comply with established policies and procedures. Without this approval process, there is a risk of maverick spending, where employees make purchases outside of existing contracts or guidelines. This can result in excessive spending, inefficient resource use, and a breach of compliance regulations.
Therefore, organizations should use procurement tools that support necessary approvals and controls to prevent maverick spending and promote distributed procurement, achieving greater agility and efficiency while balancing decentralization and control.
5. Competitiveness
Besides the danger of maverick spending, there may be instances where team members intentionally opt to purchase goods or services outside of established contracts, even when they know that there is a contract covering the purchase. It happens when they believe that an alternative option is more cost-effective and will benefit the company financially.
Nonetheless, such actions can have detrimental consequences on the procurement process, including non-compliance with contractual obligations and the deterioration of vendor relationships. Therefore, it is crucial to educate employees on the significance of following the approved procurement policies and procedures and the negative repercussions of non-compliance.
Additionally, organizations can incentivize compliance and integrate compliance metrics into performance evaluations to encourage adherence to procurement regulations.
Here is how you can avoid excess Maverick Spending:
1. Determining Reasons for Maverick Spending
Most employees who deviate from procurement guidelines do not intentionally do so or harbor negative motives. Rather, they may lack a clear understanding of the procurement process or find it cumbersome and time-consuming.
The use of eProcurement software can also be intimidating, particularly to those who do not utilize it frequently. Furthermore, employees may come across better pricing options elsewhere, without comprehending the expenses related to invoice and payment processing or expense reimbursement.
To address this, it is important to regularly communicate the reasoning behind the procurement process and emphasize its value. Organizing lunch and learn sessions, recognizing outstanding individual or departmental achievements, and providing a platform for employees to offer feedback and suggest vendors are all effective ways to achieve this.
By doing so, organizations can increase employee buy-in, resulting in more compliance with procurement policies and procedures.
2. Automating Purchase Approvals
When progress towards approvals is sluggish, individuals may be more inclined to take matters into their own hands. Therefore, having a swift and effective approval process in place can prevent buyers from resorting to rogue actions. It is crucial to define the individuals responsible for granting approvals beforehand and establish a clear approval path.
SaaS management tools use automation to eliminate the delays and challenges associated with manual approval processes. The system can automatically direct approval requests to the appropriate parties, record their responses, establish a communication channel for inquiries and clarifications, and keep buyers informed of the approval status. This transparency and comprehension substantially reduce incidents of unauthorized purchases.
3. Improving Contract Management
It is crucial to take corrective action and begin managing supplier relationships successfully after instances of maverick expenditure. To avoid further monetary losses during the procurement process, effective contract management is essential. Automation of the renewal and supplier assessment processes is possible through automated supplier management. With no surprise costs or ongoing wasted spending, this makes sure that purchasers have access to the data they need to make wise selections at renewal time.
4. Streamlining Procedures
To prevent uncontrolled maverick spending, it is crucial to have a clear escalation process that outlines when and how to involve the central procurement team and any necessary approval steps. It is also vital to ensure that everyone involved understands the importance of following this process to minimize the risks of non-compliance.
In addition, having a process to manage emergency requests or unforeseen needs can maintain the agility required to meet changing business requirements while still adhering to procurement guidelines. Regular monitoring and analysis of procurement data can help organizations identify areas where their procurement processes may be inadequate and continuously refine and improve their procurement strategies.
It's a good way for companies to optimize their procurement process, minimize maverick spending, and ensure compliance with established policies and procedures.
5. Educating HR
Employers that want to emphasize to their staff the significance of procurement compliance might consider including the HR team in the training process. Employees will be more likely to comprehend the seriousness of the problem and refrain from maverick spending if it is made clear that adherence to procurement regulations and processes is a non-negotiable aspect of the company's culture.
In addition, HR can help in formulating and enforcing sanctions against staff members who repeatedly participate in maverick spending. Employees will be motivated to follow the specified procurement procedure and adhere to contractual responsibilities by clearly defining the repercussions for noncompliance.
By doing so, you may reduce the dangers posed by maverick spending and help your firm develop a culture of accountability.
6. Increasing Visibility
HR can play a crucial role in promoting a culture of procurement compliance by establishing and enforcing a code of conduct that outlines the organization's procurement policies and procedures. This code can be made part of employee onboarding materials and reviewed regularly to ensure its relevance.
Additionally, HR can collaborate with procurement teams to design training and awareness programs that educate employees on the risks associated with maverick spending and the importance of adhering to established procurement processes. These programs can be delivered through various mediums, including online courses, job aids, and in-person sessions.
Moreover, HR can help establish a reward system that incentivizes compliance with procurement policies and procedures. This can involve recognizing employees who consistently follow the procurement process, including compliance metrics in performance evaluations, and providing bonuses or other incentives for achieving procurement objectives.
The partnership between HR and procurement teams can help cultivate a procurement culture that prioritizes compliance and reduces the incidence of maverick spending.
Organizations can address the issue of maverick spending by gaining a deeper understanding of its root causes and taking appropriate measures. A comprehensive procurement management platform such as BusinessBid can be a valuable solution, providing end-to-end visibility and control over the procurement process.
BusinessBid enables organizations to enforce procurement policies and procedures by automating the approval process, ensuring that all purchases adhere to established contracts and agreements. This reduces the risk of maverick spending and streamlines the procurement process, making it faster and more efficient.
With this data, organizations can proactively address these issues, reducing the risk of financial loss and improving procurement performance.
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