Maverick spend, or the spending that occurs outside of an organization’s official purchasing processes is a silent burden. It can be slow and steady, or seemingly random in occurrence. Usually, when companies suffer from any amount of maverick spend it is spending that isn’t tracked, and the significance of the uncontrolled spending isn’t fully realized.
Keeping a business’ budget under control is a challenge for procurement and accounting departments everywhere, and it’s an even bigger problem when some forms of spending go under the radar.
Did you know that organizations lose on average 10 to 20% of their savings from maverick spend? Understanding how spending in this way affects your business is an important first step in finding a solution.
Optimizing your procurement process can help put that money back in your budget, but it starts with understanding what maverick spend looks like in your organization, and how the right procurement processes and solutions to provide visibility can help resolve this elusive issue.
What Is Maverick Spend?
Companies typically have some kind of predefined spending rules put into place by finance teams (sometimes with the help of a procurement team) and budget managers. These rules dictate what and how much is eligible for purchase to help employees (purchase requestors) make purchases in the right way, and help prevent mismanaged and unrecorded spending overall.
The term “maverick spend” refers to transactions made outside of these rules. While most large-scale purchases are made with well-known suppliers and conducted directly through a procurement team’s contract, not all spending is made this formally.
What Causes It?
Maverick spenders are rarely ever malicious; many of them have good intentions and are only purchasing products and services to get the job done without thinking too much about procurement policies at the time.
Off-contract procurement often happens for a variety of reasons:
- There are no controls in place to enforce procurement policies.
- Poor spend visibility is common enough in the company that no one truly knows what ideal spending looks like.
- Inefficient approval processes can lead some employees to skip out on formal procurement whenever it’s convenient for them.
- A lot of indirect spend occurs, which is often harder to control since it covers the transactions not directly related to manufacturing the company’s products and services.
Standard practices used to streamline procurement, such as the adoption of software-based spend management, can certainly help cut down on maverick spending, but we’re going to go into some specifics to help out any businesses that truly struggle with rogue spend.
What Types of Maverick Spend Exist?
Maverick spend by definition involves uncontrolled and unpredictable spending, but there are varying degrees with which both of these traits manifest.
- Uncontrolled and unknown: An invoice without an associated contract received from a vendor you haven’t worked with before.
- Partly controlled and partly known: An incomplete invoice sent from a vendor you are familiar with. For instance, you might know the identity of the supplier but aren’t aware of the details of what was purchased.
- Partly controlled and known: You have a contract and an approved vendor, but some of the details of the transaction are missing.
Regardless of what type, maverick spending can happen almost anywhere for any type of purchase, from advertising to SaaS subscriptions, to manufacturing and professional services.
Why Is It Important To Control Spend?
Maverick spending is inefficient spending, as it doesn’t adhere to the contract terms your procurement professionals worked so hard to craft. The result can range from:
- Missing out on savings compared to properly negotiated contracts.
- Reduced quality control, as the goods purchased aren’t curated and are likely of inferior quality.
- Loss of trust with vendors as a result of potential breaches of contract. You also run the risk of regulatory non-compliance when you work with unknown suppliers.
- Wasted time from the accounting teams who need to reconcile the books as a result of rogue spending. Having way too many transactions from too many vendors cuts down on procurement team efficiency.
- Inaccurate budgeting, as you can’t know for sure if you have been spending within budget or overspending, making budget planning and saving more difficult.
It’s worth noting that out-of-contract spending isn’t always a negative. Businesses searching for new deals that could be better than those offered by currently contracted suppliers sometimes have to make risky first-time purchases.
An employee, for instance, might stumble upon a more competitive alternative and would like to make a purchase despite no prior study from the procurement team. In these cases, a discussion over whether to include the new supplier into the formal procurement process should ensue.
Nonetheless, having too many unapproved purchases still results in the drawbacks listed above and must be kept to a minimum.
How Do You Keep Maverick Spend Under Control?
While the detection of rogue spending can prove elusive, many companies have successfully implemented the right tools and controls to combat most cases of maverick spending. Some of the most impactful changes to make include the following.
Know Where Rogue Purchases Are Being Made
Spend visibility is the first step to combating maverick spend. You need to know what your business is buying, who’s buying it, and what purposes each transaction is meant to serve.
Start by collecting all your spend data, which can come from anywhere in the company and take many forms:
- Credit card statements
- Financial documents
- Enterprise resource planning modules
Collect all this information; clean it up by standardizing it and removing duplicate data; and categorize it by spend category, department, or otherwise. Getting the right spend data on the table is always the first step since you can start analyzing the results from there to identify maverick spend.
Keep a Tight Grip on Approved Vendors
Using vendor management software, keep a solid record of your preferred suppliers and make sure it’s accessible by anyone in the business at any time. The more accessible it is, the more likely it will be used to analyze spending and reach for cost-saving opportunities.
Some companies go as far as to force limits on payment cards so that purchases from unauthorized vendors are blocked immediately. Either way, do thorough research to develop a list of pre-approved vendors. These preferred suppliers will be essential for staff members making immediate purchases.
Streamline Approval Workflows
You want a purchase approval process to be stringent enough to reduce maverick spending but also streamlined enough that employees and teams don’t see it as an obstacle.
One common setup is having procurement managers require approval for purchases above a certain price. These managers need to have a direct line of communication with the finance or procurement departments for quick response times.
Work on the Procure-To-Pay Cycle
The P2P cycle is a subset of the overall procurement function. It involves connecting the purchasing activities of the business with the accounts payable department. A healthy P2P cycle implies tight controls on payments and supplier relationships, which in turn contributes to minimal maverick spending.
Get Employees On Board
Maverick spend, whenever it does happen, typically occurs at the lower level with individual employees making off-the-wall purchasing decisions without significant planning. Educating employees on the importance of spend management goes a long way to cutting down on this rogue purchasing.
In fact, make it clear that the benefits of good spend management extend to the employees themselves. Consider writing up official guidelines with this information. Most employees are more likely to help out when they believe they have a direct connection with the results.
But whether we’re talking about employees or department managers, holding everyone accountable for their own expenses in the end is important. This strategy is the best way to close gaps in the procurement process.
Define Roles and Responsibilities
Sure, the finance team and budget owners take the wheel when it comes to large-scale transactions and budget planning, but who is responsible for procuring goods and services for internal use day-to-day? And who has the authority to approve small purchases?
Don’t just let any employee have free reign over a company credit card. To control maverick spend, designate certain teams and individuals as purchasers with spending limits within an official approval matrix. Make it clear that transactions must pass through the appropriate flow of approvers before being signed off. You should especially require that a purchase order be issued for every transaction.
Get Procurement Done Right
A spend analysis, the process used to identify unexpected purchases and unknown vendors, involves asking yourself a few questions:
- Is your procurement process well-developed?
- Is it too detailed to the point of becoming frustrating to work with?
- Are you actually getting the best deals you can find?
- How do you monitor one-off transactions?
- Are your employees and teams accountable for their own spending?
Working to eliminate maverick spending will ultimately improve your procurement efficiency in general. Likewise, the better your company is at processing invoices and reducing delays, the more likely the employees will follow the advice of the procurement team.
Adopt Electronic Procurement Systems
E-procurement is a viable solution to the maverick spending problem rampant in many organizations today. By boosting spend analysis management capabilities through automation and digital handling of data and analytics, we’re starting to see companies take stronger control over their budgets.
Other Types of Spend To Keep an Eye Out For
Maverick spending isn’t the only term you’ll hear in cost control meetings. It’s also worth understanding related concepts like spot buying and tail spend.
Not all transactions are made with formal planning in mind. On occasion, an employee might need to fulfill an immediate need with a short-term purchase, which is often termed as “spot buying.” This type of spending generally occurs when:
- The product or service is used infrequently enough that the business only purchases it in low volumes.
- The product is on an unusually good sale, and waiting to purchase it may result in losing out on the opportunity.
- The product is necessary in an emergency when delaying the transaction would cause more problems for the company overall.
Spot buying is a challenge to control since the procurement department might not have plans in advance for such spending, and the purchaser often doesn’t take the time to negotiate contracts, compare deals, or make long-term plans regarding the value of the transaction.
No matter how efficient a procurement department is at managing spend, its efforts will inevitably cover only the vast majority of the total spending done by the company.
The Pareto Principle states that 80% of a company’s spending ultimately is covered by procurement planning while 20% ends up as tail spend. There will always be a small portion at the end that goes unaccounted for, as covering 100% of spending is too expensive and inefficient because of diminishing returns.
While tail spend is naturally unavoidable, the procurement team can still benefit from identifying where tail spend happens so that it can plan accordingly.
Finally Tackle Maverick Spending
An organization’s maverick spending is always a threat to its spend control initiatives, as it can prove difficult to identify and control. But the businesses that can manage spend effectively do so by implementing the right technologies and process changes that specifically target rogue or maverick spending.
Features like compliance monitoring and transactional recordkeeping help cut down on money trickling out of the business budget every quarter, but it’s just as important to choose a solution that’s both easy to use so that it encourages sustained user adoption, and offers external support to help you get the most value out of it.