Maverick spending, or the practice of making unauthorized purchases outside of negotiated contracts, poses a significant challenge to procurement organizations, undermining their strategic spending plans and eroding cost savings.
A staggering statistic highlights the extent of the issue: companies can lose up to 10 to 20% of their savings due to maverick spending, according to procurement analysts. Uncontrolled maverick spending not only inflates costs but also disrupts supplier relationships and procurement processes, leading to inefficiencies and a lack of compliance that can severely impact an organization’s bottom line and operational integrity.
Uncontrolled spending can quickly derail your organization’s financial health. This blog post dives into the risks of maverick spending, explores why it occurs, and offers practical strategies to rein in unnecessary expenses before they impact your bottom line. Read below for actionable insights to safeguard your budget and improve financial efficiency!
What Is Maverick Spending?
Maverick spend refers to unauthorized or maverick purchasing activities that occur outside of established procurement processes and guidelines within an organization. It typically involves purchases made by employees without following proper procurement procedures, such as bypassing approved suppliers, failing to obtain necessary approvals or making purchases above predefined spending thresholds without proper authorization.
Maverick spending can lead to several negative consequences for organizations, including increased costs, loss of negotiation leverage with preferred suppliers, compliance risks, and lack of visibility and lack of control over spending. It drives up costs as purchases are often made at non-contracted rates or without negotiated discounts, resulting in inflated prices for goods or services compared to established agreements. This accumulates over time, leading to overall higher expenses for the organization.
Bypassing approved procurement processes and preferred suppliers means missed opportunities for leveraging volume discounts or cost-saving measures, diminishing the company’s purchasing power and potentially resulting in unnecessary expenditure. Budget overruns are also common consequences, as unauthorized purchases accumulate outside of planned expenditures, straining financial resources and potentially causing cash flow issues.
Additionally, resources diverted to managing maverick spend activities, such as unauthorized invoice processing or compliance issue resolution, are diverted from critical business functions, hampering operational efficiency and productivity. And in worst-case scenarios, maverick spending could expose companies to legal and regulatory compliance risks, potentially resulting in penalties, fines and reputational damage.
Effective procurement strategies and controls are essential to reduce maverick spending and ensure that the purchasing process aligns with organizational objectives and compliance standards:
- Cost Control: By adhering to established procurement processes and negotiating contracts with preferred suppliers, companies can optimize costs and maximize savings opportunities.
- Budget Management: By preventing unauthorized purchases from accumulating outside of planned expenditures, organizations can maintain budget discipline and avoid budget overruns that could strain financial resources and hinder strategic initiatives.
- Operational Efficiency: By streamlining procurement processes and enforcing compliance with established policies and procedures, organizations can allocate resources more effectively.
- Compliance and Risk Management: Adhering to procurement policies, contractual agreements and industry regulations helps organizations avoid costly penalties, fines and reputational damage, while safeguarding against potential legal liabilities.
- Supplier Relationships: By fostering collaborative partnerships and adhering to established supplier agreements, organizations can strengthen supplier relationships, drive value and unlock innovation opportunities.
How Does Maverick Spending Happen?
Maverick spending within companies often arises from a myriad of factors. A common cause is the lack of employee familiarity with established procurement policies, procedures, or endorsed suppliers, which consequently results in autonomous purchase decisions.
In some instances, employees sidestep the standard procurement channels because of pressing deadlines or when the formal procedures seem burdensome, confusing or inefficient, tempting them to seek faster or more user-friendly alternatives.
This urge to skirt traditional protocols may also stem from a perception that procurement rules are excessively rigid, impelling personnel to bypass them to gain a sense of empowerment or to enjoy more leeway in making purchasing choices.
Insufficient training on procurement policies and procedures is another culprit. Employees may inadvertently engage in maverick spending due to a lack of understanding of proper procurement protocols. Additionally, outdated or inefficient procurement software, tools or processes may discourage employees from following proper procedures, leading them to seek alternative methods for acquiring goods or services.
There are altruistic reasons for maverick spend, as well. Employees may have existing relationships with specific suppliers or vendors outside of approved channels, leading them to engage in maverick spend to maintain these relationships.
Urgent needs or unexpected requirements may also drive maverick spending, as time-sensitive projects or unforeseen events create pressure to acquire goods or services quickly, often prioritizing speed over compliance with procurement policies.
Whatever the reason, addressing the root causes can help to mitigate the occurrence of unauthorized purchasing activities.
What Are the 3 Different Types of Maverick Spend?
Maverick spending manifests in various forms within organizations, often categorized into three distinct types. Let’s examine each type in detail.
Tail Spend
Tail spend, consisting of purchases of low-volume, highly specialized goods, poses challenges for procurement management due to limited visibility and unique characteristics. These purchases frequently fall outside traditional procurement processes, creating opportunities for maverick spend as employees engage with non-preferred suppliers or make ad-hoc purchases without proper authorization. Check out this blog post that explores the importance of data collaboration and visibility.
Spot Buying
Characterized by one-off purchases from non-preferred suppliers, spot buying often occurs when employees prioritize convenience or expediency over adherence to procurement policies and negotiated contracts. This practice can lead to higher costs, missed cost-saving opportunities, and increased compliance risks.
Non-PO spend
Non-PO spend, which encompasses any spending done without a purchase order, represents a significant source of maverick spend. Without the formal documentation and approval process provided by purchase orders, non-PO spend lacks transparency and control, making it susceptible to unauthorized purchases and compliance breaches.
How to Control Maverick Spending
Controlling maverick spending is crucial for organizations to maintain financial discipline, compliance and operational efficiency. Here are practical tips and strategies to prevent maverick spend:
- Establish Clear Procurement Policies and Procedures: Clearly outline procurement policies, procedures and approval processes, and communicate policies regularly to all employees and provide training, as needed.
- Educate and Train Employees: Offer training programs to educate employees on procurement policies and procedures, and be sure to emphasize the importance of compliance and the consequences of maverick spend.
- Implement Purchase Order (PO) Systems: Require all purchases to be made through a formal PO system, and ensure that POs are properly authorized and tracked.
- Centralize Procurement Functions: Centralization enables organizations to consolidate purchasing activities and streamline processes. Be sure to designate procurement professionals to oversee purchasing activities and ensure compliance.
- Maintain Preferred Supplier Lists: Establish and maintain lists of preferred suppliers for commonly purchased goods and services. Encourage employees to use only approved suppliers to leverage negotiated contracts and discounts.
- Monitor and Analyze Spending Patterns: Analyze procurement data regularly to identify instances of maverick spend. Use analytics tools to track spending, identify trends and detect potential compliance issues.
- Implement Spend Approval Hierarchies: Define spend approval hierarchies based on spending thresholds and organizational roles, and require appropriate levels of authorization for purchases based on predefined criteria.
- Foster a Culture of Compliance: Recognize and reward adherence to procurement policies and encourage open communication and feedback. It’s also important to review procurement processes on a regular basis and identify areas for improvement.
Technology and automation play critical roles in controlling maverick spend, as well. Advanced procurement technologies, such as procurement management software and e-procurement software like Ivalua, can help to automate manual tasks, streamline workflows and facilitate real-time monitoring of purchasing activities. These technologies enable organizations to centralize procurement data, track spending trends and identify instances of maverick spend more effectively.
Additionally, the automation made possible by such platforms helps enforce compliance with procurement policies by implementing predefined approval workflows, flagging unauthorized purchases and generating alerts for policy violations. Check out a demo of Ivalua’s source-to-pay platform.
Tail Spend Challenges
Tail spend (the bottom 20% of spend that typically goes unmanaged due to its perceived insignificance) presents both challenges and opportunities for organizations striving to optimize their procurement processes and drive cost savings.
First, there’s the challenge of a fragmented supplier base. When there are a large number of suppliers, procurement teams find it increasingly difficult to maintain meaningful, strategic relationships. The sheer volume of suppliers dilutes the focus and resources that can be allocated to each, often leading to a lack of engagement and missed opportunities for consolidation or negotiation of better terms.
Keeping track of contracts, especially for infrequent or minor suppliers, can become a logistical nightmare. This may lead to the use of outdated terms, inadvertent non-compliance with procurement policies or missed renewals – all of which can negatively impact operational efficiency.
Second, tail spend is often characterized by a lack of control and visibility. In many organizations, it’s not centrally managed but rather handled by various departments or individuals. This decentralization leads to inconsistent purchasing practices and difficulties in enforcing procurement policies. Without centralized oversight, data on tail spend tends to be fragmented and incomplete, as well, making it hard to gain a comprehensive understanding of spending patterns.
Organizations also may face resource constraints that limit their ability to tackle tail spend comprehensively. Procurement teams are frequently focused on managing direct spend and strategic supplier relationships, which are seen as more critical to the business. As a result, tail spend is often neglected or given lower priority, despite its potential impact on cost savings and efficiency.
What’s more, effective management of tail spend requires sophisticated tools for data analysis, contract management and supplier integration. However, the cost and complexity of implementing such solutions may be prohibitive.
Tail Spend Analysis and Opportunities
Using spend analytics tools, organizations can gain insights into their tail spend activities, including the frequency and volume of transactions, supplier performance metrics and spending patterns across different spend categories and departments. Robust data analysis enables organizations to identify areas of inefficiency, duplication and non-compliance within tail spend, so they can prioritize strategic interventions and optimization efforts.
What’s more, data-driven insights empower organizations to negotiate better terms with suppliers, consolidate spending and implement targeted cost-saving initiatives.
Effective contract management practices are also critical for ensuring compliance. Organizations should thoroughly review and negotiate contract terms – pricing, delivery schedules and performance metrics – to ensure alignment with organizational objectives.
Maintaining a centralized repository of contracts and associated documents helps to enhance visibility into supplier relationships and obligations, revealing opportunities for consolidation, renegotiation or termination. It also helps to monitor contract performance and enforce contractual terms. By bringing tail spend under management, organizations can save 5-15%.
5 Best Practices for Controlling Maverick Spend
Here are 5 actionable steps and recommendations for eliminating maverick spend and increasing spend visibility:
1) Get Executive Buy-in and Communicate Policies Clearly
When senior leaders endorse and actively support procurement policies, it sets a tone of compliance and seriousness throughout the company. Clear communication of these policies is equally crucial, ensuring that all employees understand the procurement processes, as well as the implications of maverick buying. By aligning the organization from the top down, companies can foster a culture of accountability and strategic spending that significantly reduces instances of unauthorized purchases.
2) Make Purchase Orders Mandatory for All Spending
Instituting a mandate that all purchases must be accompanied by an official purchase order introduces a structured, traceable process for procurement, enabling better tracking and management of expenditures. By ensuring that every transaction is pre-approved and documented, organizations can greatly reduce the occurrence of unauthorized rogue spend, enhance the accuracy of financial forecasting and improve supplier negotiations through consolidated buying.
3) Implement Purchase Order Software to Streamline the Process
Adopting purchase order software simplifies the procurement process, making it easier for employees to comply with purchasing policies. This technology automates and streamlines the creation, approval and management of POs, reducing manual errors and inefficiencies. With features like electronic approvals, budget tracking and real-time spend analytics, purchase order software can significantly enhance the procurement team’s ability to monitor and optimize spending.
4) Stop Sharing Company Credit Cards and Establish Cardholder Policies
By restricting the use of company cards to a select group of employees and setting clear guidelines on allowable purchases, organizations can minimize unauthorized transactions. Implementing controls such as spending limits, transaction alerts and regular audits of card usage strengthens oversight and accountability, as well.
5) Provide Spend Visibility and Training to Empower Employees
Enhancing spend visibility and offering targeted training programs empowers employees to make informed purchasing decisions that align with company policies. Access to real-time spending data and the strategic reasons behind vendor selections helps to demystify the procurement process for non-procurement staff. Coupled with training on the importance of compliance, budget management and the impact of rogue spend, this approach encourages responsible spending behavior and promotes a culture of fiscal responsibility across the organization.
Read our blog post for a deep dive on the benefits, challenges and steps to implement business spend management.
CACI’s Digital Transformation Journey with Ivalua
CACI, a Fortune 1000 company providing information solutions and services in support of national security missions and government transformation, was looking to improve efficiency and empower its procurement and AP teams to analyze data and eliminate manual data entry. They aimed to provide full visibility across the procurement process, effective audit support with electronic retention of documentation, and the ability to support growth through acquisitions without adding headcount.
After implementing Ivalua’s Source-to-Pay software, CACI’s AP and procurement department became virtually 100% paperless and onboarded 99% of its 40,000 suppliers, resulting in a 30% reduction in operation costs. Additionally, the sourcing process and formal agreements resulted in 95% addressable spend, and 100% of employees are using the platform. Read the full case study.
With the right team and the right technology, true digital transformation is possible. Ivalua’s platform empowered us to realize virtually 100% paperless procurement and account payable processes. The ease of use and supplier friendly model delivered rapid value, and the flexibility helped bring our talent’s best ideas to life to build a competitive advantage.
– William Mertz, Procurement Director, CACI
See why Gartner named Ivalua a S2P leader in its 2024 Gartner Magic Quadrant for Source-to-Pay Suites.
Take Back Control of Your Spend with Ivalua
Ivalua’s spend management software offers comprehensive features and capabilities to increase visibility and control over spending, enabling organizations to optimize their procurement processes. By providing a complete 360-degree view of all supplier data through its Spend Analysis Software, Ivalua enables organizations to analyze spending patterns, identify cost-saving opportunities and make informed procurement decisions based on real-time insights.
Additionally, Ivalua’s solutions enable accurate classifications on-demand, ensuring that spending data is categorized correctly and can be easily analyzed for strategic purposes. Organizations gain a clear understanding of their expenditures across various categories, and the ability to prioritize areas for cost reduction or optimization.
Download Ivalua’s Spend Analysis datasheet to learn more about the solution.
Our Spend Analysis solutions promote complete transparency in procurement processes, as well, so that organizations can more easily track spending and ensure compliance with policies throughout the procurement process. This transparency fosters accountability and trust within the organization and with suppliers, leading to more effective supplier relationships.
Another key feature of Ivalua’s solution is its Simple Data Extraction, Transformation, and Loading (ETL) capabilities which help to streamline the collection, standardization and integration of data from diverse sources into a unified system. Ivalua can also highlight areas where strategic sourcing could replace irregular purchases and pinpoint gaps in procurement policies that may lead to non-compliant spending. The platform’s detailed analysis supports the development of targeted improvements and employee training programs, directly addressing the root causes of maverick spend.
Conclusion
Maverick spend not only leads to financial inefficiencies and compliance risks but also undermines strategic procurement objectives and supplier relationships. By implementing robust controls, fostering a culture of compliance, and leveraging technology solutions like Ivalua, organizations can mitigate the impact of maverick spend and drive sustainable growth.
Ready to take back control of your spend? Learn more about Ivalua’s procurement platform and get started today!
