8 Benefits of Reducing Maverick Spend
By Hugo Britt | January 18, 2022
Last financial year, you confidently promised your CFO that procurement’s cost-cutting initiatives would slash millions from the company’s bottom line. Today, however, you’ve been summoned to the same CFO’s office to answer a single question:
“Where’s the money?”
There are several reasons that procurement savings don’t find their way into the P&L and one of the main causes for unrealized benefits is maverick spend.
What is maverick spend and why is it a problem?
Maverick spend involves people in the organization buying a product or service off-contract or outside of pre-established procurement policies.
Maverick buying means the organization will not benefit from the contracts and discounts negotiated by procurement. It means cost savings do not reach the bottom line and exposes the company to supply risk, quality risk, operational risk, and reputational risk. Maverick spend can also lead to breach of contract and can damage supplier relationships.
According to Basware, many organizations lose 10-20% of their targeted savings due to maverick spend.
Example of maverick spend
Let’s take office paper as an example of how maverick spend occurs.
Procurement negotiates a deal with a stationery provider to purchase a certain amount of office paper per year for a significant discount. All employees are informed via an email which includes instructions on how to purchase via the eProcurement system.
Unfortunately, several teams within the business decide to purchase off-contract and source their own office paper.
- The marketing team prefers a slightly glossier paper than the contracted product.
- Some teams don’t want to wait for the paper to be shipped from the supplier, preferring to buy paper from the local office supplies store.
- One person noticed office paper was on sale at her local store and thought she was getting a good deal for the company by buying some.
- Some team members say they find the eProcurement system too difficult or confusing to use.
- Others claim they simply didn’t know about the procurement policy and the contracted supplier.
As a result, spend on office paper actually rises over the year instead of falling. Data for off-contract purchases were not captured in the e-Procurement system, making it difficult to track. The office stationery supplier warns that the discount was offered on the condition of certain volumes being purchased and indicates that the contract has been breached. In addition, it turns out that some of the office paper purchased off-contract was sourced from a supplier with a reputation for poor environmental practices.
In other words, maverick spending has exposed the business to financial and reputational risk. It has also damaged the relationship with the supplier, who is unlikely to offer such beneficial terms again in future.
The procurement team should take steps to identify the causes of maverick buying and find targeted solutions; for example by educating stakeholders about procurement policy, offering training in the eProcurement system, improving the user-friendliness of software or (in the case of repeat offenders) instituting a “no purchase, no pay” policy.
8 benefits of reducing maverick spend
Reducing maverick spend isn’t just about saving money.
Increased benefits realization
Benefits realization is a strategy that recognizes the connection between a project and the value it can provide to an organization. The goal of benefits realization is to find a way to measure a project’s success while highlighting how those accomplishments play a role in the program’s overall objectives.
When establishing a plan to reduce maverick spend, be sure to include how the projected procurement savings will their way to the company’s bottom line – and what could be done with those savings.
Improved compliance with contract terms
When purchases are made outside of contract terms, companies can see big losses without even realizing how much money is falling through the cracks. Effort made towards reducing maverick spend and monitoring contract compliance can lead to a significant reduction in savings lost.
Better relationships with suppliers
Rogue spenders who make purchases on their own accord are potentially damaging the relationships procurement has spent countless hours trying to establish with preferred suppliers.
Reducing maverick spend and funneling purchases towards pre-negotiated contracts with preferred suppliers will not only save you money, but signal to your supplier base that you value the partnership and take the relationship seriously.
Lower supply risk
Lower operational and quality risk
Leaving operational processes unenforced and a lack of quality control can have lasting effects on a business. When there are clear purchasing expectations in place, buyers are more likely to follow protocol, purchase through the appropriate channels, and purchase authorized products or services that meet predetermined standards.
Lower reputational risk
Controlling maverick spend helps lower an organization’s reputational risk in the case of stakeholders engaging unapproved suppliers.