Controlling expenses is a crucial part of improving cash efficiency. But you can only control the expenses you know about.
Without strong budgetary control and visibility, spending happens in the background— unchecked.
Today we’ll look at the causes and impacts of maverick spend. You’ll learn:
- What maverick spend is
- How much money it can cost an organization
- How to calculate spend
- Five ways to prevent maverick spend
With the help of this article, your organization will be prepared to take better control of finances and promote a culture where saving and on-contract spending are the default.
What is maverick spend?
Maverick spend is spending outside your preferred supplier list and company spend policy.
If your company is like most, your percentage of maverick spend is high. To understand how much rogue spending may cost your company, we extrapolated costs based on the type and size of the hundreds of businesses we work with at Order. We forecasted how much the average business loses on maverick spend per year and uncovered methods to cut this amount.
How much does maverick spend cost your business?
According to our proprietary data, mid-sized companies (100-999 employees) spend $402,500 per year on suppliers. If 80% is maverick spend, an average mid-sized company consumes $322,000 annually on untracked spending.
That’s a sizeable cash leak in the purchasing process. Over three years, nearly a million dollars have been lost or misused.
When it comes to the real-world consequences of maverick spend, organizations report that the most significant effect is the loss of savings they would have received from well-negotiated contracts. Some organizations report up to a 16% loss of negotiated savings.
On top of the outright costs, maverick spending risks breaching contracts with suppliers since employees are purchasing through other vendors. This can weaken supplier relationships, complicate contract management, and slow order fulfillment.
Finance also can’t properly close the books if they can’t match spend to purchase, creating another procedural bottleneck. What’s more, when your procurement team spends hours reviewing transactions and suppliers, they lose time in which they could focus on more strategic activities.
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Calculate your maverick spend costs with spend analysis
If you don’t already have a spend management platform, conduct a spend analysis to identify where maverick spend occurs and how it impacts your bottom line.
- Find all spend data: Compile your company spend from invoices, company credit cards, your ERP, financial spreadsheets, etc. Input the data into one database, such as Google Sheets.
- Clean the data: The data will likely be in different formats rather than uniform. Remove duplicates, convert text numbers into numerals, remove extra spaces, and ensure that time zones (e.g., when a month’s spending starts) are the same.
- Categorize the data: Once you have your raw data, create columns by amount spent, department team, vendor name, spend category (e.g., office supplies), and purchase frequency. Under each category, mark vendors as preferred or not.
- Analyze the data: Calculate the amount spent on vendors (preferred and non-preferred) within each category over 12 months. With this view, you should see how much of that was maverick (i.e., the amount spent on non-preferred vendors).
For example, say you spend $1 million on “professional services” each year, and $100K of this amount was maverick spend. Based on the statistic above, you lost 16% of negotiated savings, or $16,000, due to spending with non-preferred vendors.
|Spend category||Cost per year||Maverick spend||Total savings lost|
Take this same approach with all spend categories to calculate the total savings lost by maverick spend, including over a two- to three-year period.
Hint: An easier way to calculate maverick spend is to use a spend management platform. This method collects your spend data in one location to check for different categories and vendors easily.
5 Tips to eliminate maverick spend
The two most common causes of maverick spend are poor company spending culture and inefficient technology. The best way to eliminate maverick spend is to address those two causes to improve operational efficiency.
Remove improper spending through education and the right processes and tools:
- Create a documented spending policy
Staff are content to follow company policy regarding spending, provided they know what the policy requires. Management must give buyers a clear path to compliance. The procurement department can ensure this by codifying corporate procurement policy.
- Outline the process for submitting a purchase requisition or intake form
- Determine departmental prerequisites for all purchases
- Assign departmental approvers to review purchase requests
- Establish strategic sourcing guidelines and preferred vendor lists
- Outline the order, invoice, and payment process
With a well-defined and adequately documented process, everyone has the tools they need for following purchasing procedures.
- Educate teams about the problem of maverick spend
Controlling maverick spend should be a company-wide effort. Educate management about maverick spend and the costs of non-compliance listed above and ensure they educate their departments in turn.
Communicate both the negative consequences of maverick spend and the positive outcomes of eliminating it. Provide the “why” behind the company purchasing policy. Create procurement onboarding training for new hires. Explain how the procure-to-pay (P2P process) works.
Another beneficial practice is holding annual procurement process training for employees who regularly interact with suppliers and vendors.
- Ensure purchases go through one purchasing system
Seventy-five percent of organizations report a lack of self-service or guided buying tools as one of the leading causes of maverick spend. Centralize your purchasing with a single, intuitive purchasing system that discourages employees from spending outside formal contracts.
A centralized purchasing system like Order is user-friendly and consolidates spending. It funnels employees into using one purchasing catalog and one cart. Team members simply log in to their respective department account, go through the purchasing process (guided by the tool), and make all purchase requests and orders in one location.
Not only can you set budgets and enforce approvals within this system, but you also have 100% spend visibility within the platform. This means you can view spending by user to ensure employees aren’t spending outside of contracts. Then, automatically consolidate spending into one invoice at the end of the month.
- Change company culture around compliance
According to a study by The Hackett Group, 69% of organizations report employee “non-compliant mentality” as another top cause of maverick spend. At its core, this problem is a company culture issue.
Employees might not intentionally skirt compliance—for example, they are sometimes convinced they’ve found a better supplier. But it still means company dollars are spent outside the formal purchasing policy.
Unfortunately, this non-compliant purchasing behavior is not always apparent. Due to siloed purchasing practices and departmental spending, many CFOs don't have the spend visibility they need.
By changing the culture around spending and creating automation and budget limits before employees make a purchase, you encourage employee compliance and back up policies with better visibility.
- Identify vendors that meet needs and save money
Sixty-three percent of organizations said that decreased realization of sourcing savings (i.e. missed savings from negotiated contracts) is one of the most significant consequences of maverick spend. But employees often purchase outside of negotiated contracts because they believe they found a better option or prefer a different vendor.
Therein lies the rub: You want to make purchases that meet employee needs and provide the best cost savings. A spend management tool analyzes the products you need by vendor and finds the best deals every time.
A procurement software tool like Order analyzes different vendors, partly based on your past purchasing history. It identifies vendors that will give your company the highest cost savings, even for product substitutions.
Curbing maverick spend with Order
Maverick spend is like any other non-conforming process. It results in decreased savings and increased risks. Organizations prioritizing reducing maverick spend achieve 91% employee compliance (on-contract spending).
With Order, organizations gain control and visibility in their procurement function by:
- Automating approvals and purchase order creation
- Establishing spending limits by role, user, department, or location
- Curating approved vendors through easy-to-use catalogs
- Ensuring contract compliance through three-way matching
- Enabling automated payments to take advantage of early pay discounts