If you’re in procurement, the amount of your maverick spend—spending outside of your preferred supplier list and company spend policy—is likely high. According to CIPS, maverick spend can account for up to 80% of a company’s total spend.
To understand what maverick spend is costing your company, we extrapolated costs based on the type and size of the hundreds of businesses that we work with at Order. We forecasted how much the average business loses on maverick spend per year, and include tips on how to cut this amount. Check out these costs and tips below.
How much does maverick spending cost your business?
According to our proprietary data, mid-sized companies (100-999 employees) spend $402,500 per year on suppliers. If 80% of that is maverick spend, that means $322,000 a year of an average mid-sized company’s budget. That’s a significant cash leak in your purchasing process. Over a three-year period, that’s nearly a million dollars lost or used inappropriately.
When it comes to the actual consequences of maverick spend, organizations report that the biggest effect is the loss of savings that they would have received from negotiated contracts. Some organizations report up to 16% losses of negotiated savings.
On top of the outright costs, you risk breaching contracts with suppliers with maverick spend (since employees are purchasing through other vendors), which can impact contract management and fulfillment. Finance also can’t properly close the books if they can’t match spend to purchase, creating yet another pricey bottleneck.
And if your procurement team is spending hours reviewing transactions and suppliers, they miss focusing their attention on more strategic activities.
Calculate your maverick spend costs with a spend analysis
If you don’t already have a spend management platform, conduct a spend analysis to identify where maverick spend is occurring and how its impacting 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 above likely won’t be uniform, as it will be in different formats. Remove duplicates. Convert text numbers into numerals. Remove extra spaces. 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 how often an item is purchased. Under each category, mark vendors as preferred or not.
- Analyze the data. Calculate how much was spent on vendors (preferred and non-preferred) within each category over 12 months. With this view, you should be able to see how much of that was maverick (i.e., the amount spent on non-preferred vendors).
As an example, say you spend $1 million on “professional services” each year, and $100K of this amount was maverick spend. Based on your calculations, 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. Your spend data is collected in one location so you can easily check spending for different categories and vendors.
3 tips in eliminating maverick spend
The two most common causes of maverick spend are poor company spend culture and inefficient technology. So the best way to eliminate maverick spend is to address those two causes. Remove improper spending through education and the right processes and tools.
Tip #1 in eliminating maverick spend: Educate your teams about the dangers of maverick spend
Include the whole company in an effort to tackle and control maverick spend. Educate your employees and higher-level management about maverick spend and the costs of non-compliance listed above.
Communicate both the negative consequences of maverick spend on a departmental level and the positives of eliminating it. Provide the “why” behind the company purchasing policy and the preferred list of suppliers (especially when onboarding new employees). Explain how your procure-to-pay (P2P process) works. Also hold annual procurement process training for employees that interact with suppliers/vendors regularly.
In addition to education efforts, improve your spend technology. We recommend implementing the following systems and processes to automatically block maverick spend.
Tip #2 in eliminating maverick spend: Ensure purchases go through one purchasing system
75% of organizations report a lack of self-service/guided buying tools as one of the main causes of maverick spend. Centralize your purchasing with a single, intuitive purchasing system and avoid employees spending outside of formal contracts.
A centralized purchasing system like Order is user-friendly for employees and consolidates spending. You only have one purchasing catalog and one cart, rather than employees making purchases all over the Internet. Team members can simply log in to their respective department account, go through the purchasing process (guided by the tool), and make all purchase requests/orders in one location.
Not only can you set budgets and enforce approvals, but you also have 100% real-time spend visibility within the platform—you can view spend by user to make sure employees aren’t spending outside of contracts. Spending is consolidated into one invoice at the end of the month. And like Mediaplanet, you can also save an average of 8% with Order’s automated strategic sourcing on both your highest-spend items and the long tail.
Tip #3 in eliminating maverick spend: Automate Purchase approval and budget controls
According to a study by The Hackett Group, 69% of organizations report employee “non-compliant mentality” as another top cause of maverick spend. This problem is a company culture issue at its core.
While employees might not intentionally be trying to be non-compliant (they may just be convinced that they found a better supplier), it still means company dollars are being used outside of the formal purchasing policy. And, unfortunately, this non-compliant purchasing behavior is not always readily apparent. A Pymnts survey found that more than 60% of CFOs don’t have total spend visibility.
By creating approval controls before a purchase can be made, you enforce employee compliance and can see spending as it occurs.
Within your centralized purchasing system, set budgets and enforce approvals by user, location, and product category. Also, set budget limits across all vendors. Employees then simply have to request approval for a vendor purchase, and you, as the approver, can either confirm or deny. They can’t go over the budgets you set or purchase through other vendors.
Mia Busch, operations assistant at MINISO USA, is a strong proponent of automated budget controls—before Order, budgets were difficult to enforce. “Now, we have a budget for each store that we can see right away, and that shows where each store is,” she says. “Now, I can control budget.”
Tip #4 in eliminating maverick spend: Identify vendors that meet Employee needs and offers cost savings
63% of organizations said that the decreased realization of sourcing savings (i.e., missed savings from negotiated contracts) is one of the biggest consequences of maverick buying. 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, but also provide the best cost savings. A spend management tool can analyze the products you need by vendor and find the best deals every time.
Whenever you need to make a purchase, the Order platform analyzes different vendors, partly based on your purchasing history (what employees have purchased in the past). It identifies vendors that will give your company the highest cost savings, even for product substitutions.
For XpresSpa, this capability resulted in major savings. Order’s platform identified multiple new vendors that adhered to airport security standards, could deliver on logistical necessities, and maintained preferred brands & products. Year 1 savings amounted to over $68,000.
Maverick spending: The silent drain on company dollars
Maverick spend is like any other non-conformist process—it results in decreased savings and increased risks. Stop maverick spend in its tracks with the solutions listed above. It’s worth the effort. Organizations that prioritize reducing maverick spend achieve 91% employee compliance (on-contract spend).
Check out Order and how our platform can remove maverick spend.