Procurement teams need a balanced approach to fix maverick spend

Procurement is rising up in the priority list of both corporates as well as Governments.

The two foremost examples are:

a) In December 2014, the U.S. Government reported a reduction of more than $55 billion in contract savings in the fiscal year 2013 from the previous year. It was a part of a four-year decrease in the cost of Federal contracting.

b) Novartis, a global healthcare company, has reported procurement savings of $1.6 billion in 2014 and expected to increase the same in 2015. ‘Strategic Sourcing’ has played a key role in the success of procurement teams in the above-mentioned cases. A dent in this key game plan is maverick spending.

What Is Maverick Spend?

Every company’s procurement department should ideally have a present budgetary allocation or estimate of how much they plan to spend on different heads. The approximation of how much is spent on each item from a supplier is also predefined. In most cases, the procurement team endeavors to keep all spending within this preset estimate and negotiates contracts and agreements in line with the procurement policy and spending guidelines.

What Is Maverick Spending In Procurement?

Maverick spend can be defined as the purchase that is made out of the preferable route. These are ad-hoc purchases made outside a negotiated contract with a preferred supplier.

When the procurement department buys from suppliers outside the pre-approved contracts there is no control over the amount spent and it also affects the relationship with pre-approved suppliers. The company may not get a cost advantage that is usually a part of an ongoing supplier relationship.

This article discusses maverick spending and countermeasures with respect to the pharmaceutical industry for a better picture. How much organization really loses?

Reducing Maverick Spending

To reduce maverick spend one must first be able to track and identify it easily. For this, there should be systems in place to ensure greater visibility of all spending. Easy monitoring, cross verification, and auditing help catch maverick spending easily and thus curtail it.

Implementing modern technology solutions to streamline procurement is a good solution. However, new technology will only work as well as the ability of all the people involved in being able to use it. Training of all the stakeholders in the proper use of the system ensures that it is implemented properly end to end. Good training makes everybody’s work easier, which will encourage its use. When there is no training, new technology is more likely to cause time delays and bottlenecks.

Ideally, a procurement software should be easy to use with a user interface that is intelligent and intuitive. The flow of the process should also be smart and match the real-time process. When this system is integrated into the ERP system there will be a flow of data to all the stakeholders, thereby creating more transparency and control overspending. This makes maverick spend analysis easier and this by itself will halt maverick spending.

When all the levels of management, as well as the procurement team, are aware of the procurement policy and have ready access to the data relevant to them, it builds accountability. Implementing technology to manage procurement also standardizes the process and approvals so that there is no indiscriminate maverick spending due to slower approvals or any other bottleneck.

Direct Capital Loss

Maverick spending is overspending. During the negotiation, procurement teams not only negotiate the product prices but also work on other charges such as logistics cost based on the total volume of business. In case a buyer gets a deal from a new supplier that offers a comparatively lower price than the discounted price quoted by the preferred supplier, then two things must be checked:

a) The additional costs such as logistics cost, material handling cost, and quality assurance

b) Future relationship with the preferred buyer which is important in case of product supply shortage and return policies