How much visibility do you have into your organization’s procurement processes?
If your answer is anything less than “complete visibility,” you’re almost certainly losing money and missing out on cost-saving opportunities.
For example, if you’re not sure which business units are spending what, your organization is almost certainly suffering from rogue spending problems, meaning employees buy things without going through proper approval channels. In fact, one 2013 study found that 54 percent of employees are guilty of rogue spending. What’s more, 66 percent of employees admit to making “risky purchases” and an astonishing 33 percent admit to theft. For example, an employee might submit a dinner receipt saying he or she tipped the waiter 25 percent, when, in reality, he or she only left 10 percent. This way, he or she can expect a little bit extra when he or she submits his or her expenses.Rogue spending is a very serious problem for every organization it affects, because it forces companies to absorb unbudgeted expenses. While companies with vast resources (like Google) might not have any difficulty covering these unplanned costs, most companies don’t have never-ending resources. And even if they did, rogue spending still takes a big bite out of the bottom line—making it impossible to deliver the most value to shareholders.
Maverick purchases only account for up to 2 percent of overall indirect spend, according to one measure. Still, this spending can adversely impact any organization—and larger ones in particular. If, for example, a company spends $10 million every year, it spends $200 thousand on rogue purchases. It follows, then, that the average large company stands to save millions of dollars just by reducing rogue spending 5 percent to 10 percent.
The good news is that rogue spending is a solvable problem. With the right approach, you can reduce the likelihood your organization incurs problems related to unapproved purchases. And who knows? You may be able to eliminate it altogether.
Here are four things that you need to do:
1. Conduct a spend analysis to see where rogue spending is occurring
You won’t be able to reduce rogue spending if you have no idea where it’s happening in the first place.
To rein in unnecessary spending, conduct a spend analysis that gives you the data you need to identify where unauthorized purchases are being made.
If you haven’t already, invest in an e-procurement platform that makes it much easier to gain full visibility into your organization’s procurement processes. These modern platforms enable you to easily implement a new procurement system wherein everyone uses digital purchase orders to buy everything—making things much easier to track and manage.
2. Get your employees on board
If you want your team to change its behaviors, you need to make sure that every worker is on board with your new initiative. Otherwise, it’s likely to be business as usual.
Once you’ve identified where you need to direct most of your focus to combat rogue spending, it’s time to get folks to buy into the program. Tell them, specifically, how reducing rogue spending benefits them.
On one side of the coin, rogue spending can put a company that’s barely profitable into the red—which means employees’ jobs would be at risk.
On the other side, if your company is flush with cash, you may want to incentivize your team to reduce rogue spending. If you can get employees to eliminate $1 million of wasteful spending, maybe it’s worth paying out $250,000 or $500,000 worth of bonuses.
3. Use rogue spending to improve your company
If your employees from one department are constantly buying things without approval, it’s a good indication that you should probably focus on doing what you can to improve that department.
Maybe there’s so much rogue spending because the team is not trained properly and not aware of the purchasing process. Maybe they are buying at need and feel they cannot depend on getting a timely approval or fear having the request denied and it negatively impacting their project.
In either instance, you can make necessary adjustments to improve operations. The point is that you don’t have to view rogue spending as a completely negative thing.
4. Only let authorized individuals purchase things
Some companies have problems with maverick spending because there is no purchasing process or approval workflow in place.
In this instance, the easiest ways to reduce rogue spending is to review your purchasing policy and implement key oversight. Start with an approval workflow and establish a standard approval system that will work for general purchases and if necessary align to budget or project based for others. You can allow non-approval purchases for certain positions to remain in place like replenishing office supplies or coffee service, but implement spend limits to avoid gross overspending.
You can avoid losses by simply boosting oversight with an approval workflow. It raises awareness of spend and empowers each user from requester to approver to be more active in controlling spend.
Don’t let rogue spending hold your company back. With the right tools, people, and policies in place, you can drastically reduce unauthorized spending and significantly increase your profitability. What’s not to like?