Purchasing managers need help? Learn how to overcome the daily challenges of indirect spend to reclaim your day.
Rogue spending: Why you can’t afford to ignore it
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 how much employees and business units are spending and which suppliers they are purchasing from, your organization is likely experiencing rogue spending.
What is rogue spend?
So, what is the definition of rogue spend and how does it impact your business? Rogue, tail or maverick spend (sometimes referred to as dark purchasing) refers to unmanaged, uncontracted, and non-compliant expenditure. These terms are used interchangeably to describe any purchasing by employees that occurs outside of procurement mandates, contracts, or policies.
The nemesis of procurement professionals everywhere, rogue spending flies in the face of every strategic process and policy, or negotiated contract aimed at reducing business costs.
This spend leakage impacts your business by silently eating away at your profit margins.
How does rogue spending occur?
Employees buy items without going through the appropriate purchasing, expense, and approval channels. In recent years, studies have found that 54 percent of employees are guilty of rogue spending.
An employee might submit a dinner receipt saying they tipped the waiter 25 percent, when they only left 10 percent. An artful way for employees to pocket a few extra dollars when reimbursed, at the expense of your business.
While this might sound negligible, consider how this adds up, when multiple employees are repeatedly committing the same offences, and worse.
Another prime example of rogue spending that can afflict businesses if undetected is non-compliant or uncontracted vendor spend. Procurement teams are tasked with gaining spend under management or managing addressable spend, which entails negotiating optimal agreements and nurturing relationships with preferred suppliers, while ensuring CSR and legal compliance.
They set out to get the best deals by negotiating volume-based discounts and early settlement concessions. When employees evade these contracts and purchase once-off items from random suppliers, your business stands to lose significant cost savings.
Rogue spending is a costly problem as it forces businesses to absorb unbudgeted expenses. While companies with vast resources might not have any difficulty covering these unplanned costs, most companies don’t have the resources to afford these wasteful and unnecessary outlays.
And even if they did, rogue spending still takes a big bite out of the bottom line—making it impossible for procurement teams to achieve their strategic KPIs that facilitate business profitability goals.
Why rogue spending happens
There are many underlying causes for maverick or rogue spending. Some instances are triggered by inefficient processes, while others are opportunistic - when processes are devoid of accountability or consequences, and sometimes it’s completely unintentional, when employees are uninformed.
Some all too familiar root causes include:
Outdated manual or paper-based processes
Expensive legacy systems with limited user access
A lack of a centralized digital procurement platform that enables visibility and control
Inadequate procurement processes and policy enforcement
P-card purchases are not correctly approved or exceed pre-defined authority limits
Unmanaged indirect spend
Decentralized locations and business units
Lack of training, inadequate communication, or collaboration
Resistance to change
Frustration with slow approval processes
The good news is that rogue spending is solvable. With the right procurement tools and a proactive approach, you can implement the policies, processes, and approvals to guide purchasing behavior and contain costs.
The solution to rogue spending
Here are a few proactive countermeasures that can assist in eliminating rogue spending in your business:
Prioritize indirect spend management
Cost containment should always be top of mind and intrinsic to your corporate culture, yet gaps can exist, even in the most disciplined organizations.
Significant saving opportunities lie in areas of indirect spend, a category that’s often overlooked and underestimated. When left unchecked, with no visibility, policies, or processes in place, indirect spend can skyrocket, wasting significant sums of money over time due to these avoidable blind spots.
Undetected rogue spending proliferates in this category due to a general lack of oversight and control.
Rogue spend can account for up to one-fifth (20%) of an organization’s total spend and is most evident in low-value, high-frequency purchases, such as maintenance, repairs, office supplies and professional services, which are not strategically sourced.
Protect your working capital by ensuring the same oversight that governs direct procurement is applied to indirect procurement to stop rogue spending in its tracks.
Replace inefficient processes with a digital spend management strategy
If you’re still relying on manual or paper-based processes, you can be sure that unaccounted, unauthorized, and off-contract rogue spend is taking place in your business.
Most organizations experience issues with rogue spend when no purchasing or approval process exists, or when unenforced processes are circumvented without a trace.
You can level up your spend management strategy with a digital procurement platform that automates processes and makes it easy for your employees to comply with spending policies. Your solution should enable visibility and productivity while guiding purchasing behavior and accountable spending.
Procurement software enables collaboration between employees, to ensure that supplier requests are onboarded and approved at the correct level before a purchase request can be approved. You can configure multi-level approval workflows that escalate based on pre-defined criteria to take the risk out of approvals and ensure that all spend gets the right level of authorization, every time.
You can avoid losses by simply boosting oversight and budget-centric control in automated procurement workflows.
Analyze your spend
Spend analytics can be used to gain a clear view of spending behavior in your business – from employees, to suppliers, projects, and budgets. You won’t be able to eradicate rogue spending if you don’t have the tools or visibility to identify where it’s happening.
To rein in shadow spending, leverage spend analytics and reporting tools, powered by procurement software. Analyze spend to identify problem areas that require more scrutiny and cost control. And take advantage of native internal controls to eliminate rogue spending going forward.
The sooner you deploy procurement and spend analytics software, the sooner your business will achieve complete visibility and data-driven decision-making capabilities.
Empower your team
If you want to change spending behavior, you need to make sure that your team is on board with your initiatives. Otherwise, you can assume it will be business as usual.
Rogue spending can put a company that’s barely profitable into the red—which means employees’ jobs will be at risk. Communicate and educate them on the importance of proactive spend management.
Empower your team with a tech stack that drives cost-saving objectives, compliance, and adoption. Source mobile and easy-to-use procurement software that guides purchasing decisions and drives an accountable spending culture. Your system should empower your employees, not hinder them from carrying out purchasing for, and on behalf of your business.
By providing a spend management framework with pre-configured rules, policies and approval workflows, your team can easily go about their work, while risk is mitigated by the system’s internal controls.
Eliminate rogue spending: Your opportunity awaits
If you haven’t yet addressed rogue spending in your business, you should see the initiative as an opportunity for positive change and cost savings.
Prioritize reducing the impact on working capital and boost profitability by making inroads to reducing rogue spend. After all, in the current economic climate, what organization can afford not to?
Bolster your spend management strategy with procurement software. With a cloud solution like Fraxion, you can simplify, analyze, and get proactive control over indirect expenditure and eliminate rogue spend.
Read more about the cost saving benefits of leveraging spend management software here.