- Feb 25, 2019,
Managing company spend is one of the best presents that you can give to procurement. However the terms Maverick, Rogue and Tail are far too common in the discussion, and not for good reasons.
These three forms of “unmanaged spend” are sometimes used interchangeably, sometimes meant to represent different things. However, the underlying assessment is that all of them are bad. Maverick, Rogue and Tail – all of them involve spending money that you cannot fully analyze or track. You are not sure exactly where this money is going, whether it will bring friends back with it or how much ROI you can actually expect by investing with it.
The procurement industry is especially vulnerable to unmanaged spend. Too much of it can lower the value of a procurement company drastically. 80% of the procurement executives in a survey said as much – and these are the people who would know. Even a little of it makes that same company less competitive, because most successful leaders in the field know exactly how to streamline their funds.
How Does the Money Get Away?
No matter the type of unmanaged spending, it is all bad for the company. However, it is good to observe how money leaves the company so that spend can be analyzed and optimized.
In general, unmanaged spend is any money that gets wasted by corporate decision makers outside of the procurement guidelines and infrastructure. The risk tolerance for this kind of spend is usually untenable, especially if a company’s guidelines have been proven to work over time. Just as importantly, unmanaged spend destroys the transparency of the corporate spending process. Planning for the future becomes difficult, and forecasting is skewed because all funds cannot be accounted for.
Money usually slips through the cracks with small purchases. Large purchases are more high profile and vital to the company, so they are assigned to department heads and procurement professionals. These people base their careers on spend transparency, and they are also the best at tracking funds. Smaller purchases are not given the same amount of tracking resources, and they may be assigned to people with less experience keeping up with records.
Smaller purchases are given more leeway, and some employees may even be able to make decisions on little things with complete autonomy. The problem is that these “little things” add up over time, and if the employee, division or department has become used to moving money without reporting, the spend becomes unmanaged and significant. Unmanaged spending does not necessarily mean corruption or purposeful obfuscation (although it can), but it definitely means bad habits.
Finally, unmanaged spend can also be caused through contract overlap. If departments move or unmanaged purchases become relevant outside of their original purpose, the threshold for unmanaged spend becomes higher. Many companies actually end up buying too many widgets (company pens, for example) when this happens. When contracts overlap in this way, a company gets more out of compliance with its own metrics and suffers potential threshold misses on volume discounts.
Employees who are given too much autonomy will use it. People have less trouble spending other people’s money, especially if that money is not tracked. Combine this with the excuse that “I cannot do my job without [this and that widget], and I can’t wait on finance to approve everything!” Employees without professional experience in procurement jeopardize compliance, raise costs and set a bad example for the rest of the business.
It is usually best to align the entire company with strategic sourcing best practices. In many companies, only top procurement professionals are burdened with these terms. However, it is best to incorporate them into even the smallest purchases in order to avoid bloat in the unmanaged spending department.
The Reasons for Unmanaged Spending
Let’s look into the reasons for unmanaged spending more precisely.
- Employees believe their individual spending is unimportant to overall company spend.
- The process for recording small transactions is annoying or not present at all.
- Decision makers are focused only on large purchases, not on smaller ones.
- The company believes that its unmanaged spending remains the same over time and refuses to believe bloat.
- Procurement professionals are not tasked with the management of spend across department lines and regardless of scale.
- The contracts for the company are not updated, creating duplicate orders or overlapping orders.
- Vendors are not updated continuously to be best in class.
What is Maverick Spend?
The maverick in your office is the one who likes to do things his way. He may be a top performer, but he does not mind breaking the rules to do so. This is usually a person with a bit of autonomy because of his position or performance. The unmanaged spend tends to grow over time with this kind of personality. As the saying goes, “if you give an inch, he will take a mile.” There is a time component to this – the distance that is “taken” grows the longer that it is left unchecked.
What is Rogue Spend?
Rogue spend is usually a product of a company procurement policy gone bad, or no policy being implemented at all. Instead of being limited to a single maverick, rogue spend means the unpredictable spending can come from anyone. People in all departments need things. If the petty cash drawer is unlocked with no barriers to access, you can bet that everyone will eventually take advantage for their own purposes. As stated before, this kind of spending does not have to be corrupt – the folks engaging in it may have the company’s best interests at heart. However, a lack of policy virtually ensures overspend and low ROI on that spend.
What is Tail Spend?
Tail spend is based on Pareto’s Rule (the 80/20 rule). In most cases, this rule means that high productivity comes from a very focused part of a resource. As a result, the majority of that resource’s use is inefficient. The same is true here. Tail spend is the 20 percent of your spend that uses 80 percent of your vendors. These transactions get larger over time, which is the “tail” that eventually spirals out of control (“tail wagging the dog).
From Managed to Unmanaged
You may not have holistic visibility on unmanaged spend. However, the longer that the trend goes unchecked, the bigger it will become. Most companies successfully start the transition from unmanaged to managed from the bottom up.
The low value transactions within a company are the ones that add up to large amounts of unmanaged spend. Organizing these high volume, low value transactions is essential to creating more visibility in spend and eventually moving into an automated system.
First, the company must set a value threshold. There are many technologies to help automate this process, most notably the “P card” (procurement/purchase card). This card, which must be swiped for every purchase, allows the company a streamlined path to full visibility on the small stuff. Employees are more likely to follow it, because its use does not require much more time or engagement than a debit card at the grocery store.
The company must then streamline how it places orders. Put all low value purchases in an e-catalog. Use only quality suppliers. If the company sees that the purchase of a particular item is becoming more frequent, the company should add that item to the catalog.
The company should also create a central hub for contracts. This puts all of the vendors under the watchful eye of the new system. Once contracts are centralized, overlapping orders can be flagged.
From the Bottom to the Top
Everyone must buy into the new system that you create for procurement – not just decision makers at the top, and not just the troublemakers at the bottom. Procurement pros must lead the charge and set the example. Although they may not need the system, they must use it to ensure lower level employees that everyone is legitimizing it.
Low level employees will probably resist these changes initially. They may seem like little more than an extra step in an already crowded workday. You can avoid this morale shift by clearly stating what the new policies are for and making sure they are as streamlined as possible.
Make sure that everyone knows their role within the new system. Certain employees may suffer the loss of their buying privileges as procurement pathways become more streamlined. If everyone understands this is in the best interests of the company, however, all loyal hands will eventually come to its aid. Hopefully, the words Maverick, Rogue and Tail will eliminate themselves completely from the vocabulary of the procurement department. More importantly, the concepts should eliminate themselves from the psyche of employees with a little too much autonomy.
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