What is rogue spending and how to minimise It
Most will agree that the main role of procurement is to ensure that the best possible deal is made and that the company is spending its money wisely while ensuring full visibility of what and how much each business unit is spending.
But if services and materials are being bought outside the visibility of procurement and are bypassing proper approval channels, it's termed as rogue spend which can lead to missed savings and the possibility of the supply chain creating risk.
But what is rogue spending?
The term represents all spend that falls outside the standard procurement process, with no agreed suppliers, and without other pre-negotiated contracts and terms in place. Normally, these types of purchases with no procurement control or visibility happen more often with low-value transactions in the tail.
Companies in which the business units have a P-card or the autonomy of handling smaller purchases are more likely to have rogue spending happening, especially if those purchases don't have to go through any type of approval process or a posterior audit.
A report conducted by The Hackett Group around rogue spending and the lack of visibility for procurement that this practice brings concluded that even companies “with substantial organisational influence struggle to achieve 100% compliance on contract spend.” And that 16% of the entire company's negotiated savings were lost due to business units going outside procurement processes.
The survey also discovered that the main reasons for the occurrence of rogue spending are the lack of self-service tools (75%), a non-compliant mentality (69%), and resistance to behavioural change despite official policies (69%).
This means that rogue spending can happen anywhere, and it's more common than it looks, but it's not impossible to minimise. Procurement can become an active voice and the leader of those purchases to ensure that there's no off-track and off-contract spending.
How to actively minimise rogue spending
The first step to take is to get a better understanding of what is happening in your tail spend categories right now, by utilising a detailed spend analysis from a finance AP file. Detailed spend analysis can be carried out with surprisingly little data, whereas the ideal would be multiple data points, a clear picture can be accumulated by just supplier name, amount, date and department attributed (and sometimes less).
An analysis will very quickly highlight areas of spend that are not backed up by a PO, areas where multiple suppliers that offer the same service exist (but often not utilised) and areas that have no discernible data attributed to them - the most vulnerable to risk.
Utilising a digital platform for sourcing, contracts and purchases, and more specifically, smaller transactions in the tail will also cut rogue spending to a minimum.
Machine learning technology can use the data gathered and spot where the bigger risks are, find opportunities and show where procurement can act and create a strategy to manage the spend.
A software solution can also be used to minimise the occurrence of rogue spending by structuring the approval flow of each purchase – it can be by amount, supplier, project, etc. The approval process within tail is often a hard nut to crack, as by its very nature, a lot of transactions need to take place quickly and reactively, so any steps into the process need to be almost transparent to the user and still give flexibility and speed otherwise circumnavigation will almost always take place.
The Maistro tail spend solution incorporates all of the above-mentioned practices to ensure transactions in the tail take place in a frictionless way, whilst gathering data at every step and using grip and control to manage risk. Why not get in touch to find out how most companies use a Maistro spend analysis to kickstart their journey to mitigating rogue spending in the business.