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Maverick spending is probably a well-known problem for most organizations and procurement professionals. Let's look at how you can utilize procurement analytics to identify such challenges.
Identifying Maverick Spending
In a broader term, maverick spending refers to a purchase that doesn't follow a company's pre-established procurement policy. These purchases often side-step compliant procurement processes, ending up being quite costly for the organization. Maverick spending can also damage procurement's efforts, lead to internal conflicts, and slow down the entire buying process.
There could be several reasons as to why maverick spending occurs in your company, but often the root-cause is related to:
- Limited follow-up of spend, contracts, and procurement policies,
- Defective policies/routines and poor communication of these internally,
- Inadequate focus on procurement processes, or
- Contracts that do not meet the needs of end-users.
For this article, we will be focusing on examples of how to identify opportunities related to spend outside contracts.
Tracking Contract Utilization
A key parameter you need to analyze and track is the share of spend through contracts (also known as contract utilization or loyalty). The example shows you how the ratio is developing over time, here measured by quarters.
Although the analysis only provides you with an overall snapshot, it is often considered a Key Performance Indicator (KPI) for many procurement functions. In addition to monitoring the general development, it also paints a picture of the opportunity for reducing maverick spending (or contract leakages).
By linking spend with your contract data, these insights should be available at your fingertips.
Spend Outside Contracts by Suppliers
To help understand the root-causes, you need to look more closely at the suppliers you are using. More specifically, you should analyze spend outside contracts by suppliers.
Identifying non-compliant (supplier) spend could highlight a lack of contract coverage or limited utilization of contracted suppliers. These insights are also vital for public organizations to ensure compliance with the applicable procurement regulations and thresholds.
Contract Utilization Across the Organization
To fully mitigate the maverick spending problem, you also need to understand where the contract leakages occur. Depending on your data and company structure, this could be cost centers, departments, companies, or business units.
The two analyses below provide you valuable insight into contract utilization across the organization, measured by departments in this example.
The first analysis (left-hand side) shows the share of spend through and outside contracts, while the second showcases the change in contract utilization (in absolute %).
As a procurement professional, part of your responsibility is to investigate the insights and findings provided above. In this example, addressing the following questions might be of relevance to your team;
- What is the reason for department "Sør" having 8% higher contract utilization than department "Nord"?
- Why does department "Vest" experience a negative trend (-11%) in spend through contracts
Diving into the data is the best way to drive fact-based decisions and implement the most appropriate measures to mitigate the problem. Or in other words;
What gets measured, gets done!
Spend Through Contract by Categories
Analyzing and tracking contract utilization may also highlight the need for additional contracts, or rather, a lack of contract coverage. In the next example, we take a look at contract utilization across spend categories.
This type of analysis can reveal spend areas, such as categories, where you do not have sufficient contract coverage today. In other words, the existing contracts might not fully cover the organization and end-users needs. Looking at the data, you might want to ask yourself:
- Why is the contract utilization for the category "Trelast" 0%? Is it due to no contracts being in place at all or that the existing ones are misrepresenting actual business needs?
Please note that these insights can also indicate bundling opportunities, assuming that your existing contracts satisfy all your needs within the category.
Disclaimer. The insights provided above are merely indications and don't always give you the full picture. For example, you might want to validate the analysis with qualitative and other relevant insights.