Maverick Spend in Procurement: How to Identify and Reduce It

Take, for instance, the case of a producer who goes through an extensive back-and-forth with suppliers when it comes to negotiating prices for supplies. The price is fair and documented, and procurement can move on. Then a representative at one facility ends up running out of supplies just before an outgoing deadline. The approved distributor says that it will take five days to deliver, and the requisition has to be approved twice. A local seller has the product on hand and offers one-day shipping, so the representative places the order over the phone.

Two weeks later, another plant does the same thing, followed by a depot. Each order is tiny and has its own worthy reason. It is only at the quarterly analysis that procurement sees the full picture: a huge percentage of the cost of supplies was incurred outside the framework of the contract, and the pricing was not agreed upon.

This is how maverick spend is generated in procurement: quietly, in some legitimate steps. This paper examines maverick spending: the meaning, the ways to identify it within your own data, measuring its size, and the tips to minimize it without complicating purchasing.

What "maverick" really means

Maverick spending refers to any spending that occurs outside the manner in which an organization has chosen to spend money. These transactions typically fall into four overlapping categories consisting of buying from unapproved suppliers, buying from sources that exist but on which no contract was signed, buying without a purchase order, and also bypassing approvals that are usually needed. One transaction can fall into all four categories simultaneously, like the telephone order mentioned above.

The important distinction here is that maverick spend does not always result from a deliberate breaking of rules. Many individuals circumvent processes because they find them unmanageable. The organization’s supplier may fail to make an on-time delivery, the requisition process may take longer than what the purchase warrants, the contract may have been created but the individuals making the order were not informed, or the organization’s policy may not include provision for urgent needs. Although the fraud exists and needs to be controlled, it is still a minor occurrence compared to what is seen in organizations.

This is a business issue because off-contract buying loses the benefit of favorable pricing and reduces the volume commitment of existing contracts. It also leaves holes in the company's procurement spend management data, merely saying that the costs that cannot be tracked cannot be integrated.

What it looks like inside a real organization

⇒ The unapproved supplier situation

A service center is in urgent need of diagnostic equipment for a customer. The intended supplier cannot deliver it for ten days, so an employee makes a purchase locally and asks for reimbursement. Later on, instead of seeing the vendor's price comparison or tax and banking data verification, the procurement department notices only a payment made to a non-registered supplier without knowing the reason for going off contract.

⇒ The missing PO

A marketing team agrees to content services via email. Work is done, and after six weeks, an invoice of 3.4 lakhs is received in accounts payable without a PO. Now, finance is in a dilemma about whether to pay, which would reward the bypassing, or not pay and penalize a supplier who had delivered the work. The underlying issue is that a PO is where budgets get confirmed and commitment takes place. In the present case, the commitment took place even before someone authorized got to know about it.

⇒ The off-contract purchase

Procurement negotiates Rs 70,000 per unit for the component based on committed annual volume. The other department does not have any idea about the contract and buys the component from another source for Rs 82,000. This is 4.8 lakhs more than the negotiated price for 40 units. More importantly, the other volume has reduced the committed volume for the current price of Rs 70,000.

⇒ The split purchase procedure

Regulations require managerial approval for purchases over Rs 50,000. An employee can request numerous purchases from a supplier, all of which satisfy the regulation. Whether this situation occurs randomly or purposefully depends on the situation, making patterns more meaningful than transactions. This subject will be discussed later in this chapter.

Why employees bypass the process

Speed is the main reason. Because the authorized purchasing path usually takes days, while the unauthorized path only takes minutes, it is easy to predict the outcome. Complications add to the situation: too many steps in forms, an unclear negotiating path, and approval officers being on vacation or busy. Then there is visibility. The majority of employees have never seen the authorized vendors list, which is usually kept somewhere as an Excel table. They have no idea whether they are covered by contracts or not.

There are two other significant causes. Unclear policies cause confusion when it comes to definitions of what needs approval. People end up guessing in favor of their own needs. And the issue of retrospective approval means organizations are sending the wrong signal: if the PO raised after the invoice is never turned down, then it must have been understood that the PO is optional. Before rushing to conclusions, check both of these factors in your own operations.

How to identify maverick spend using your own data

One of the main mistakes operatives make is searching for the singular “maverick spend” point in their ERP system. In fact, it usually isn’t there. Maverick spend is a conclusion that you will reach through combining data from different points: vendor master, purchase requisition, purchase order, contracts, invoice, approvals, cards, and expenses, as well as the respective departments. The following six queries can identify most of the things you will meet in this way.

♦ Start with the supplier

Verify every vendor's payment received in a specific timeframe against the authorized vendor list. Just looking at names is not the most reliable method, as “Sharma Traders” could refer to one business entity or two separate entities, so we should use tax registration numbers and bank account details whenever possible. After you have come up with the unmatched vendors, try to evaluate them. You can pay attention to new vendors who had their companies registered a few days before payments were made, those who were repeatedly used by a certain department or employee, and those that share the same bank account and address as another vendor. If the local agent in the service center example has received 6 lakh across eleven invoices in a quarter, all paid from the same location, the important question is not about who breached the policy but what purpose the location actually needed the agent for.

♦ Identify Non-PO expenditure

Highlight invoices without any PO reference, then analyze the dates of PO issuance in relation to invoice dates and dates of receipt of goods. A PO issued after the issue of the invoice is a post facto PO there may be a paper trail, but it came too late to have any significance. A single instance is just an exception; twenty instances from the same department in one quarter is a systematic problem. There are some non-PO expenditures that are legitimate, such as rent, utility bills, statutory requirements, and banking charges. Exclude these explicitly.

♦ Test for the contract

Compare what was purchased to what was contracted for: the actual supplier, price, and quantity compared to the contracted supplier, price, and terms. This explains how a business can have an approved supplier list and still do off-contract spending. For example, when the contract specifies a price of Rs 70,000 per unit, but invoices reveal that the same vendor is being invoiced at Rs 76,000 since one of its branches purchased without regard to the contract, then the supplier is approved, the purchase order was placed, but the negotiated price never came into play.

♦ Read the approval trail

Check each transaction if an approval was granted, especially by a person who is allowed to approve the transaction for the certain amount. Check if the approvals were given before the purchase order or invoice was issued. Check if the approver is the same as the person making the purchase, where the policy does not allow such action, or if the approver has gone over the limits in making the approval.

♦ Look for transaction patterns

React the payments as per the department, vendor, requester, category, and time, then look for trends. Take for example a threshold of RS 50,000. Person X is making three purchases from the same supplier of Rs 30,000, Rs 28,000, and RS 32,000, in total RS 90,000, hence exceeding the threshold. Such transactions do not imply that the policy was broken, there could be other reasons. However, this requires further investigation. It may be possible that there was one requirement or that the purchase order could have been justified by a better total price.

♦ Find where it is concentrated

Identify the proportion of the flagged spends per department, site, product category, vendor, and requestor. The proportion is never equal, and the inequality is the information you seek. If a plant is the source of the vast majority of your non-PO purchases, it is easy to assume that they are flouting the rules. More accurate explanations might be that the selected supplier does not have sufficient stock in that part of the country, that the approval cycle is too slow for their operational requirements, that there are no contracts that address the local needs, or that no one ever learned about the process.

How to measure maverick spend

The basic calculation is simple:

If a firm spends Rs 20 crore in one quarter, and Rs 3 crore of that was outside the defined procedure, then maverick spending equals 15%. However, the crucial part is the numerator because there is no universal definition. One firm counts merely the expenditures without a purchase order (PO), while another firm considers the non-approved suppliers, non-compliance purchases, and cases of bypassing the approval process. Both interpretations of the term can be justified provided that they follow one’s procurement policy as well as remain consistent because the trend is more important than the figure itself. Be very careful when using public benchmarks unless there is a clarification regarding how they were formed.

Apart from the overall percentage, monitor the quantitative data on maverick spending, which includes the figure for maverick orders, off-contract spending, and non-approved supplier spending. It is the breakdown of the figures that provides information on where to act.

How to solve it: Change the system before punishing the individuals

⇒ One of the most important lessons is this

Compliant purchasing should not be more difficult than non-compliant purchasing. For example, the authorized purchasing process may require five forms, three messages, two approvals, and four days of the process. Meanwhile, it is possible to purchase something from a local merchant in ten minutes. The result is that a business has created motives to avoid procurement, and this will not be solved by policy reminders. The rest of the recommendations are aimed at making the process easier.

⇒ To start with, the policy should be usable

It should be clear what needs to be approved, the thresholds, the types of purchases allowed for each procurement level, and how to deal with emergencies. Making sure there is an emergency purchase procedure in place would help remove the need for improvised ones. It is also important to have regulations in place, which serve as a basis for procurement compliance.

⇒ Then make the approved vendors easily available

Vendors listed on a spreadsheet that must be navigated through are not accessible; they need to search for the vendor categories, know what is covered, and request another vendor when coverage is lacking. And that’s important, since lack of coverage is one of the top causes of off-contract procurement. For commodity spend, use catalogs, defined purchase rules, and fast approvals for lower-value purchases to make compliance the fastest approach.

⇒ Speed of the approval process deserves separate consideration

Requests must be automatically routed to the appropriate person to review them, based on value and category, escalate if that person fails to respond, and be remotely approvable when travelers or shop floors are involved. The PO must be an actual authorization tool that is created before making a commitment and contains the approval within, not just a document generated after purchase to close accounts payable.

⇒ Finally, monitor constantly

Finding out about maverick spending during an annual audit means that those bad habits have been practiced for 12 months already. Reviewing the same metrics on a monthly basis will help you identify a new trend, like using a new vendor by a particular plant.

Where automation and procurement software strengthen these controls

Human controls require people to remember to use them. An automated procurement process consistently uses them, and the most effective method will be the one that implements the process of purchasing in the actual order of operations: Request – Approval – Approved Vendor – Purchase Order – Receipt – Invoice & Matching – Payment.

Automation of purchase orders is what creates transparency in the system. When an approved request reaches a purchase order with vendor information, goods description, price, quantity, information about delivery, and a note of approval, there would be no need to enter the data into the system again, and the chance of data tampering would be eliminated. After that, processing invoices will have a point of reference in the PO, which will diminish the number of exceptions in the accounts payable department.

Businesses using spreadsheets, emails, outgoing POs, manual vendor databases, and approval processes work for each part but not for the whole. Purchase management solutions consolidate vendors, requests, approvals, POs, spending data, audit trail, and reporting. As a result, answers about identification can be obtained from one database instead of five since all of the info is concentrated in the software. However, it is not a magic pill: not even the best purchasing software can make a bad policy work.

How TYASuite fits into the process

These controls become simpler to enforce if purchases are made using a centralized procurement system. This is the place where an ERP and procurement solution called TYASuite could be integrated, and it is important to elaborate on it, given the above-mentioned issues.

Centralized management of vendors will enable you to manage your approved suppliers effectively, since all the supplier information will be stored in a single system; it becomes easier for you to see which suppliers are approved and to route requests to them. Using structured purchase requests and approvals makes informal purchases less likely, as it gives the approval committee all the information required to approve purchases and follows the predefined workflow instead of hallway discussions and emails. Purchase orders will make each purchase traceable and give it the necessary authority.

The integration of requests, approvals, suppliers, and Purchase Orders (POs) in one unified system allows for increased visibility of expenses; hence, the previously mentioned pattern analysis becomes an activity to maintain rather than a spreadsheet that has to be created quarterly. The above also facilitates the connection of procurement with the overall Procure-to-Pay cycle, from order to delivery, invoice, reconciliation, and payment; it is thus possible to trace a purchase from initial information to the payment that was made against it. However, this does not mean that compliance is guaranteed, even though TYASuite plays a vital role in purchasing regulation and standardization.

Maverick spend vs. Invoice exceptions

Maverick expenditure and invoice exception are closely connected, but not quite the same issue. While the former deals with the issue of how a purchase is made, the latter is the problem discovered during invoice processing.

Procure-to-Pay is the element that connects the two processes, since a purchase made outside the system leads to exceptions further in the process (an invoice without the corresponding Purchase Order).

A practical action plan

In case the action plan has to be taken to the meeting, follow the steps below:

1. Measure the amount of off-process spending at hand. Define the scope of the measurement with finance people and measure the percentage spent in the previous quarter as a starting point.

2. Identify the leading departments, categories, and suppliers. Perform the concentration analysis and define where the major value lies.

3. Determine the reason. Speak to requesters in these areas. Does it have anything to do with speed, coverage, awareness or policy misunderstanding?

4. Solve supplier coverage and approval issues. Add suppliers where there are legitimate needs and eliminate redundant approval steps.

5. Make buying easier. Make search, request and low-cost purchasing fast enough so that people prefer the compliant path.

6. Automate approvals and purchase orders. Approve requests automatically, create POs based on approved requests and prevent retrospective POs.

7. Control monthly. Report the same metrics every month and analyze any exceptions in the right context.

Frequently asked questions

1. What is maverick spending in terms of procurement?

Maverick spending refers to procurement activities that go outside the internal policies of the organization. It can involve purchasing goods and services from unauthorized suppliers, making purchases before obtaining a purchase order, or going against other internal procedures.

2. What is an example of maverick spending?

For example, a factory chooses to procure packaging from a local supplier at a higher cost because the vendor it usually works with is unable to deliver on time. Thus, the factory receives an invoice but no purchase order.

3. How can one recognize maverick spending?

A good way to recognize maverick spending is to collect and analyze data on suppliers, invoices, and financial approvals. This may help to reveal suppliers who were not authorized and have been issuing invoices without getting purchase orders.

4. What causes maverick spending?

The factors responsible for maverick spending include slow approvals, unusual suppliers, unclear purchasing policies, and inability to find the right suppliers.

5. What can be done to mitigate maverick spending?

To overcome maverick spending, the organization should clearly define its policies, make sure that suppliers are easy to find, and ensure that complaints are handled quickly.

6. How can procurement automation assist?

It applies routing, approval, and purchase order policies, reduces manual follow-ups and keying, and leaves a record for analysis. It facilitates control but does not substitute for proper policy.

7. What is the difference between maverick spend and off-contract spend?

Off-contract spend is a particular type of maverick spend: buying products without considering the contract. Maverick spend is wider and includes such issues as an unauthorized vendor, lack of a purchase order, and so forth.

8. Can procurement management software help control maverick spend?

Sure. Centralizing vendors, requests, approvals, and POs makes the compliance path simpler while making violations easier to detect. However, effectiveness depends on the quality of policy and vendors covered.

If your procurement department wastes much time detecting off-process purchases manually, a centralized workflow can bring all these components into a single process: requests, approvals, vendors, and purchase orders. Find out how TYASuite can facilitate your procurement workflow.