Using Contracts to Prevent Maverick Spend

Procurement spends a lot of time agreeing contracts with suppliers. Despite of all procurement’s effort, staff often spend company money with vendors on products that aren’t covered by the contracts that have been put in place by procurement. These transactions can be either deliberate or inadvertent.

Some common examples in offices are:

·        Staff purchase unbranded toners because of they are cheaper.

·        Staff making their own travel and accommodation arrangements.

·        Emergency purchases.

When people stick to using the supplier contracts that procurement has carefully negotiated, then costs will be lower and procurement would have a firm handle on where the money is being spent.

The downside of non-compliance with contracts is compromise on transparency, reduced profitability, and increased risk.

You also seriously hurt procurement team’s ego when purchasing is done outside the agreed contracts.

Yes, it matters.

So, then, how can a procurement chief ensure that spend across the organisation is compliant with contracts?

 Here are some ways for minimising maverick spend: 

• Get some visibility

First of all you need to increase the visibility you have over different areas of spend where compliance might be at its lowest.

This may sound like a tedious process but with sourcing technology and contract management solution, spend data shall be visible to your teams.

• Communication

By keeping stakeholders informed about the contracts or the spend management systems you have put in place for purchasing products you increase chances for them to stick to the agreements you have.

• Normalise the transactions

As procurement chief, once you receive adequate explanation as to why purchase was done outside the contract, and you are satisfied with it, do the right paperwork to normalize the transaction. This way you lead by example and people will follow your lead.

• Involve all relevant parties

While clear communication might be essential, you also need to make sure that you involve and work with all relevant stakeholders during any negotiation process, particularly around those associated with more personalised services, such as marketing or legal providers.

• Expert Knowledge

You need to involve someone from user department in contract negotiation who has the knowledge in product or services being acquired to ensure that specs matches up with the needs of the business.

• Use 80:20

It would be nice to get 100% contract compliance, with everyone generating purchase orders properly and sticking resolutely to the agreed contracts. However, that is quite a steep hill to scale at once.

Gradual improvement is alright.  Allow for “emergency purchases” of say 10% but keep tightening the system as you aim at 100% compliance.