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Category: Procurement and Sourcing

Supply Chain News: Understanding Rogue Procurement Spend

 

Getting Data is not Easy, but Payback from Effort May be High

 

Sept. 6, 2018
SCDigest Editorial Staff

On its blog, the Institute for Supply Management does a deep dive each month on a metric that relates to procurement performance.

This summer, that included a look at measuring "rogue spend."

Supply Chain Digest Says...

Looking for rogue spend "is not something you're going to do once a month because it does take a reasonable amount of work."

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What is rogue spend, also called maverick or unmanaged spend? ISM says it is defined as the "process of an employee buying a needed product or service without complying with the organization's normal or prescribed process; off-contract buying."

Rogue spend occurs most often in indirect procurement and so-called "tail spend," characterized by large numbers of lower dollar procurement transactions in a variety of categories, including maintenance, repair and operations; office supplies; and professional services.

Since these are small individual transactions, they are typically not strategically sourced, and often purchased outside contracts and/or procurement procedures.

But defining rogue spend is a lot easier that quantifying it. Finding rogue spend requires an exhaustive examination of financial reports and data, Tracey Smith, president and founder of consulting firm Numerical Insights, told ISM.

"It's not something that leaps out of your data easily, but it is also an opportunity," Smith says. "If you need to look for cost savings and you've taken all the low-hanging fruit and renegotiated all your contracts, rogue spend is an area where you can get into your tail spend and try to find cost savings."

According to a 2016 research report by The Hackett Group, 29% of indirect spend is off-contract. High levels of rogue spend, Hackett says, can be a sign of such bad company practices as poor spend visibility and procurement policy violations.

"It's not unheard of for rogue-spend levels to reach as high as 80% of total spend in some organizations," ISM says.


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Hackett's 2016 report indicated 10% of rogue tail spend is typical for a "non-mature procurement organization," and 5% for a "world-class organization."

Even though tail spend usually makes up no more than one-fifth of a company's total spend, eliminating 5% of rogue spend from that amount can result in cost savings that earn a supply manager high praise from the C-suite and finance department.

Looking for rogue spend "is not something you're going to do once a month because it does take a reasonable amount of work," Smith also told ISM. "So, you could do it every six months. What you're looking to trace is spend that has been charged to a certain cost center, instead of a contract that was in place. So, when you start to mine that data, you have to try and identify which of those transactions look like they are associated with spend categories that you have negotiated contracts on."

Not surprisingly, Smith also says that rogue spend is a bigger problem in large companies with multiple locations, employee turnover and a lack of across-the-board awareness on contracts.

Smith adds that actions to reduce rogue spend include: (1) analyze company spend and identify actionable patterns of rogue spend, (2) raise awareness of contracts and spend policies and (3) streamline the procurement process where necessary.

Of course, SCDigest notes that identifying rogue spend can be much easier for companies that have adopted so-call spend management solutions, though this is primarily a large company scenario.

Any thoughts on measuring or controlling rogue spend? Let us know your thoughts at the Feedback section below.

 

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