How to Tame Maverick Spending by Improving your Procure to Pay Processing

Executive Summary Designed to accommodate direct spending, traditional Procure to Pay (P2P) processes have not been able to keep up with the growing demand for efficient management of indirect spending. As a result, organizations increasingly struggle with maverick spending practices that preclude savings and lead to higher costs. Employees typically resort to maverick spending, or purchasing of services and supplies outside of the established policies and procedures, when organizations P2P processes fail to meet their expectations and needs for fast and efficient order placement and approval. These inefficiencies, in turn, commonly result from cumbersome ERP platforms that keep these processes in place. Investing in tools that optimize ERP usability can significantly enhance employee compliance and reduce the problem of maverick spending. By streamlining P2P workflow, strengthening data integrity, and empowering business users with efficient and user-friendly tools, Winshuttle solutions can help organizations improve ERP usability and curb maverick spending.

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The Problem of Maverick Spending

The sourcing, procurement and payment processes, collectively known as Procure to Pay (P2P), were developed to manage acquisition of raw materials used to build various products. These expenditures are known as direct spending and have always been considered critical for business. Expenditures not directly related to product developmenteverything from office supplies to telecom services and contract laborare known as indirect spending. For many years, expenditures associated with indirect spending were an afterthought for procurement organizations. However, as first-world economies have shifted from manufacturing to services and as information technology has become more critical to all businesses, indirect spending has moved to center stage. Indirect spending accounts for 60% to 90% of expenditures in service industries and up to 50% in modern manufacturing. As a result, procurement organizations have had to adapt: Processes designed to handle forecasting and scheduled purchasing of large volumes of raw materials from a relatively small number of suppliers must now work for short-cycle, variable purchases from hundreds or even thousands of suppliers. Its no surprise that the transition has not always been smooth and that procurement organizations continue to struggle with high levels of maverick spendingspending that occurs outside of the approved procurement processin indirect categories. A 2011 study by A.T. Kearney of indirect spending at 162 large and mid-sized European companies found that while 95% of indirect spending was theoretically governed by contracts and other defined processes, only about 65% of this spending actually complied with policies and procedures1. The Hackett Group estimates that, on average, 14.4% of all indirect spending at U.S. corporations is non-compliant2. There is a real cost attached to maverick spending. Hackett estimates that companies save an average of 15% by using preferred suppliers, contracted rates and other processes. Since maverick spending bypasses these processes, Hackett estimates it costs companies more than 2% of total indirect spending in lost savings and inefficiencies.

Why Employees Go Maverick

The question of why employees engage in maverick spending is a difficult one to answer. However, research offers some intriguing clues. The Kearney study found that the most frequently offered explanation for buyer non-compliance in indirect spending was that buyers had no incentive to comply (Figure 1). The implication is that employees bypass procurement processes because they dont see any value in them. If maverick spending works better for the employees, then they will choose that path.
Buyers have no incentive to comply

69%

Controls to identify non-compliance are not in place

49%

Buyers have poor visibility of contractual rates

41%

0% 10% 20% 30% 40% 50% 60% 70% 80% Percent of Organizations That Agree

Figure 1: Reasons for non-compliance with P2P policies

How to Tame Maverick Spending

This finding suggests that if companies want to eliminate maverick spending, they should take a hard look at their P2P systems and figure out how to make them function better from the perspective of employees who must use them every day. A survey of available research suggests that P2P systems are failing employees in several ways: Catalogs populated with out-of-date, incomplete or inaccurate data: Catalogs are among the easiest ways to enforce spending policies and enable supplier collaboration. However, employees have a low tolerance for error and will quickly learn to bypass the catalog if they find that it is incomplete or if the item delivered is not what they had anticipated it to be. A 2006 survey of best practices for using SAP for P2P automation noted a widespread underuse of catalogs because of poor data quality3. One survey participant said: The biggest problem is data accuracy and content, and timeliness of contentkeeping it up [to] date with multiple plants using different SAP numbers, [dealing with] files that are not up to date. We cant get plants to agree to a common part number. Nobody uses the catalog[it] isnt up to snuff. It isnt coded properly, or they cant find it [information]. Slow or cumbersome ordering and approval processes: Employees will often go outside of the established procurement channels if they believe that doing so will result in faster delivery of an item. Analysis by performance benchmarking group APQC found a direct correlation between high levels of maverick spending and poorer on-time order receipt (Figure 2).4 Furthermore, even the perception of poor performance is enough to promote maverick spending. A Hackett Group study on non-compliant indirect spending noted that even when following the approved process resulted in quicker delivery, employees often thought it did not: Purchase bureaucracy implies too many levels of approval, which slows down the process and depletes confidence from buyers in a fast purchase.
Percentage of supplier orders received by original request date (on-time) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 25th Percentile Median Maverick Spend Less than 1% 75th Percentile N=66 80.0% 68.5% 90.0% 95.0% 84.5% 90.0%

16% or more

Figure 2: Maverick spend and on-time order receipt

P2P processes perceived as irrelevant or ill-suited to indirect spending: A general belief among employees that purchasing policies and processes are designed for large, forecasted purchases associated with direct spending and arent flexible enough to suit demand-driven indirect spending can also lead to maverick spending. The Hackett Group study asked participants why they did not use the established procurement processes. In response, 28% indicated that business team has more subject-matter knowledge and expertise, while another 26% said that procurement resources are committed elsewhere. In other words, over half of the respondents felt that the procurement processes lacked either the ability or the capacity to meet their particular needs. While this list is far from exhaustive, the data suggest that these day-to-day sources of dissatisfaction often lead employees to go outside of the established P2P processes when making indirect purchases.

How to Tame Maverick Spending

Taming Maverick Spending

Many consultants and software vendors suggest that the solution to maverick spending lies in tighter controls and more advanced automation. However, no matter how airtight the system may be, it can only work if employees use it. Thus, if the root cause of maverick spending lies in employee dissatisfaction with P2P systems and tools, organizations should think twice before investing in even more extensive automation or control and instead look at ways to make their existing solutions more usable. Areas for improvement may include: Better master data management: The existence of out-of-date, incomplete or inaccurate catalogs is likely a symptom of poor master data management. For many organizations, the process of uploading and updating data is still manual, making it slow and prone to error. The lack of standard processes for data governance makes it difficult to keep data consistent across multiple systems or between internal buyers and external suppliers. Better master data management means a better catalog and a better employee experience. Simpler workflow procedures: Proper approval processes are critical for enforcing spending policies. If customers view purchase approval or any other part of the P2P process as too slow or cumbersome, there is likely a problem with the design and implementation of the workflow enabling this process. Workflow tools that are tightly integrated with the underlying data functions are generally more efficient, requiring less data re-entry and replication of steps. Good visibility on open and pending approvals ensures that the process moves along at a reasonable speed. More flexible design: The perception that P2P processes are out of sync with the business realities of employees engaging in indirect spending can hinder compliance. Involving business users in the design and implementation of processes will likely make them more receptive to using them. The capability of rapid customization and revision ensures that as business needs change, the processes can change with them, continuing to enable greater efficiency and productivity, rather than becoming barriers to progress. Focusing on these user-level improvements could be a better way to encourage compliance than trying to impose ever more structure or rely on greater levels of automation to eliminate the human element.

The Winshuttle Solution for P2P

For companies that use SAP as the basis for their P2P systems, Winshuttle offers products and solutions that can help tame maverick spending by eliminating the usability deficits that encourage users to go outside of the established procedures. Winshuttle does not replace or marginalize an organizations SAP installation; rather, Winshuttle focuses on ways to enhance the way employees interact with SAP to increase adoption and help companies maximize their SAP investment. P2P Usability Goal Increase catalog data quality through better master data management. Speed up approval processes with simpler workflow. Winshuttle Solution Winshuttle specializes in making core data entry and data maintenance operations in SAP faster and less error-prone. Winshuttle Transaction provides a simplified UI and bulk update capabilities that help keep master data complete and up to date. Winshuttle tools allow rapid creation of workflow solutions that execute SAP data operations. Winshuttle Workflow provides a visual design environment for rapid development, and Winshuttle Server leverages Microsoft SharePoint as an environment for workflow collaboration. Winshuttle tools allow users to create powerful solutions on top of SAP without writing code, eliminating IT bottlenecks and giving business users the ability to solve their own problems. Winshuttle Studio allows non-programmers to rapidly build flexible data operation and workflow solutions within a managed environment governed by Winshuttle Central.

Create P2P processes that are suited to indirect spending by empowering business users with flexible design tools.

How to Tame Maverick Spending

Conclusion
Traditional P2P processes have not been able to effectively manage indirect spending in modern enterprises, resulting in maverick spending practices that significantly increase costs and decrease savings. Research has shown that employees often bypass established purchasing protocols when they are dissatisfied with the processes involved, either due to poor catalog data quality or due to cumbersome procedures associated with order placement and approval. By improving ERP usability and workflows underlying the P2P processes, Winshuttle solutions can help organizations raise employee compliance and reduce maverick spending. For more information about how Winshuttle can help your company improve P2P compliance, curb maverick spending and get the most out of your ERP installation, visit www.winshuttle.com or email info@winshuttle. com.

European Indirect Spend Management Study, American Express and A.T. Kearney, 2011. Reducing Non-Recurring Business-Critical Spending, Hackett Group Executive Insight, 2009. P2P SAP Best Practices: Perspectives from Suppliers and Subject Matter Experts, Rob Handfield, North Carolina State University, 2006. Maverick Spend in the Procurement Function, APQC, 2010.

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How to Tame Maverick Spending