Dark purchasing leads to loss of negotiated savings but this is often just the tip of the iceberg, with problematic processes and ulterior motives lurking beneath the surface. So what can businesses do to negate the need for employees to go off-piste?
If ever there were anything anathema to the procurement profession, dark purchasing is it. It goes against the grain of all the careful processes procurement has put in place to ensure the best deal. It is not easy to gauge the extent of the problem because there is no formal reporting of rogue spend, but Elaine Porteous, a freelance writer in supply chain, believes it could account for between 25% and 80% of an organisation’s total spend. “Companies do not track off-contract purchases regularly or efficiently enough to provide meaningful data, or if they do, they don’t share it,” she says. What we can be sure of is that it is a widespread problem. A 2019 report on the subject by The Hackett Group says that even businesses “with substantial organisational influence struggle to achieve 100% compliance on contract spend.”
Why go rogue?
Porteous says rogue spend is traditionally most evident around low-value, high-frequency tail spend purchases. “It occurs where the P2P process is not clear, where it is pliable and where P-cards are in use,” she says, though she adds while this is the general trend, large-value purchases may also be made this way at times.
Hackett’s survey found the top reasons for maverick spend to be lack of self-service tools (75%), a non-compliant mentality (69%), and resistance to behavioural change despite official policies (69%).“Rogue spending often happens through frustration at the lack of speed of conventional P2P processing,” says Porteous. “Slow approval for purchase requisitions and orders can be to blame. Where processes are ineffective and time-consuming, employees bypass the correct method. Sometimes employees feel the contract in place is not the best deal and they can do better.”
Data monitoring and correction
Les Ball, CPO of engineering firm ABB’s motors and generators division, calls rogue spend a “disabler” for procurement. He says it often comes about when engineers engage with suppliers early in the development of a product and by the time procurement gets involved it’s difficult to add value because “the supplier feels they already have the business”. In another scenario, a global company may have appointed a supplier for all IT peripherals but a local site continues to source from a local supplier. So what can procurement do to bring people back onboard? “What I’ve learned is there’s very little value to kill the tail, to try and get suppliers removed, because as fast as you remove them they get added back in,” Ball says.
Data analytics is the key to tackling the problem, he adds, because it gives you visibility, along with culture change and education for stakeholders. Cross-functional partnering between procurement, product development teams and R&D ensures purchasing is involved early on, so there is “less chance of a supplier coming out of nowhere”. Ball says it’s important to educate stakeholders and create a culture where they want to comply and there’s a clear benefit if they do so. “In the companies I’ve been working in we’ve always put in a consequence for non-compliance. First of all a warning, then a written warning, then something more severe,” he says. “With all the ability to analyse spend data, we’re in a much better position than ever before in terms of monitoring.”
Guided buying practices
Hackett found as much as 16% of negotiated savings were lost due to stakeholders going off-piste, with the largest amounts being in the categories of finished goods for resale, sales and marketing support, HR, and admin and business services. It recommended businesses implement “guided buying”, where stakeholders can buy goods and services from any location on the device of their choice, but with controls in place. Such a system should be flexible enough so users can suggest alternative suppliers. Does this mean there are times when dark purchasing can be acceptable?
Porteous thinks not. “The category management and P2P procurement process should take care of all third-party expenditure using all the tools employees are given.” Ball is even firmer, saying rogue spend can signal more sinister matters that require investigation. “There have been instances where it’s been revealed that the rogue spend was directed towards a company where there was an inappropriate relationship. It has resulted in termination,” he says. “If the process makes it easy to go to the company they should be using, and the commercial agreement provides the most cost-effective solution, and you’ve done a great job in communicating the change management, the question is why would you continue to avoid what is a defined strategy?”