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Is Non-Centralized Spending Burning Up Your Profits?

Is Non-Centralized Spending Burning Up Your Profits?

It’s a dangerous practice that is threatening your company’s bottom line. Every single day, it could be robbing your organization of more of the capital it needs to be successful.

Not only that, it also makes your company vulnerable to several threats both internal and external. And the worst thing about it?

It could be happening right under your nose.

Non-centralized spending, also known as ‘rogue’ spending, is causing your organization to waste lots of money. If you want to make your company more successful, you need to reduce this practice and begin to put a managed spend program in place.

 

The Issue

As any procurement professional knows, it’s extremely important to manage your company’s spend as effectively as possible. This means understanding what is being spent and what resources are being purchased.

As a procurement professional, you’re tasked with making sure each purchase is accounted for. If this doesn’t happen, the company could lose large sums of money and even open itself up to threats from the outside. That’s why rogue spending is such a huge problem.

 

What is Rogue Spending?

Rogue spend can be defined as any spending that occurs outside the purview of procurement or not part of your company’s centralized procurement process. When a non-procurement professional purchases resources without consulting with the procurement department, they are engaging in rogue spending.

In some cases, rogue spending may be done to make smaller purchases that need to be done quickly. In other situations, it’s done to buy more expensive resources. It’s not always harmful, but when it is allowed to continue, it can easily grow into a cumulative out-of-control money pit.

 

Why This Happens

There are several different reasons why rogue spending occurs, but here are a few of the most common:

  • The current procurement procedures are too cumbersome and complex, and is in impediment to the typical work flow
  • The official corporate policy concerning procurement is either incomplete, not enforced or nebulous, preventing real collaboration with procurement from happening
  • Procurement does not have enough visibility to see what purchases are being made

 

Here’s a possible scenario:

Bobby manages the sales department and the customer relationship management (CRM) program they are using has become outdated. They need an upgrade, and they need it fast.

Since Bobby is already familiar with the software needed to make his sales representative more effective, he doesn’t see the need to approach procurement. Besides, having to deal with the red tape, politics, and unclear procurement policies will make the process take longer.

As a result, Bobby feels the company will start losing out on sales, which could make his team look bad. Because of this, he makes the decision to purchase the new CRM platform.

Makes sense, right? On the surface, it can seem like a great idea.

But it’s not.

Since non-centralized spend is typically done by non-procurement professionals, it can become dangerous to the organization. These professionals may not be intentionally trying to create problems, but since they don’t have procurement experience, they could be putting the organization in danger.

Let’s look at Bobby’s case again.

Bobby has purchased his brand-spanking-new CRM and couldn’t be happier! However, since he is not familiar with software licenses, he’s actually hurting his company in the long run.

Bobby doesn’t know the first thing about managing software licenses, which means more licenses are being installed than their end-user license agreement allowed. Because of this, the vendor will end up conducting an audit.

They will find that their licenses are being used incorrectly and the company will now have a nice big fine to pay. To make matters worse, they will still have to pay for the additional licenses they used. Software noncompliance can be a very expensive mistake.

If Bobby had brought procurement into the process, they could have made sure that the purchase was made in a way that benefitted the entire organization. They may have even been able to negotiate a better price and better terms.

It usually happens because tail spend management is a complicated endeavor requiring buy-in from leadership and the different departments and subsidiaries and it appears to not provide immediate results, which may be a false assumption.

 

How To Reduce Rogue Spending

So what’s the solution then? How can you reduce or eliminate rogue spending?

The answer lies in an effective tail spend management program.

What is tail spend? Tail spend refers to the purchases that doesn’t fall into the primary group of purchases made by the company.

Ideally, about 80% of a company’s spend is done with about 20% of its suppliers. These suppliers are the main vendors that service the organization.

The 20% of spend that is left over is known as the “tail.” These purchases are usually done by smaller local offices for incidental purchases. It may seem that these purchases wouldn’t account for much, but in a larger organization, they do.

Tail spend management is an ongoing process that procurement uses to monitor and analyze spending that occurs with the smaller purchases that typically aren’t managed.

 

The Benefits of Tail Spend Management

Managing your organization’s tail spend will make it easier for your company to monitor and manage its spending. It will also help you manage vendor relationships in a way that increases your company’s buying power.

When this is done, it allows you to leverage your spending power and save money. Since many organizations have their tail spend spread out over too many different suppliers. This dilutes their buying power and results in wasted spending.

Tail spend management involves a rigorous process of auditing your procurement practices, analyzing your supplier relationship, and implementing an all-encompassing strategy for managing your tail spend over time.

Tail spend management helps you take charge of your company’s spending. You will gain greater control over purchases that are made. Being able to monitor tail spend makes it easier to enact and enforce policies that keep people accountable for the purchases that are being made.

The result? Less vulnerability and less wasteful spending. Your company will eliminate threats and keep more of its money. You’ll be a hero!

 

Conclusion

Tail spend management requires a lot of effort and resources. This is one of the reasons why companies don’t do it. It’s probably why you’re not doing it.  Or it could be the fact that you may not know where to start.

Well, as we know, knowledge is power. The best approach is to do your homework. Through some basic research, find those professionals who specialize in creating efficiencies in your procurement process.

The low hanging fruit can yield quick results for your ROI.

Register for a webinar or two. You will gain more insight into this pressing issue and have the opportunity to get some of your questions answered.

There is money on the line, that is not going to your bottom-line.

What are you waiting for?

 

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