iStart - eprocurement: Corral your maverick spend


Published on

With millions being wasted annually in

‘off-contract’ spending, David McNickel

examines the human and systems drivers

behind rogue spending and explores

how e-procurement systems can turn the

tables on the mavericks - delivering real

cost savings…

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iStart - eprocurement: Corral your maverick spend

  1. 1. Feature Corral your maverick spend42 Quarter One 2012
  2. 2. With millions being wasted annually in‘off-contract’ spending, David McNickelexamines the human and systems driversbehind rogue spending and exploreshow e-procurement systems can turn thetables on the mavericks - delivering realcost savings…A s a business, agreeing what to buy, and from whom, allows the opportunity to negotiate suppliers hard. But when agreements are undermined by rogue buyers going to suppliers outside the Maverick deal, efforts come to nought. So what exactly is maverick spend’? Motivations In simple terms, it refers to procurement outside of a companyscontracts, systems or processes. A typical maverick spend, for example, might be Our procurement process sucksa staff member deciding that rather than buying a ream of A4 from a companys Office staff whose printer is out of ink cant waitcontracted suppliers, they will instead pop into a neighbourhood stationary store until tomorrow for the next stationary delivery. Theyto pick some up – paying full retail instead of a discounted price. This type of have work to do today so will be forced to buy retailspending is usually labelled as something entirely different (and legitimate) on to get their jobs done. What about the actual buy-expense claims, and becomes virtually impossible to track. Maverick spending ing process? Are there endless screens, login codesis usually buried in Maintenance, Repair and Operating (MRO) budgets – for and line item details to fill in? Is it possible yourthings like stationary, administration, raw materials and services – and in this team avoid the official channel because its tooway it occurs under the radar, as opposed to large purchases like a new print- complicated and takes too long?ing press or a fleet of company vehicles which could never be hidden in themiscellaneous column. In terms of prevalence, for organisations that pay little Who knew?attention to spend analysis its likely maverick spending is widespread – more so If your people dont know about the new sup-if decentralised buying is the status quo. Estimates vary widely, but once a spend plier contracts you have negotiated, or theyre notanalysis has been undertaken and new policies and processes enacted, compa- informed that buying retail is actually forbidden,nies typically report annual cost reductions of at least 10 per cent - and up to 30 theyll be mavericks without even realising it. Haveper cent or more is not unheard of. you recently merged or acquired other businesses So who are the maverick spenders and why do they do it? Essentially there or branches? Has purchasing training for these neware two groups. The first group are rare but at the same time are nowhere near staff been a priority?as rare as we would like to think. Just a few of the most recent examples aredetailed in the sidebar Watch out for the cowboys on page 44. They are simply Head Office can get stuffedcriminals who, once given access to an organisations finances, will continue to Decentralised management makes sense for thingssteal from that organisation until they are caught. The other group are far more like setting marketing priorities, driving sales andcommon - just ordinary staff members with no malicious intent, but who will providing regionally responsive services, but innonetheless flout a companys purchasing policies until they are brought into these times of nationwide next-day delivery, areline. For many managers, the answer to the why do they do it question is actu- there really any benefits to decentralised purchas-ally hard to hear – because for the most part, its managements fault. For once ing?they remove criminality as a motivator, organisations usually need look no fur-ther than their own internal processes, efficiencies and controls for the reasonsbehind their maverick spending problems. ›› Quarter One 2012 43
  3. 3. Feature // eProcurement Watch out for the Cowboys Maverick spending in NZ & Australia is by no means limited to a couple of extra highlighters and an unneces- sary back-up printer cartridge. Procurement authority and access to a companys financial systems is seen by many as an open invitation to steal, and the thieves are routinely among an organisations most trusted employ- ees. Below are just a few of the most recent cases. Name: Jonathan Name: Trevor Esera Name: Herminia Lanuza Kirkpatrick Arrested: 2009 Arrested: 2009 Arrested: 2011 Position: Accountant & IT Manager Position: Financial con- Position: CEO of AUTs Victim: Rinnai troller Business Innovation Stole: $1.75 million Victim: Importer (name Center Method: Esera faked accountancy and suppressed) Victim: AUT University business school degrees, then set up Stole $2.7 million Stole: $665,000 fictitious companies through which he Method: Throughout her six year tenure Method: Kirkpatrick set up numer- invoiced Rinnai 350 times over six years as financial controller, Lanuza recorded ous false companies through which to to the value of $1.75M. He then approved legitimate invoices as being paid while invoice AUT. With his signing approval for payment of the invoices and the money she channeled the money into her own invoices up to $15,000 Kirkpatrick was was deposited into his wifes accounts. accounts. She also drew cheques from able to steal $665,000 over the course of her company illegitimately and obtained 10 years at the University. Name: Martyn Scott unauthorised direct credit from the BNZ. Arrested: 2010 After her arrest company management Name: David Don Position: Company accountant described the business as left virtually Arrested: 2011 Victim: National Fire & Security insolvent. Position: Accountant, Stole: $1.4 million St Patricks College Method: Over the course of six years Name: Christopher Sue Wellington Scott created fake invoices and paid the Arrested 2006 Victim: St Patricks College money into his own accounts. He also Position: Company Accountant & Finance Stole: $126,000 took genuine invoices and paid those Manager Method: Employed by the prestigious into his accounts and made double pay- Victim: Turners Auctions Wellington boys school for five years, Don ments of invoices - where he would Stole: $2.8 million recently pleaded guilty to eight charges legitimately pay an invoice but then pay Method: During seven years in vari- of “accessing a computer to obtain a the exact amount again to himself. ous financial roles at Turners, Sue used benefit” and money laundering. false accounting to direct millions into his accounts and also pocketed secret Name: Richard Watson Name: Sonya Causer commissions from international vehicle Arrested: 2010 Arrested: 2009 suppliers. He was only caught when he Position: General Position: Payroll intensified his activities while filling in for Manager & Financial Manager the firms financial controller who was on Controller at The Ross Victim: Electrical maternity leave. Group Retailers Clive Peeters Victim: The Ross Group Stole: A$19 million Stole: $5.5 million Method: Over a two year period Causer Method: In computer banking transac- used her position as an accountant and tions, Watson transferred money into his senior member of Clive Peeters finance own accounts but entered the names team to transfer millions to herself and of legitimate company creditors into her front companies. A major Australian the payee details box. This enabled his electrical retailer, Clive Peeters collapsed continuing fraud to go undetected for 10 into voluntary administration in 2010, due years. in part to Causers large scale fraud.44 Quarter One 2012
  4. 4. Stopping the mavericks The first step to eliminating rogue spending in an organisation is to conducta spend analysis. While we wont go into great detail about that here (thats afeature on its own) the short story is that when undertaking a spend analysis anorganisation drills very deep into its procurement systems and asks; what are wespending, who is doing the spending, who are they spending with and what arethe processes by which we are spending? The answers to those questions areusually surprising and should result in a spend management overhaul. This typi-cally involves dramatically reducing maverick spending, gaining the maximumleverage from an organisations buying power, removing process inefficienciesand building in management spend visibility. In today’s marketplace, one funda-mental deployment that increases the likelihood of spend management initia-tives being successful, is an e-procurement solution. The reason for this, saysPeter Kane of e-procurement specialists Unimarket, is that they help businessesachieve one way to buy. How so? Consider a maverick steer in a western movie – away from the herd,free to roam wherever it wants with no restrictions. Now picture the same ani-mal in a pen, its movements efficiently channelled with no opportunity to stray.Applied to procurement the rogue spender is the maverick, but channelledthrough an e-procurement system they have only one path to follow and simplycant wander off. “What a number of organisations struggle with,” says Kane, “is they have somesystems dealing with some purchasing, and other systems dealing with otherpurchasing, and its very hard for them to get the total picture. So the goal isto get one way of spending, one way that they do their purchasing.” Althoughe-procurement has been around since the earliest days of the internet, failureslike the e-commerce dotcom crash and the government pulling the plug on itsGoProcure system in 2003 have at times dampened enthusiasm for the con-cept. Similarly, older in-house procurement systems with poor usability and com-plicated protocols have also slowed progress in the field. More recently, however,widespread consumer adoption of online shopping and the much enhancedusability of Web 3.0 design styles has driven an expectation from staff thatsimilar Amazon-ish purchasing platforms should be available in the workplace.“People want to be able to buy at work as simply as they buy at home” saysKane, “but with the older technologies those aspects [technical protocols] weremore ingrained in the systems in a way that impacts on the user experience.A couple of the key tenets of the Unimarket philosophy are ease of use andtransparency. Our solution is very user friendly, but at the same time it has all thecontrols and disciplines in the technology so the finance & procurement peoplehave what theyre looking for from the system.”SaaS vs In-house applications Once an organisation has undertaken a spend analysis, e-procurement hasthe potential to deliver cost savings in three key areas – process efficiency, con-tract compliance and price reductions through leveraging buying power – eitheras an individual company, or better yet, as part of a trade buying group. Theywill then have to make a decision around what type of solution to deploy – eitherSoftware as a Service or an in-house application. The good news for many –especially those who already have in-house ERP and are concerned about theirlegacy investment – is that it doesnt necessarily have to be an either/or scenario,and can actually be both. For organisations with existing ERP functionality, manyERP vendors already supply specialist purchasing modules which may wellbe the right procurement solution, although they are also often accompaniedby specific annual licensing fees for the module. If a company in this scenario ›› Quarter One 2012 45
  5. 5. Feature // eProcurement Before maverick spending can be tamed and cost savings delivered, however, spend management needs to be taken seriously by all parties – and driven from the top down. wants to opt for e-procurement in the cloud, Kane says they can quite easily Well Cross That Bridge... discontinue their existing purchasing module (saving the annual licensing fees) As the managing director of the Charted Institute and integrate a cloud-based solution like Unimarket directly into their legacy ERP. of Purchasing & Supply, Jonathan Dutton heads up the “For an organisation thats already made investments in ERP, theyre looking at Australasian arm of an entity focused specifically on help- the cost benefit associated with cloud solutions, and finding it quite compelling. ing organisations and individuals improve their procurement Theres a realisation that the benefit of that legacy investment is what you can practices. Like most, his take on maverick spenders is that do with what bolts on top of your ERP system.” good systems and processes will clean most of them out One such benefit is spend visibility. “Dashboards deliver the standard reports eventually, but that might take longer in Australia and New that cover off the core things that procurement and finance will be looking for,” Zealand, because the relatively small size of our markets has says Kane. “But they can then also upload to their own data warehouses to do many organisations wondering if its worth making the sys- data manipulation if they want more in-depth analysis. Its very easy to slice and tems investment just yet. dice in any way that a customer might be looking for.” Companies that wish to “In the old world there was lots of maverick spend,” he maintain de-centralised purchasing can also benefit from e-procurement in the says, “and in the future world there will be very little. Were cloud. Regional offices can all log into their organisations cloud portal for pur- just on a bridge between the two at the moment.” chasing from approved suppliers (aggregating their spend and limiting contract So whats keeping us from getting to the other side? leakage), deliveries can be made to the individual locations (as per the negoti- Dutton says unlike companies in Europe or North America ated contract) while oversight can be maintained at a central facility. IT spend- which have their pick of competing vendors, purchasers in ing with cloud based e-procurement should also decrease. Product catalogues Australia and New Zealand are nowhere near as well served are maintained by suppliers, so all the staffing expense of maintaining product with potential suppliers. With monopolies and duopolies being databases in a system is moved to them. Software licensing costs are reduced the order of the day, procurement routines here are typically as well, as rather than issue licenses on a per seat basis, cloud-based services well established and entrenched, he says, and managers usually provide an annual subscription service – meaning as many staff as struggle to see the potential payoff from investing in new required can access the system at no extra cost. “Theres an initial upfront setup solutions. Either that, he says, or a company thats grown and configuration cost,” says Kane, “but after that its all you can eat from a users through acquisitions and inherited a range of legacy procure- perspective.” ment procedures thinks to itself “well theres a lot of time, money and effort involved in overhauling all that - whats the Get with the program reward, whats the benefit if all the existing systems are still Before maverick spending can be tamed and cost savings delivered, however, working okay?” spend management needs to be taken seriously by all parties – and driven from Dutton foresees a continued steady decline in maverick the top down. After a spend analysis is undertaken, a spend management plan spending, due to higher standards and training for procure- can easily be prepared that optimises the procurement process - but once thats ment managers - and the gradual introduction of new IT sys- done management needs to ensure that its new purchasing policies are clearly tems simply not allowing it. understood by all in the buying chain. And as uncomfortable as it may be for “Good procurement processes now are increasingly indi- some, policies must be enforced. Branding irons probably wont be required for visible from good software,” he says. “If a users choices are these modern day mavericks, but staff do need to understand there will be con- constrained and presented in a way that enforces better con- sequences for off-contract spending and corrective action will be taken against trol - thats usually a very good thing.” rogue spenders.46 Quarter One 2012