That's what happens when individuals in your organization bypass your carefully negotiated deals with suppliers, and procure items from unauthorized sources.
The problem is a serious one. According to Corcentric, which automates the processing of invoices and payments, dark spending can cost a company hundreds of thousands of dollars each year.
In a recent survey of purchasing professionals by AmeriQuest Business Services, Inc., about a third said they didn’t know who within their organizations had the final say on procurement activities. Twenty percent said procurement had “no visibility within their own firms.” (The same number said their companies lacked any formal procurement process.) A quarter said they ordered supplies on their own, then filed expense reports.
“The more a procurement department spends, the less capital is available for the rest of the company to work with,” says Reginald Peterson, director of indirect products at AmeriQuest. “When there is confusion about procurement procedures, a company is not as profitable as it could be.”
Even companies that pay close attention to procurement spend can see their efforts frustrated by rogue purchasers. All the work that goes into negotiating the best possible deals with suppliers “is not worth much if the organization is not following those programs and purchasing through them,” says Corcentric chief operating officer Matt Clark.
Companies who fail to control their procurement spend lose in two ways, says Clark. They miss out on the discounts that were negotiated with approved suppliers, and they lack visibility of purchases at the line-item level. In the absence of such information, they can’t make strategic decisions on future programs.
It’s not easy to put a hard number on the cost of dark spending. (That’s why they call it “dark.”) But Clark has seen estimates that, for every dollar that’s spent under an authorized procurement program, another one violates it.
Not surprisingly, the larger the organization, the greater the problem. Geographic dispersity is just as much an issue as headcount; the very existence of multiple offices around the country or world is an invitation for locals to pursue their own purchasing paths.
Dark spending starts becoming a serious issue at the mid-market point: between $100m and $200m in revenues, according to Clark. In terms of staffing, the tipping point is typically around 100-150 employees.
“Everybody starts with the right intentions,” Clark says. “Companies grow fast, and before they know it, they’re a victim of their growth.” Purchasing is one of the places where the cracks are first to show.
Discipline begins to slip when the company hasn’t made it easy or clear to identify the proper channels for purchasing. At such times, individuals will take the approach with which they’re most comfortable. In addition, a buyer at the local level might have a strong personal relationship with a particular supplier — one who offers free tickets to sporting events, or expensive gifts at Christmas.
Buyers might think they’re getting better deals by going rogue. A canny supplier will offer certain items at a discount, only to follow up with goods that are priced far above negotiated levels.
In conversations with C-level executives, Clark encounters the problem of dark spending frequently. Their response, he says, is often “that deer-in-the-headlights look. They’ll say, ‘You have to talk to my procurement guy.’ Or ‘Our secretary takes care of that.’
“They choose to ignore it because they probably know it’s not being optimized,” he adds. “They don’t want to spend a lot of time thinking about it.”
The solution starts with having a coherent strategy for procurement. Which might seem like an obvious step, but in the absence of one, employees will fill the vacuum with their own practices.
Clark says executives need to hammer home the importance of the policy to individuals. That could mean linking compensation with adherence, tying bonuses to how well purchasers complied with the corporate strategy. It’s a matter of “putting teeth behind it” — whether in the form of incentives or punitive measures.
It’s equally crucial to digitize transactions as early as possible. Managers should be able to track purchase orders all the way to acknowledgment, with invoices processed electronically to ensure proper billing.
By automating the entire process, companies can create a series of defined checkpoints, confirm that the negotiated supplier and price are correct, and ensure that the bill is paid accordingly. Manual processes require line-by-line matching of paper invoices, a process that involves excessive labor and isn’t scalable. Automation limits human involvement to exceptions.
In addition, companies need to have a specific individual who bears responsibility for procurement. “That’s where the buck stops in setting the strategy, and owning its ongoing management,” says Clark.
Supply chains, of course, are undergoing constant change, driven by growth, mergers, acquisitions, new management and the evolution of markets. Companies need to assess their procurement programs on a constant basis, to head off any slippage in discipline that occurs over time, and the resulting occurrence of dark spending.
“You need to have a number of different metrics in place to make sure the numbers are going in the right direction,” says Clark. “The goal should be to see the scorecard improving continuously.”
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