Procurement studies reveal that 20% or more of total corporate spend is for purchases that could have been acquired at a lower cost. A key contributor to this inefficient spend is rogue spending, which is defined as not following corporate procurement policies when acquiring goods or services, such as making unauthorized purchases or buying from higher priced non-preferred suppliers.
Purchasing goods or services out of contract or from non-preferred suppliers means the company isn’t benefitting from negotiated price discounts from preferred suppliers. Rogue spending occurs at all corporate functions and fleet operations is no exception, especially when it is managing dispersed assets operated by multiple field locations. Rogue spending is common at companies that are growing through acquisition, or have a large number of remote operational locations, or experience high employee turnover rates.
I recently had several very interesting conversations about rogue spending in fleet with Lee Pierce, global fleet manager for Weatherford International, a multinational oilfield service company. Our conversations started at an industry event, where Pierce explained various ways rogue spending occurs in fleet and shared successful strategies to control it, which are summarized below.
Rogue Spending in Fleet
There are three ways to pay a fleet vendor – via a purchase order, a P-card, or a national account program. A nagging headache for fleet managers is dealing with employees who do not follow established procurement policies.
A common example of rogue spending, according to Pierce, occurs when field personnel buy aftermarket equipment for vehicles, primarily trucks, without informing fleet operations. Typically, these purchases are made impulsively by field employees to resolve a pressing operational need without seeking authorization to do so. Often, these are innocent purchases since many employees don’t know how to go through proper channels to get authorization to make an expenditure.
Other examples of rogue spending that Pierce has seen over the course of her career include unauthorized equipment rentals to meet an operational need, which requires a contractual agreement that the employee does not have authorization to sign on behalf of the company. It isn’t the vendor’s responsibility to ensure whether or not the employee is authorized to make the expenditure and the rental commitment, especially if the vendor has had prior dealings with the employee. According to Pierce, the responsibility falls on the employer for not having the safeguards in place to prevent such an occurrence.
Yet another example is modifications to field assets, which are not reported to fleet and may go undetected for years, until a problem occurs that brings it to the attention of fleet management.
A key enabler of rogue spending is the corporate P-card, which field personnel use to buy unauthorized goods and services that are approved by their immediate management because it resolves a pressing operational need. Often, this type of rogue spending does not get discovered unless there is an audit. These unauthorized purchases are often done under the philosophy that it is easier to ask for forgiveness than permission. In other cases, these types of expenditures are embedded into a G&L account deliberately concealing rogue expenditures by miscoding them.
Strategies to Minimize Unauthorized Spending
The overwhelming percentage of rogue spending is done because employees believe they are doing the right thing and are not attempting to do something nefarious. Many times, employees do not know they are not authorized to make expenditures, because procurement guidelines were not communicated to them. Even when purchasing policies are communicated company-wide by the VP of operations, there is no guarantee the message will reach all employees, especially when there is a high turnover and employees join the work force subsequent to these communications.
Below are three strategies recommended by Pierce to curb rogue spending in fleet operations:
- Ensure that procurement policies are regularly communicated (and recommunicated) to all employees on an ongoing basis. Often, at the field level, employees do not receive the procurement policy requirements from their immediate management. This is especially true at larger fleets, which have many layers of management or numerous field operations. Often, the problem is that these employees simply did not know that what they were doing was against fleet policy. All they know is that they have an issue preventing them from completing their job and they are looking to resolve the problem. “The real problem is when managers do not communicate these policy restrictions to employees and this information is not pushed down to the lower levels of the organization. It is a communication issue,” said Pierce.
- Mandate that expenditure requests go through a formal approval process. “There must be restrictions as to who can issue a purchase order. There should be greater emphasis on using a centralized billing system. Fleet management needs to communicate to the field that it has a fleet program to meet any of their needs and it’s not necessary to go out on their own to make expenditures,” said Pierce. When developing an approval process, you need to be sure that it is a streamlined procedure. A common justification for rogue spending, at some companies, is the desire to bypass a lengthy approval process in order to expedite emergency purchases. To minimize this, keep things simple to expedite approvals.
- Maximize face-to-face communication with employees explaining procurement policies and restrictions. Pierce conducts what she calls “roadshows,” which are quarterly in-person meetings to explain corporate purchasing guidelines and available fleet programs, but is continually surprised when employees tell her, “I didn’t know that any of this existed.” The takeaway from this anecdotal story is that communicating procurement guidelines is not a one-time effort; it is an ongoing, never-ending process.
What is the best solution to control rogue spending in fleet?
Pierce summarized it in three words: “Audit, audit, audit.”
Let me know what you think.
Originally posted on Automotive Fleet