Where does all the money go? For businesses in the UK, this question is impossible to answer. Nearly nine in 10 (87%) UK companies have no oversight of up to 25% of their spending, according to a survey of 300 procurement decision-makers by Ivalua, a procurement and spend-management platform.
Partly to blame for this lack of visibility is a growing trend called shadow spending, which occurs when employees purchase workplace products or services without proper authorisation. The study found that shadow spending already conceals about 10% of total company spending in the UK, and over half of respondents expect it to become a bigger problem. According to Stephen Carter, product director at Ivalua: “Businesses are eroding margins and exposing themselves to risks without even realising it.”
But what’s behind the rise in unauthorised spending? Most likely, employees are not trying to be difficult – they’re trying to get stuff done.
What’s causing shadow spending to spike?
Employees who break company rules often do so because toeing the line actually makes their job more difficult. If procurement procedures are too rigid, or are viewed as unnecessary bureaucratic obstacles, people will find ways around them. For instance, an engineer who purchases a software solution without going through the proper channels isn’t intending to undermine budget controls, they simply want to solve a problem blocking their work. What the finance team perceives as a policy violation can feel like a survival move to front-line staff.
Cases such as this may indicate a failure by the organisation to understand or address employees’ pain points. But shadow spending thrives in blind spots. Firms need visibility over what is being purchased and by whom if they are to stem the spread of shadow spending. Four in five supply chain decision-makers, however, lack the visibility required to track spending properly, according to the Ivalua research. Is this the result of incomplete data? Or are too many employees concealing unauthorised spending on products or services they consider necessary?
Communicating the risks of shadow spending
Shadow spending is not only causing organisations to spend more than they’ve budgeted, it is also leading to missed opportunities to save costs. Firms that tolerate erratic buying practices may lose leverage with their suppliers, miss out on bulk pricing or struggle to forecast cash flow accurately. More than half (57%) of the survey respondents said that shadow spending also raises compliance risks.
So what can firms do to stop shadow spending? Instead of tightening the rules around procurement and payment approvals, leaders should perhaps ask why the rules are so hard to follow in the first place.
Senior leaders must work to understand why employees go rogue if they wish to stop them from doing so. That means opening communication channels where staff can explain which tools or processes are slowing them down. But employees too must understand that while their shadow spending may seem inconsequential, and even solve an immediate problem, it can create significant problems for the business down the road.
Can technology prevent shadow spending?
Firms can also use digital technologies to increase visibility over their spending. The Ivalua research found that 84% of procurement leaders think AI solutions can be used to reduce shadow spending, and nearly every respondent (95%) believes that spend-analytics software can help to identify shadow spending more effectively.
In deploying these tech tools, however, leaders should focus on employee experience rather than employee surveillance. AI systems could be used to track every employee action, but they are probably better suited to solving staff pain-points. For instance, chatbots could be used to make the procurement process more efficient by serving as a first point of contact for front-line workers, thereby enhancing their access to the procurement function.
Nevertheless, shadow spending probably won’t disappear any time soon. With the right approach, however, firms could use it as a starting point to better understand their systems, provide a better employee experience and regain control over their spending.
Where does all the money go? For businesses in the UK, this question is impossible to answer. Nearly nine in 10 (87%) UK companies have no oversight of up to 25% of their spending, according to a survey of 300 procurement decision-makers by Ivalua, a procurement and spend-management platform.
Partly to blame for this lack of visibility is a growing trend called shadow spending, which occurs when employees purchase workplace products or services without proper authorisation. The study found that shadow spending already conceals about 10% of total company spending in the UK, and over half of respondents expect it to become a bigger problem. According to Stephen Carter, product director at Ivalua: "Businesses are eroding margins and exposing themselves to risks without even realising it."
But what's behind the rise in unauthorised spending? Most likely, employees are not trying to be difficult – they're trying to get stuff done.
