Shining light on procurement’s dark purchases problem

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The new year brought some good news for procurement budgets—they are on the rise. But there remains concern about spending, particularly so-called “dark” purchases that are difficult to track and control as a lack of visibility and technology deployment remain obstacles.

Late last year, Amazon Business released its 2024 State of Procurement Report, noting that 53% of respondents expect budget increases this year and another 32% anticipate budgets at current levels. Additionally, 98% are planning investments in analytics and insights tools, automation, and artificial intelligence (AI) over the next few years as companies seek out more technology-focused solutions.

Manual processes limit visibility

That last part is important because without technological tools, visibility into the procurement process can be limited as managers devote their time to more immediate needs.

A Globality report from earlier in 2023 noted that eight of 10 requests for proposals were still taking place via email and spreadsheets. The report, 2023 Research Insights for CFOs, found that 82% of procurement leaders acknowledge their indirect spend is not well managed and that cost savings is being left behind as a result.

“Companies can eradicate dark purchasing by taking steps toward control and visibility. A digital solution for the procure-to-pay process streamlines, accelerates, and exposes each task of the procurement journey, all the way through payments.”

According to Globality, indirect spend is estimated to equal between 20% and 40% of revenue, and is usually recorded under the selling, general and administrative expenses (SG&A) category. For a Global 2000 company, that means it could be spending billions of dollars it otherwise might not have to.

“These findings highlight an important lesson that is constantly being ignored – that current procurement processes are archaic and inefficient,” said Joel Hyatt, Globality co-founder, chairman and CEO. “The big legacy software companies have not invested in technological innovation for decades. With the new corporate imperative to cut costs and reduce OPEX, companies must implement proven autonomous technology that saves money on day one.”

What are dark purchases?

A lack of technology and as a result, visibility, into the procurement process in addition to decentralized processes hamper the ability to manage spend. But there are also conscious decisions that some organizations make surrounding procurement that leads to dark purchases, which are usually defined as any “any purchases that are outside your defined procurement” process, explains B5Digital. “Such purchases can affect your ability to manage cash flow,” the firm added.

Data accuracy is a large hurdle to controlling dark purchases. A 2023 SpendHQ survey found that 75% of respondents doubted the accuracy of the procurement data they present. The result is that 79% of non-procurement executives—the ones controlling the purse strings—are only somewhat or not at all confident in using procurement’s data to make strategic decisions.

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Further, 79% of respondents said their procurement teams do not have dedicated management software to track and manage their performance, with 74% still using spreadsheets, similar to the number Globality report found in its report.

“Procurement teams must do more to build and maintain influence within their organizations, including removing the dependency on spreadsheets to become more efficient,” says Pierre Laprée, chief product officer of SpendHQ. “By using the right technologies, such as spend intelligence and analytics, along with embracing procurement performance management as a general approach to enterprise collaboration, procurement can show finance and other key stakeholders reliable and indisputable data and become a trusted business partner.”

Solving the dark purchase problem

How to solve this dark purchase problem is multifold. Adopting technology that offers better insight into spend and/or automates some purchasing behaviors can help. AmeriQuest Business Services, a technology provider of financial process automation, procurement and asset management solutions, recently published a white paper, Defeating Dark Purchasing, that offers additional tips.

“There is a large discrepancy among today’s business organizations between what they think they spend within the procurement function and what they actually spend,” the white paper states. “This shadowy area where items purchased cannot be easily justified by capital outlay or by material inventory is known as dark purchasing. The ubiquitous loss of revenue and control that occurs as a result of dark purchasing is a systemic challenge for companies of all sizes.”

Related Resources

 

Procurement’s data problem

A recent report from Globality found that 82% of procurement leaders acknowledge their indirect spend is not well managed and that cost savings is being left behind as a result. Even more, that report, 2023 Research Insights for CFOs, noted that 8 in 10 requests for proposals are still taking place via email and/or spreadsheets.

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In a survey of 2,000 people involved in their organization’s procurement process, AmeriQuest found that 20.4% had no procurement process in place; 13.3% had no idea if their company had a procurement process in place, and one in five said procurement had no visibility within the company. Twenty-five percent said procurement is a function of accounts receivable/accounts payable, and the same number said they simply order suppliers on their own and file expense reports.

“One of the first steps companies can take to fight dark purchasing is to clearly identify and assign procurement responsibilities within an organization,” AmeriQuest noted. “Internal stakeholders and particularly C-suite executives need to buy into the importance of a transparent procurement process.”

AmeriQuest recommends deploying digital procure-to-pay solutions. Nearly two-thirds (66%) of respondents said their organizations do not employ an e-procurement solution.

“Companies can eradicate dark purchasing by taking steps toward control and visibility,” the firm said. “A digital solution for the procure-to-pay process streamlines, accelerates, and exposes each task of the procurement journey, all the way through payments.”

The company also suggested a combination of centralizing processes around procurement functions and educating the workforce on purchasing policies can be effective tools to utilize.

“Digitizing the procurement process for an enterprise may seem daunting, but it is the most effective way to ensure spend stays on track. When manual processes are eliminated and a digital strategy implemented, organizations are able to centralize control over all company spend, validate pricing and terms, and attain full visibility into all purchase transactions,” AmeriQuest summed up.

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