Encouraging employees to spend company money as if it were their own may well be dangerous advice — most Americans spend carelessly, save poorly and take on debt at record levels. Strategies such as setting precise standards, instituting convenient purchasing programs and managing demand can improve spending habits.

A manager wipes a few pie crumbs from his cheek at a restaurant table in Boston where he’s finishing a three-day recruiting excursion. He looks at the bill in front of him, debating whether to leave a 25 percent or 30 percent tip — after all, dessert was delicious and it’s been a successful trip. Back at corporate headquarters in Chicago, another manager ponders the quickest way to procure the slew of poster boards, folders and other office supplies she needs for a crucial presentation the next morning.

These two different situations are part of the same discretionary spending process that can give financial executives fits. "When I ran a corporate purchasing program, we had very good control on direct materials, which totaled about $25 billion in goods," says John G. Yates, senior vice president of the corporate purchasing card for American Express in New York and the former head of General Electric’s corporate purchasing program. "Yet, we didn’t have as good a handle on the indirect area, which covered $3 billion to $4 billion." One of the downfalls of employee spending on office supplies, computer equipment, computer peripherals, office space, temporary labor, maintenance, tool cribs and other discretionary needs is that it is based on judgment. And judgment can be flawed — or, in many cases, downright shoddy. The manager in Chicago might zip over to a nearby office supply store to buy materials for her presentation, ignoring regular supply channels. Doing so costs the company money by dodging preferred-vendor discounts and reduces the amount of volume necessary for the company to maintain those discounts.

Yet, encouraging employees to spend the company’s money as if it were their own can be deadly advice considering their personal spending habits. In her book, "The Overspent American: Upscaling, Downshifting, and the New Consumer" (Basic Books, 1998), Juliet B. Schor explores how Americans, particularly those in the $50,000 to $100,000 income bracket, have taken conspicuous consumption to new levels during the past decade. "The new consumerism has led to a kind of mass ‘overspending’ within the middle class," writes Schor, an economist at Harvard University. "They spend more than they realize they are spending, and more than is fiscally prudent. And they spend in ways that are collectively, if not individually, self-defeating." Her research points to several disturbing trends: The average person’s spending increased at least 30 percent between 1979 and 1995; 63 percent of households earning $50,000 to $100,000 a year are now in credit card debt; and personal bankruptcies are at record levels.

This behavior describes people who spend company money on a daily basis. Although most employees do not intentionally squander company resources, their poor decisions on routine, discretionary expenditures, taken collectively, are far more likely to bruise the bottom line than the occasional whopper an ethically challenged employee might slide onto an expense report.

It is the financial executive’s responsibility to rein in, clarify and communicate the company’s purchasing limits related to buying office supplies at the last minute, leaving tips on business trips and making a multitude of other discretionary purchases. "If you don’t have standards in your organization," notes Michele Flynn, founding principal of Boston-based Expense Management Solutions, "you make [spending] decisions based on: What do I want? Why do I want it? And what did Joe get?" Keeping up with Joe in marketing or Joe across the hall is one way spending gets out of hand; other monkey wrenches include antiquated processes ("use it or lose it" budgeting approaches, for example), maverick buying (when employees skirt preferred vendors and established purchasing programs) and poor accountability. For financial executives addressing poor spending habits, the key to success lies not in regulating individual behavior, but in collecting and structuring the information employees need to make better decisions. Here are five strategies to improve employees’ spending habits.

1. Set precise standards. When a personal computer crashes, a manager’s top priority is to replace the unit as soon as possible in the interest of productivity. The manager will likely buy a new computer before scouring other offices within the company for an available model. Whether the new computer has too much or too little functionality also takes a backseat to getting the employee up and running again. "Companies can end up with huge inventories of PCs," says Keith Stock, consultant with A.T. Kearney in New York. "Because the need for PCs and laptops has recently exploded, many companies have not yet assigned enterprisewide standards for the types of computer equipment employees can purchase." As a result, many companies purchase too many computers with too much functionality at undue cost.
   
   

   Just about any type of item or service a company purchases can be included in purchase standards. "Financial executives can put in place targets so people know what is expected of them," says Flynn. And standards should be explicit. When employees rent office space, for example, a fair target would be square feet per employee because figures such as price per square foot and office size vary depending on location and department. "If people have no idea how many square feet is the right amount, they’re going to plan differently than if they have a target. If you have seven operations that are all doing the same thing in different parts of the country, they’re going to pay different prices for rent per square foot [because that measure is a function of location]. But do they really need a different amount of square feet per person? The answer is probably no if they’re all in the same business. It’s easier to manage to a set number than it is to say, ‘Just keep it down.’ "

2. Boost your bargaining power. Stock encourages companies to perform "aggressive sourcing," whereby businesses with many product lines, subsidiaries or distinct business units sharpen their efforts to aggregate purchases over the entire enterprise, giving the company better bargaining power with vendors. A highly centralized inventory and a large number of buyers can lead to greater discounts from vendors. Once vendors have been selected, financial executives should develop and communicate purchasing programs that ensure that volume levels remain adequate to continue to receive discounts. "We give our managers the ability to pick the vendors they want, but we do our best to direct them in that process," says Fred Driebholz, CFO of Unique Restaurant Concepts and Sforza Enterprises, which consist of 16 restaurants in south Florida. "And we constantly review their decisions." Driebholz’s program consists of three categories of vendors: mandatory, recommended and approved. Mandatory vendors must be used if they’re available. If not, managers may select a vendor from the "recommended" list. If none are available, managers may select a vendor entirely of their choice with the understanding that the selection must be approved by headquarters.
3. Make the inexpensive way the easy way. Difficult and antiquated systems can sabotage preferred-vendor programs by encouraging employees to find alternative ways to purchase what they need. Take office supplies: A person in a field office typically must track down one or more signatures on a paper requisition, submit the requisition to the purchasing department, then wait several days for the supplies to arrive from a remote warehouse. "That is a very common methodology, particularly for large corporations," says Flynn. A better system, she suggests, would enable the field-office employee to access an electronic catalog from a desktop, click on the items that are needed, electronically route the request for approvals and on to the vendor to receive the items the next morning.
   
   

   "For convenience purposes," Stock says, "people will go across the street instead of going through proper supply channels." If a company is interested in maintaining the vendor discounts it has arranged, the proper channels should also be the most convenient channels. "The less automated the process, the more ripe it is for abuse," says Flynn. "The more streamlined and more automated it is, the more difficult it becomes to abuse." Purchasing cards from companies like Visa, MasterCard and American Express are one way to tighten spending controls through automation. Yates says one of the keys to curbing poor spending habits among employees is "supplier rationalization," the process by which large companies differentiate among the thousands of vendors they use. The American Express purchasing card, for example, offers different usage modes — the card will not work with vendors that do not appear on the company’s preferred supplier list, or it will work everywhere, while noting each purchase from a non-preferred supplier on the statements the company receives. Visa and MasterCard offer purchasing cards with similar cost-containment features.

4. Manage the demand. Getting standards and systems in place marks a first step in taming sloppy spending. It’s equally important to track targets and actuals and report them on an ongoing basis. If, through cost averaging and benchmarking, a target for office supplies per person per year is set at, say, $200, that figure should apply throughout the company. "Use that target to report out by division and by location," Flynn advises. "Identify divisions that are way above or way below average. Make sure those that are way below average are not engaging in maverick buying and putting those charges somewhere else so that they come in under ’miscellaneous.’ " If a division or location far exceeds the target for office supplies, find out whether that group is buying off the program or simply being exorbitant. "It’s difficult for a manager in a particular location to say, ’Well, my people need $400 worth of office supplies per person’ when every other manager in the country is spending $200 per person on office supplies," says Flynn.

   Antiquated systems can sabotage preferred-vendor programs by encouraging employees to find alternative ways to purchase what they need.

   
   

   Stock says companies can also conduct "demand management," a type of external benchmarking, by determining internal averages (e.g. laptops per employee, office supplies per employee, travel and entertainment spending per salesperson) and then comparing those numbers to similar figures at other companies. "Look at all the categories that don’t show up on the general ledger," Stock says, "then compare the figures to companies similar in size, industry and function. One company I know has 1.5 PCs per employee. Another company has .8 PCs per employee. Why is that? Is it because the first company is buying in excess, or do the two companies have different computing needs?"

Establish accountability. Managers and other employees must understand the importance of enterprisewide standards and purchasing programs. One way to accomplish this is by avoiding pooled-rate charging. If all charges are lump-summed and different divisions are charged an average cost per person for discretionary items, employees have little impetus to heed standards or participate in purchasing programs. "Anytime you do cost averaging across the corporation and you do your charge-backs on the basis of cost averaging, you lose the incentive to control expenses," says Flynn, who recommends using direct charge-back on the basis of actuals. "If it cost them $80 per square foot of office space, charge them $80 per square foot and then hold them accountable if they don’t hit the bottom line."




Financial executives can reduce last-minute purchases by underscoring the difference between deadlines and poor planning. How often do your employees use deadline excuses to dodge purchasing programs and other company spending guidelines? Deadlines — real and not-so-real — are a prime reason employees overspend on company purchases. "Creative needs can often drive up spending," says Stock. "Take an advertising firm as an example: Someone needs proofs of a new advertising print campaign overnight. That puts pressure on the creative people to meet the deadline, and they put pressure on the printer. The process of meeting the deadline creates a lot of extra costs, but are those costs necessary?" Employees should ask the same question. Too often, Stock says, employees facing deadline pressures sweep aside purchasing programs and other corporate spending guidelines in favor of a get-it-done-at-any-cost approach. By requiring employees to document why they purchased goods through alternative channels, the line between drop-dead deadlines and poor planning becomes more well-defined — and purchasing-program lapses become less frequent.




Another way to instill accountability is through the budgeting process. Many managers are instructed to take the previous year’s budget and simply tack on an increase for inflation. Doing so communicates the message that the way things have always been done is perfectly acceptable and eliminates an opportunity to improve spending behavior. But, "if you use zero-based budgeting, it requires you to look at how you do things and determine if there is a more effective way of doing business," Flynn says.

For businesses, improvement is crucial in an era where personal overspending is as American as apple pie. And if there exists a recipe for controlling maverick buying and other harmful spending behavior, certainly the most important ingredient is a system that limits where employees can and cannot obtain the supplies and services they need on a daily basis.