Compliance and getting value are challenges Procurement has always had to deal with. Are we really getting the rebates, credits and other benefits our organisations are contractually entitled to? If nobody audits and manages the supplier contract, money and business value will almost certainly be left on the table.
But how far do you go with the auditing? After all, it’s a time-consuming activity and, therefore, carries its own cost.
In my experience, much loss of value can be avoided by considering compliance when the agreement is first negotiated. Often Procurement negotiates fantastic deals with e.g. intricate rebate structures. The contract is then “thrown over the fence” for someone else NOT to manage.
If the contract is not important enough to warrant active contract management, then don’t negotiate rebate structures or anything else that requires more than just comparing invoice value to a rate card.
Instead, negotiate for the type of value that doesn’t require constant checking and double-checking once the contract is in place. Otherwise, we are just feeding a cottage industry of double checkers.
For example, some companies make a living out of auditing old invoices for large telecoms firms with the purpose of identifying errors. When these errors keep happening, it suggests something is wrong with the system that repeatedly allows these erroneous invoices to be approved. Until those systemic failings are addressed, the auditing firms will continue making a good living out of picking up the same errors over and over again.
Audits certainly have their place, but should form part of a wider approach, which includes intelligent contract negotiation and contract management.
In fact, contract management, rather than audits on their own, is the most effective way of ensuring suppliers deliver everything they have contractually committed to delivering, and that they are charging according to the agreement. Where the size and/or criticality of an agreement merits active contract management, dedicating people with the right skills to this activity is key. One of those skills is the ability to build trust with the supplier and internal stakeholders.
But for the right people to be able to manage the contract effectively, the contract itself needs to be clear in terms of deliverables and expectations. It also needs to be kept current and updated when circumstances change.
If the supplier and the contract are well managed, frequent audits should not be necessary. However, when audits do take place and pick up on a discrepancy, the most important action is to identify the failure in the system which allowed that to happen. Then fix it at a system level to reduce the risk of reoccurrence.
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