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Developing a Path to Procurement Compliance

Recently, I discussed how important compulsory and/or voluntary stakeholder compliance is in procurement technology adoption. After all, compliance bridges the rather large gap between the cost savings that get encoded into strategic supply contracts and spending processes and the savings that actually materialize on a company’s profit line. (See: Driving Savings Starts by Enforcing Compliance.)

Compliance, whether it means contract adherence (such as buying from preferred suppliers) or process adherence (such as adopting and using the lowest-cost buying and payment processes), can result in significant savings from procurement activities. Today, procurement leaders aim to achieve much more than just complete compliance. They look to add value to the organization at a more strategic level. As a result, organizations realize that procurement teams must be an integral part of the activities that drive innovation, manage supply chain risks, and optimize the supply chain process.

The key to success is to encourage active stakeholder participation in an organization's strategic sourcing and spending management processes and to create stakeholder ownership in the decision-making. Going all the way back to the early days of enterprise spending management in the 1980s and 1990s, the popular wisdom has been that when stakeholders participate in the process — from drafting the requirements, evaluating and selecting suppliers, and designing the processes that make their work easier to continuously measuring and managing supplier and technology performance — they are more likely to abide voluntarily by the decisions that result.

In essence, there is a direct correlation between the level of compliance and success of new technology and process implementations and the participation, collaboration, and sheer number of participating stakeholders. Ensuring active participation also helps identify organizational procurement “champions,” or team members who are eager to drive these processes throughout the enterprise.

In fact, Zycus recently conducted a study of 600 procurement and supply management professionals with $370 billion or more of collective spending power. Companies that placed in the top performance tier for savings attributable to spending management (30 percent or more) earned a score of nearly 8 on a scale of 0 to 10 for cross-functional participation in spending management activities. Companies falling into the lowest savings performance tier scored a 4. Also, companies reporting the highest participation rates in cross-functional strategic sourcing processes reported contract compliance rates 3.1 times higher than companies with the weakest cross-functional participation.

The implication is that organizations with active and enthusiastic stakeholder participation in decision-making have an opportunity to spend much less time and fewer resources on compulsory management of stakeholder compliance. For example, exceptions-only monitoring and alert systems might replace more burdensome, detailed, and frequent tracking of individual behavior without any loss to compliance.

Even though achieving stakeholder sourcing participation may seem extremely obvious, it is actually anything but. According to the study, winning strong and consistent stakeholder participation remains a challenge for many enterprises. Nearly half the study participants graded participation at 5 or lower on a scale of 0 to 10.

So the question becomes not how important stakeholder participation is, but rather what tactics need to be employed to achieve successful involvement. The tactic voted most effective by companies that do well with promoting stakeholder participation in strategic sourcing is to “communicate both the benefits and the business case.” However, when developing the business case, it is critical to use verifiable, tangible facts such as how reducing maverick spending by X percent will increase calculated savings by Y percent.

There is a strong relationship between technology adoption and cross-functional participation for e-sourcing, as well. Companies achieving the highest rates of cross-functional participation and collaboration in sourcing activities are nearly three times more likely than those with intermediate participation rates (and 6.8 times more likely than those with the lowest rates) to have high adoption rates for e-sourcing technology. This is because fully functional e-sourcing technology is designed to support the most effective tactics to promote stakeholder participation in strategic sourcing processes as determined by the study, instead of being focused solely on driving down supplier pricing.

Another way to encourage participation is to ensure people's opinions count heavily. That was the third most popular tactic for promoting participation among high performers. Stakeholders should be given a structured mechanism for registering opinions, reviewing the opinions of others, and understanding clearly how a sourcing team's collective set of opinions influences a sourcing event's outcome. A sourcing solution provides a platform for stakeholders to collaborate on drafting comprehensive requests for proposals (RFPs) and requests for quotes (RFQs) with input from all perspectives. In the same manner, evaluation of suppliers can and should involve multiple stakeholders using a single platform.

Similarly, a contract management platform that brings together legal and procurement departments in a collaborative way is also valuable. For instance, using work flow to drive contract authoring ensures not only that the best contracts are created in terms of covering all necessary clauses and caveats, but also that any deviation from contracted terms is monitored and compliance is adhered to.

But simply deploying technology illustrates that driving technology adoption and use is a must. For example, companies that favor the No. 1 tactic of “communicating benefits and business case” around strategic sourcing in concert with high adoption and the use of e-sourcing had cross-functional participation scores that averaged three points higher than the companies where e-sourcing was poorly adopted.

So unless department heads or procurement leaders want to spend the next several decades closely monitoring and frequently reporting on compliance, it is critical to promote stakeholder participation at least as assiduously as they focus on compelling compliance. Building a strong business case with tangible, verifiable benefits and implementing technology ensures that steps are taken for its adoption. It also provides a platform that makes it easy for stakeholders to participate in process improvement decision-making.

Over time, the corporate culture evolves to one where all parties routinely participate in improving procurement and sourcing processes and efforts are made to measure compliance. This allows leaders to focus on activities that are more strategic and add value to the business.

4 comments on “Developing a Path to Procurement Compliance

  1. Daniel
    January 5, 2012

    “Another way to encourage participation is to ensure people's opinions count heavily”

    James, collecting feedback and conducting customer satisfaction surveys are good for reflecting their opinions and views. Most of the companies are doing so, but very rarely they are incorporating such suggestions.

  2. Barbara Jorgensen
    January 5, 2012

    It's a good point you make–it's not just about compliance any more, it's about adding value. That is true at every level of the supply chain.

  3. JADEN
    January 17, 2012

    For companies looking to cut costs and get the most out of what they do spend, prcurement strategies should be a key area of focus. 

  4. ProcureApp
    January 26, 2012

    Well written and thank you for researching this important area. If most companies can simply inform and assist employees with identifying contract savings – the organization will benefit greatly.

    Here's a nice article that provides how to acheive compliane:

    http://gillespie411.wordpress.com/2012/01/17/procureapps-clever-compliance-tool/

    Get stakeholder agreement once – then focus on managing increased volume and better discounts.

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